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 31, 2008
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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)
(512) 338-4400
(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 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. (Check one):
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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 28, 2008,
1,944,431,517 shares of common stock, par value $.01 per
share, were outstanding.
PART I
FINANCIAL INFORMATION
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ITEM 1.
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Financial
Statements
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October 31,
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February 1,
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2008
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2008
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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7,910
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$
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7,764
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Short-term investments
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662
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208
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Accounts receivable, net
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5,532
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5,961
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Financing receivables, net
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1,526
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1,732
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Inventories, net
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1,109
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1,180
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Other
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4,795
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3,035
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Total current assets
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21,534
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19,880
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Property, plant, and equipment, net
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2,458
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2,668
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Investments
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374
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1,560
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Long-term financing receivables, net
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435
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407
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Goodwill
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1,743
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1,648
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Purchased intangible assets, net
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750
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780
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Other non-current assets
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523
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618
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Total assets
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$
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27,817
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$
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27,561
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LIABILITIES AND EQUITY
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Current liabilities:
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Short-term debt
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$
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266
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$
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225
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Accounts payable
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9,475
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11,492
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Accrued and other
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4,108
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4,323
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Short-term deferred service revenue
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2,572
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2,486
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Total current liabilities
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16,421
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18,526
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Long-term debt
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1,851
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362
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Long-term deferred service revenue
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3,001
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2,774
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Other non-current liabilities
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2,385
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2,070
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Total liabilities
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23,658
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23,732
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Commitments and contingencies (Note 11)
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Redeemable common stock and capital in excess of $.01 par
value; shares issued and outstanding: 0 and 4, respectively
(Note 14)
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-
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94
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Stockholders equity:
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Preferred stock and capital in excess of $.01 par value;
shares issued and outstanding: none
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-
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-
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Common stock and capital in excess of $.01 par value;
shares authorized: 7,000; shares issued: 3,338 and 3,320,
respectively; shares outstanding: 1,944 and 2,060, respectively
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10,945
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10,589
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Treasury stock at cost: 919 and 785 shares, respectively
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(27,903
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(25,037
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Retained earnings
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20,326
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18,199
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Accumulated other comprehensive income (loss)
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791
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(16
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Total stockholders equity
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4,159
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3,735
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Total liabilities and equity
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$
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27,817
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$
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27,561
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
1
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Three Months Ended
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Nine Months Ended
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October 31,
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November 2,
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October 31,
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November 2,
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2008
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2007
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2008
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2007
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Net revenue
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$
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15,162
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$
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15,646
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$
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47,673
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$
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45,144
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Cost of net revenue
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12,309
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12,758
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39,028
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36,467
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Gross margin
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2,853
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2,888
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8,645
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8,677
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Operating expenses:
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Selling, general, and administrative
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1,671
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1,900
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5,423
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5,557
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Research, development, and engineering
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167
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159
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487
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456
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In-process research and development
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-
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-
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2
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-
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Total operating expenses
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1,838
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2,059
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5,912
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6,013
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Operating income
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1,015
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829
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2,733
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2,664
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Investment and other, net
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(6
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107
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137
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281
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Income before income taxes
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1,009
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936
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2,870
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2,945
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Income tax provision
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282
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170
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743
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677
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Net income
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$
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727
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$
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766
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$
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2,127
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$
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2,268
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Earnings per common share:
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Basic
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$
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0.37
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$
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0.34
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$
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1.07
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$
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1.01
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Diluted
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$
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0.37
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$
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0.34
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$
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1.06
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$
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1.00
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Weighted-average shares outstanding:
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Basic
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1,953
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2,236
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1,993
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2,236
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Diluted
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1,957
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2,266
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1,998
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2,262
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
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Nine Months Ended
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October 31,
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November 2,
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2008
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2007
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Cash flows from operating activities:
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Net income
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$
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2,127
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$
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2,268
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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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575
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424
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Stock-based compensation
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201
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291
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Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies
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(113
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)
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40
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Deferred income taxes
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209
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(86
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)
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Other
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137
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64
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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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(162
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)
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(1,313
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)
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Financing receivables
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(28
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)
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(184
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)
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Inventories
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65
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(437
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)
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Other assets
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(648
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)
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(278
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)
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Accounts payable
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(1,992
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)
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899
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Deferred service revenue
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424
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790
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Accrued and other liabilities
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370
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274
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Change in cash from operating activities
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1,165
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2,752
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Cash flows from investing activities:
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Investments:
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Purchases
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(1,150
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)
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(2,088
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)
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Maturities and sales
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2,034
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2,745
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Capital expenditures
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(401
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)
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(636
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)
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Proceeds from sale of facility and land
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44
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-
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Acquisition of business, net of cash received
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(165
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)
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(106
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)
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Change in cash from investing activities
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362
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(85
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)
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Cash flows from financing activities:
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Repurchase of common stock
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(2,866
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)
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(1
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Issuance of common stock under employee plans
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79
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21
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Issuance (payment) of commercial paper, net
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253
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(100
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)
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Proceeds from issuance of debt
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1,519
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38
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Repayments of debt
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(237
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)
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(45
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)
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Other
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-
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1
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|
|
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|
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Change in cash from financing activities
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(1,252
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)
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|
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(86
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)
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|
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|
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Effect of exchange rate changes on cash and cash equivalents
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(129
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)
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109
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|
|
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|
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Change in cash and cash equivalents
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|
146
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|
2,690
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|
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Cash and cash equivalents at beginning of period
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7,764
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9,546
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Cash and cash equivalents at end of period
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$
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7,910
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$
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12,236
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The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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|
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 February 1, 2008. 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 31, 2008, the results of its operations for the
three and nine-month periods ended October 31, 2008, and
November 2, 2007, and its cash flows for the nine-month
periods ended October 31, 2008, and November 2, 2007.
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 for the three and nine-month periods ended
October 31, 2008, are not necessarily indicative of the
operating results for the full fiscal year or any future periods.
Dell Financial Services L.L.C. (DFS) was formerly a
joint venture with CIT Group Inc. (CIT). Previously,
DFSs financial results were consolidated by Dell in
accordance with Financial Accounting Standards Board
(FASB) Interpretation (FIN)
No. 46R, as Dell was the primary beneficiary. On
December 31, 2007, Dell purchased CITs remaining 30%
interest in DFS, making it a wholly-owned subsidiary. DFS has
been reported as a wholly-owned subsidiary since January 1,
2008. DFS allows Dell to provide its customers with various
financing alternatives.
Recently Issued and Adopted Accounting Pronouncements
In September 2006, the FASB issued Statement of
Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements (SFAS 157),
which defines fair value, provides a framework for measuring
fair value, and expands the disclosures required for assets and
liabilities measured at fair value. SFAS 157 applies to
existing accounting pronouncements that require fair value
measurements; it does not require any new fair value
measurements. Dell adopted the effective portions of
SFAS 157 beginning the first quarter of Fiscal 2009. In
February 2008, FASB issued FASB Staff Position (FSP)
157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2),
which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of Fiscal 2010. Dell is
currently evaluating the inputs and techniques used in these
measurements, including items such as impairment assessments of
fixed assets and goodwill impairment testing. See Note 6 of
Notes to Condensed Consolidated Financial Statements for the
impact of the adoption.
On October 10, 2008, the FASB issued FSP
No. FAS 157-3
Determining the Fair Value of a Financial Asset When
the Market for that Asset is Not Active (FSP
FAS 157-3),
which clarifies the application of SFAS 157 in a market
that is not active. Additional guidance is provided regarding
how the reporting entitys own assumptions should be
considered when relevant observable inputs do not exist, how
available observable inputs in a market that is not active
should be considered when measuring fair value, and how the use
of market quotes should be considered when assessing the
relevance of inputs available to measure fair value. FSP
FAS 157-3
became effective immediately upon issuance. Dell considered the
additional guidance with respect to the valuation of its
financial assets and liabilities and their corresponding
designation within the fair value hierarchy. Its adoption did
not have a material effect on Dells consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which provides companies with
an option to report selected financial assets and liabilities at
fair value with the changes in fair value recognized in earnings
at each subsequent reporting date. SFAS 159
4
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
provides an opportunity to mitigate potential volatility in
earnings caused by measuring related assets and liabilities
differently, and it may reduce the need for applying complex
hedge accounting provisions. While SFAS 159 became
effective for Dells 2009 fiscal year, Dell did not elect
the fair value measurement option for any of its financial
assets or liabilities.
Recently Issued Accounting Pronouncements
In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (SFAS 161),
which requires additional disclosures about the objectives
of derivative instruments and hedging activities, the method of
accounting for such instruments under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), and its related
interpretations, and a tabular disclosure of the effects of such
instruments and related hedged items on a companys
financial position, financial performance, and cash flows.
SFAS 161 does not change the accounting treatment for
derivative instruments and is effective for Dell beginning
Fiscal 2010. Management is currently evaluating the impact of
the disclosure requirements of SFAS 161.
Out of Period Adjustments During the first
nine-months of Fiscal 2009, Dell recorded adjustments related to
net revenue, cost of net revenue, operating expenses, and
investment and other, net that in the aggregate increased income
before tax by approximately $110 million. The two largest
of these corrections include a reversal of the excess amount of
the provision for Fiscal 2008 employee bonuses and foreign
exchange rate errors. Correcting these errors increased income
before tax by $46 million and $42 million,
respectively. Because these errors, both individually and in the
aggregate, were not material to any of the prior years
financial statements, and the impact of correcting these errors
in the current year is not expected to be material to the full
year Fiscal 2009 financial statements, Dell recorded the
correction of these errors in the financial statements in the
first quarter of Fiscal 2009.
Reclassifications To maintain
comparability among the periods presented, Dell has revised the
presentation of certain prior period amounts reported within
cash flow from operations presented in the Condensed
Consolidated Statements of Cash Flows. The revision had no
impact to the total change in cash from operating activities.
Dell has also revised the classification of certain prior period
amounts within the Notes to Condensed Consolidated Financial
Statements. For further discussion regarding the
reclassification of deferred service revenue and warranty
liability, see Note 7 of Notes to Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
February 1,
|
|
|
|
2008
|
|
|
2008(a)
|
|
|
|
(in millions)
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Production materials
|
|
$
|
680
|
|
|
$
|
714
|
|
Work-in-process
|
|
|
138
|
|
|
|
144
|
|
Finished goods
|
|
|
291
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,109
|
|
|
$
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Certain prior period amounts have
been changed to conform to the current year presentation. There
is no impact to the condensed consolidated financial statements
as a result of this change.
|
5
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
NOTE 3
|
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
245 million and 183 million shares for the third
quarter of Fiscal 2009 and Fiscal 2008, respectively, and
253 million and 228 million during the nine-month
periods ended October 31, 2008, and November 2, 2007.
The following table sets forth the computation of basic and
diluted earnings per share for the three and nine-month periods
ended October 31, 2008, and November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions, except per share amounts)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
727
|
|
|
$
|
766
|
|
|
$
|
2,127
|
|
|
$
|
2,268
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,953
|
|
|
|
2,236
|
|
|
|
1,993
|
|
|
|
2,236
|
|
Effect of dilutive options, restricted stock units, restricted
stock, and other
|
|
|
4
|
|
|
|
30
|
|
|
|
5
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,957
|
|
|
|
2,266
|
|
|
|
1,998
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
1.07
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
1.06
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
NOTE 4
|
COMPREHENSIVE
INCOME
|
The following table summarizes comprehensive income for the
three and nine-month periods ended October 31, 2008, and
November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
727
|
|
|
$
|
766
|
|
|
$
|
2,127
|
|
|
$
|
2,268
|
|
Unrealized gains (losses) on foreign currency hedging
instruments,
net(a)
|
|
|
808
|
|
|
|
(64
|
)
|
|
|
791
|
|
|
|
(138
|
)
|
Unrealized (losses) gains on marketable securities, net
|
|
|
(12
|
)
|
|
|
17
|
|
|
|
(35
|
)
|
|
|
32
|
|
Foreign currency translation adjustments
|
|
|
64
|
|
|
|
11
|
|
|
|
51
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,587
|
|
|
$
|
730
|
|
|
$
|
2,934
|
|
|
$
|
2,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The unrealized gains (losses) on
foreign currency hedging instruments relate to the effective
portion of the gain or loss on derivative instruments that are
designated and qualify as cash flow hedges. Dell reclassifies
these amounts into earnings in the period when 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. At October 31, 2008, a related foreign
exchange receivable of $1.6 billion is included in other
current assets and a liability of $335 million is included
in accrued and other on the Condensed Consolidated Statement of
Financial Position.
|
|
|
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
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.
Dell utilizes DFS to facilitate financing for customers who
elect to finance products sold by Dell. New financing
originations, which represent the amounts of financing provided
to customers for equipment and related software and services
through DFS, were $1.0 billion and $1.4 billion during
the three-month periods ended October 31, 2008, and
November 2, 2007, respectively, and $3.3 billion and
$4.1 billion for the nine-month periods ended
October 31, 2008, and November 2, 2007, respectively.
CIT, formerly a joint venture partner of DFS, continues to have
the right to purchase a percentage of the new customer
receivables facilitated by DFS until January 29, 2010
(Fiscal 2010). CITs contractual funding right
is up to 35% in Fiscal 2009 and 25% in Fiscal 2010. In the three
and nine-month periods ended October 31, 2008, CITs
funding percentage was approximately 30% and 35%, respectively.
DFS services the receivables purchased by CIT. However,
Dells obligation related to the performance of the DFS
originated receivables purchased by CIT is limited to the cash
funded credit reserves established at the time of funding.
In March 2008, Dell began a strategic assessment of ownership
alternatives for DFS that focused primarily on
U.S. revolving credit operations for consumer and
small-and-medium
business financing. In September 2008, Dell completed its
strategic assessment of DFS. Dell will retain the current
ownership and operating structure of DFS.
7
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Financing Receivables
The following table summarizes the components of Dells
financing receivables, net of the allowance for estimated
uncollectible amounts:
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
February 1,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Financing receivables, net:
|
|
|
|
|
|
|
|
|
Customer receivables:
|
|
|
|
|
|
|
|
|
Revolving loans, gross
|
|
$
|
803
|
|
|
$
|
1,063
|
|
Fixed-term leases and loans, gross
|
|
|
689
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
Customer receivables, gross
|
|
|
1,492
|
|
|
|
1,717
|
|
Customer receivables allowance
|
|
|
(124
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
Customer receivables, net
|
|
|
1,368
|
|
|
|
1,621
|
|
Residual interest
|
|
|
285
|
|
|
|
295
|
|
Retained interest
|
|
|
308
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
1,961
|
|
|
$
|
2,139
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
1,526
|
|
|
$
|
1,732
|
|
Long-term
|
|
|
435
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
1,961
|
|
|
$
|
2,139
|
|
|
|
|
|
|
|
|
|
|
Financing receivables consist of customer receivables, residual
interest, and retained interest in securitized receivables.
Customer receivables include revolving loans and fixed-term
leases and loans resulting from the sale of Dell products and
services. Of the customer receivables balance at
October 31, 2008, and February 1, 2008,
$31 million and $444 million, respectively, represent
balances which are due from CIT in connection with specified
promotional programs.
|
|
|
Customer receivables are presented net of allowance for
uncollectible accounts. The allowance is based on factors
including historical experience, past due receivables,
receivable type, and the risk composition of the receivables.
The composition and credit quality vary from investment grade
commercial customers to subprime consumers. Subprime receivables
comprised approximately 20% of the gross customer receivable
balance at October 31, 2008, and February 1, 2008.
Customer receivables are charged to the allowance at the earlier
of when an account is deemed to be uncollectible or when an
account is 180 days delinquent. Recoveries on customer
receivables previously charged off as uncollectible are recorded
to the allowance for uncollectible accounts.
|
As of October 31, 2008, and February 1, 2008, customer
financing receivables 60 days or more delinquent were
$47 million and $34 million, respectively. These
amounts represent 3.4% and 2.1% of the ending customer financing
receivables balances for the respective periods.
Net credit losses for the three-month periods ended
October 31, 2008, and November 2, 2007, were
$22 million and $10 million, respectively. These
amounts represent annualized credit losses of 6.5% and 2.8% of
the average outstanding customer financing receivables balance
for the respective three-month periods. Net credit losses for
the nine-month periods ended October 31, 2008, and
November 2, 2007, were $60 million and
$27 million, respectively. These amounts represent
annualized credit losses of 5.4% and 2.5% of the average
outstanding customer financing receivables balance for the
respective nine-month periods.
8
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following is a description of the components of customer
receivables:
|
|
|
|
|
Revolving loans offered under private label credit financing
programs provide qualified customers with a revolving credit
line for the purchase of products and services offered by Dell.
Revolving loans bear interest at a variable annual percentage
rate that is tied to the prime rate. Based on historical payment
patterns, revolving loan transactions are typically repaid on
average within 12 months. From time to time, account
holders may have the opportunity to finance their Dell purchases
with special programs during which, if the outstanding balance
is paid in full, no interest is charged. These special programs
generally range from 3 to 12 months. At October 31,
2008, and February 1, 2008, $331 million and
$668 million, respectively, were receivables under these
special programs.
|
|
|
|
|
|
Dell enters into sales-type lease arrangements with customers
who desire lease financing. Leases with business customers have
fixed terms of two to five years. Future maturities of minimum
lease payments at October 31, 2008, are as follows: 2009:
$66 million; 2010: $162 million; 2011:
$111 million; 2012: $42 million; and 2013:
$4 million. Fixed-term loans are also offered to qualified
small businesses and primarily consist of loans with short-term
maturities.
|
|
|
|
Dell retains a residual interest in the leased equipment. The
amount of the residual interest is established at the inception
of the lease based upon estimates of the equipment value at the
end of the lease term using historical studies, industry data,
and future
value-at-risk
demand valuation methods. On a periodic 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 in current
earnings.
|
|
|
Retained interests represent the residual beneficial interest
Dell retains in certain pools of securitized financing
receivables. Retained interests are 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 sale and at the end of each reporting period.
All gains and losses are recognized in income immediately. The
fair value of the retained interest is determined using a
discounted cash flow model with various key assumptions,
including payment rates, credit losses, discount rates, and
remaining life of the receivables sold. These assumptions are
supported by both Dells historical experience and
anticipated trends relative to the particular receivable pool.
|
The monthly payment rate is the most significant estimate
involved in the measurement process. Other significant estimates
include the credit loss rate and the discount rate. These
estimates are based on managements expectations of future
payment rates and credit loss rates, reflecting our historical
rate of payments and credit losses, industry trends, current
market interest rates, expected future interest rates, and other
considerations.
The implementation of SFAS 157 did not result in material
changes to the models or processes used to value retained
interest. See Note 6 of Notes to Condensed Consolidated
Financial Statements for the impact of the implementation of
SFAS 157.
9
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the activity in retained interest
balances for the three and nine-month periods ended
October 31, 2008, and November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Retained interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained interest at beginning of period
|
|
$
|
312
|
|
|
$
|
171
|
|
|
$
|
223
|
|
|
$
|
158
|
|
Issuances
|
|
|
59
|
|
|
|
57
|
|
|
|
291
|
|
|
|
137
|
|
Distributions from conduits
|
|
|
(73
|
)
|
|
|
(33
|
)
|
|
|
(213
|
)
|
|
|
(114
|
)
|
Net accretion
|
|
|
11
|
|
|
|
9
|
|
|
|
31
|
|
|
|
20
|
|
Change in fair value for the period
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained interest at end of period
|
|
$
|
308
|
|
|
$
|
201
|
|
|
$
|
308
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes the assumptions used to measure the
fair value of the retained interest as of October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Key Assumptions
|
|
|
|
|
|
|
|
Monthly
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
Rates
|
|
|
Losses
|
|
|
Discount Rates
|
|
|
Life
|
|
|
|
|
|
|
(lifetime)
|
|
|
(annualized)
|
|
|
(months)
|
|
|
Time of sale valuation of
retained interest
|
|
|
14
|
%
|
|
|
6
|
%
|
|
|
14
|
%
|
|
|
14
|
|
Valuation of retained
interests
|
|
|
8
|
%
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
12
|
|
The impact of adverse changes to the key valuation assumptions
to the fair value of retained interest at October 31, 2008,
is shown in the following table:
|
|
|
|
|
|
|
October 31,
|
|
|
|
2008
|
|
|
|
(in millions)
|
|
|
Adverse change of:
|
|
|
|
|
Expected prepayment speed: 10%
|
|
$
|
(15
|
)
|
Expected prepayment speed: 20%
|
|
$
|
(22
|
)
|
|
|
|
|
|
Expected credit losses: 10%
|
|
$
|
(13
|
)
|
Expected credit losses: 20%
|
|
$
|
(25
|
)
|
|
|
|
|
|
Discount rate: 10%
|
|
$
|
(5
|
)
|
Discount rate: 20%
|
|
$
|
(10
|
)
|
The analyses above utilized 10% and 20% adverse variation in
assumptions to assess the sensitivities in fair value of the
retained interest. However, these changes generally cannot be
extrapolated because the relationship between a change in one
assumption to the resulting change in fair value may not be
linear. For the above sensitivity analyses, each key assumption
was isolated and evaluated separately. Each assumption was
adjusted
10
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
by 10% and 20% while holding the other key assumptions constant.
Assumptions may be interrelated, and changes to one assumption
may impact others and the resulting fair value of the retained
interest. For example, increases in market interest rates may
result in lower prepayments and increased credit losses. The
effect of multiple assumption changes were not considered in the
analyses.
Asset Securitization
During the first nine months of Fiscal 2009 and Fiscal 2008,
Dell sold $1.1 billion and $950 million, respectively,
of fixed-term leases and loans and revolving loans to
unconsolidated qualifying special purpose entities. The
qualifying special purpose entities are bankruptcy remote legal
entities with assets and liabilities separate from those of
Dell. The sole purpose of the qualifying special purpose
entities is to facilitate the funding of financing receivables
in the capital markets. Dell determines the amount of
receivables to securitize based on its funding requirements in
conjunction with specific selection criteria designed for the
transaction. The qualifying special purpose entities have
entered into financing arrangements with three multi-seller
conduits that, in turn, issue asset-backed debt securities in
the capital markets. Transfers of financing receivables are
recorded in accordance with the provisions of
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a Replacement of FASB Statement
No. 125 (SFAS 140). The principal
balance of the securitized receivables at October 31, 2008,
and February 1, 2008, was $1.4 billion and
$1.2 billion, respectively.
Dell retains the right to receive collections on securitized
receivables in excess of amounts needed to pay interest and
principal as well as other required fees. Upon the sale of the
financing receivables, Dell records the present value of the
excess cash flows as a retained interest. At October 31,
2008, Dells retained interest in securitized receivables
was $308 million. Dell services the securitized contracts
and earns a servicing fee. Dells securitization
transactions generally do not result in servicing assets and
liabilities, as the contractual fees are adequate compensation.
Dell 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. Should these events occur, Dell does not
expect a material adverse effect on the valuation of the
retained interest or on Dells ability to securitize
financing receivables.
As of October 31, 2008, and February 1, 2008,
securitized financing receivables 60 days or more
delinquent were $58 million and $54 million,
respectively. These amounts represent 4.2% and 4.4% of the
ending securitized financing receivables balances for the
respective periods.
Net credit losses for the three months ended October 31,
2008, and November 2, 2007, were $26 million and
$21 million, respectively. These amounts represent
annualized credit losses of 7.3% and 7.1% of the average
outstanding securitized financing receivables balance for the
respective three-month periods. Net credit losses for the nine
months ended October 31, 2008, and November 2, 2007,
were $81 million and $55 million, respectively. These
amounts represent annualized credit losses of 7.8% and 6.5% of
the average outstanding securitized financing receivables
balance for the respective nine-month periods.
11
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On February 2, 2008, Dell adopted the effective portions of
SFAS 157. In February 2008, the FASB issued
FSP 157-2,
which provides a one year deferral of the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at
least annually). Therefore, Dell adopted the provisions of
SFAS 157 with respect to only financial assets and
liabilities. SFAS 157 defines fair value, establishes a
framework for measuring fair value, and enhances disclosure
requirements for fair value measurements. This statement does
not require any new fair value measurements. SFAS 157
defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
In determining fair value, Dell uses various methods including
market, income, and cost approaches. Dell utilizes valuation
techniques that maximize the use of observable inputs and
minimizes the use of unobservable inputs. The adoption of this
statement did not have a material effect on the consolidated
financial statements.
As a basis for categorizing these inputs, SFAS 157
establishes the following hierarchy, which prioritizes the
inputs used to measure fair value from market based assumptions
to entity specific assumptions:
|
|
|
Level 1: Inputs based on quoted market prices for identical
assets or liabilities in active markets at the measurement date.
|
|
|
Level 2: Observable inputs other than quoted prices
included in Level 1, such as quoted prices for similar assets
and liabilities in active markets; quoted prices for identical
or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be
corroborated by observable market data.
|
|
|
Level 3: Inputs reflect managements best estimate of
what market participants would use in pricing the asset or
liability at the measurement date. The inputs are unobservable
in the market and significant to the instruments valuation.
|
The following table presents Dells hierarchy for its
assets and liabilities measured at fair value on a recurring
basis as of October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(in millions)
|
|
|
Investments - available for sale securities
|
|
$
|
-
|
|
|
$
|
1,035
|
|
|
$
|
27
|
|
|
$
|
1,062
|
|
Investments - trading securities
|
|
|
1
|
|
|
|
82
|
|
|
|
-
|
|
|
|
83
|
|
Retained interest
|
|
|
-
|
|
|
|
-
|
|
|
|
308
|
|
|
|
308
|
|
Derivative instruments
|
|
|
-
|
|
|
|
1,687
|
|
|
|
-
|
|
|
|
1,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on recurring basis
|
|
$
|
1
|
|
|
$
|
2,804
|
|
|
$
|
335
|
|
|
$
|
3,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
390
|
|
|
$
|
-
|
|
|
$
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value on recurring basis
|
|
$
|
-
|
|
|
$
|
390
|
|
|
$
|
-
|
|
|
$
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following section describes the valuation methodologies Dell
uses to measure financial instruments at fair value:
Investments Available for Sale The majority
of Dells investment portfolio 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, as of October 31,
2008, 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. The Level 3 position 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.
Investments Trading Securities The majority
of Dells trading portfolio 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 that are not exchange traded and valued at their net asset
value, which can be market corroborated.
Retained Interests 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, current and long-term, on the
Condensed Consolidated Statement of Financial Position. See
Note 5 of Notes to Condensed Consolidated Financial
Statements for additional information about retained interest.
Derivative Instruments Dells derivative
financial instruments consist of interest rate swaps and foreign
currency forward and purchased option contracts. The portfolio
is valued using internal models based on market observable
inputs, including interest rate curves and both forward and spot
prices for currencies, implied volatilities, and credit risk.
13
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 (Level 3) for the three and nine
months ended October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Retained
|
|
|
Available
|
|
|
|
|
Three Months Ended
October 31, 2008
|
|
Interest
|
|
|
for Sale
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at August 1, 2008
|
|
$
|
312
|
|
|
$
|
26
|
|
|
$
|
338
|
|
Net unrealized gains included in
earnings(a)
|
|
|
10
|
|
|
|
1
|
|
|
|
11
|
|
Issuances and settlements
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008
|
|
$
|
308
|
|
|
$
|
27
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
Retained
|
|
|
Available
|
|
|
|
|
Nine Months Ended
October 31, 2008
|
|
Interest
|
|
|
for Sale
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at February 1, 2008
|
|
$
|
223
|
|
|
$
|
-
|
|
|
$
|
223
|
|
Net unrealized gains included in
earnings(a)
|
|
|
7
|
|
|
|
2
|
|
|
|
9
|
|
Issuances and settlements
|
|
|
78
|
|
|
|
-
|
|
|
|
78
|
|
Purchases
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008
|
|
$
|
308
|
|
|
$
|
27
|
|
|
$
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
The unrealized gains on investments
available for sale represent accrued interest.
|
Unrealized gains for the three and nine-month period ended
October 31, 2008, related to the Level 3 retained
interest asset and convertible debt security asset still held at
the reporting date, are reported in income.
Items Measured at Fair Value on a Nonrecurring
Basis Certain financial assets and liabilities
are measured at fair value on a nonrecurring basis and therefore
not included in the recurring fair value table. The balances are
not material relative to our balance sheet, and there were no
material non-recurring adjustments to disclose under the
provisions of SFAS 157 for the three and nine-month periods
ended October 31, 2008.
14
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
NOTE 7
|
WARRANTY
LIABILITY AND RELATED DEFERRED SERVICE REVENUE
|
Revenue from extended warranty and service contracts, for which
Dell is obligated to perform, is recorded as deferred revenue
and subsequently recognized over the term of the contract or
when the service is completed. Dell records warranty liabilities
at the time of sale for the estimated costs that may be incurred
under its limited warranty. Changes in Dells deferred
revenue for extended warranties, and warranty liability for
standard warranties which are included in other current and
non-current liabilities on Dells Condensed Consolidated
Statements of Financial Position, are presented in the following
tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
November 2,
2007(b)
|
|
|
October 31, 2008
|
|
|
November 2,
2007(b)
|
|
|
|
(in millions)
|
|
|
Deferred service revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred service revenue at beginning of period
|
|
$
|
5,689
|
|
|
$
|
4,662
|
|
|
$
|
5,260
|
|
|
$
|
4,221
|
|
Revenue deferred for new extended warranty and service contracts
sold(c)
|
|
|
696
|
|
|
|
1,060
|
|
|
|
2,698
|
|
|
|
2,876
|
|
Revenue
recognized(d)
|
|
|
(812
|
)
|
|
|
(702
|
)
|
|
|
(2,385
|
)
|
|
|
(2,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred service revenue at end of period
|
|
$
|
5,573
|
|
|
$
|
5,020
|
|
|
$
|
5,573
|
|
|
$
|
5,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
2,572
|
|
|
$
|
2,385
|
|
|
$
|
2,572
|
|
|
$
|
2,385
|
|
Non-current portion
|
|
|
3,001
|
|
|
|
2,635
|
|
|
|
3,001
|
|
|
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred service revenue at end of period
|
|
$
|
5,573
|
|
|
$
|
5,020
|
|
|
$
|
5,573
|
|
|
$
|
5,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
November 2, 2007
|
|
|
October 31, 2008
|
|
|
November 2, 2007
|
|
|
|
(in millions)
|
|
|
Warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at beginning of period
|
|
$
|
1,078
|
|
|
$
|
914
|
|
|
$
|
929
|
|
|
$
|
958
|
|
Costs accrued for new warranty contracts and changes in
estimates for pre-existing
warranties(a) (c)
|
|
|
227
|
|
|
|
301
|
|
|
|
910
|
|
|
|
870
|
|
Service obligations
honored(d)
|
|
|
(283
|
)
|
|
|
(274
|
)
|
|
|
(817
|
)
|
|
|
(887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
1,022
|
|
|
$
|
941
|
|
|
$
|
1,022
|
|
|
$
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
723
|
|
|
$
|
610
|
|
|
$
|
723
|
|
|
$
|
610
|
|
Non-current portion
|
|
|
299
|
|
|
|
331
|
|
|
|
299
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability at end of period
|
|
$
|
1,022
|
|
|
$
|
941
|
|
|
$
|
1,022
|
|
|
$
|
941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
(b)
|
|
Prior period amounts have been
changed to reflect a reclassification between the current
portion and non-current portion of deferred service revenue.
There is no impact to the Condensed Consolidated Statements of
Income as a result of this change.
|
|
(c)
|
|
Includes the impact of foreign
currency exchange rate fluctuations.
|
|
(d)
|
|
Fiscal 2009 and Fiscal 2008 amounts
have been revised to include foreign currency exchange rate
fluctuations in revenue deferred for new extended warranty and
service contracts sold and costs accrued for new warranty
contracts and changes in estimates for pre-existing warranties
to conform to the current period presentation.
|
15
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Dell completed two acquisitions, The Networked Storage Company
and MessageOne, Inc. (MessageOne), in the first nine
months of Fiscal 2009 for approximately $183 million in
cash. Dell recorded approximately $126 million of goodwill
and approximately $63 million of purchased intangibles
related to these acquisitions. The larger of these transactions
was the purchase of MessageOne, for approximately
$164 million in cash plus an additional $10 million to
be used for management retention. MessageOne has been integrated
into Dells Global Services organization, which supports
Dells Americas Commercial; Europe, Middle East, and Africa
(EMEA) Commercial; and Asia Pacific-Japan
(APJ) Commercial segments, and The Networked Storage
Company has been integrated into Dells EMEA Commercial
segment. With these acquisitions, Dell expects to be able to
broaden its services offerings to customers.
The acquisition of MessageOne was identified and acknowledged by
Dells Board of Directors as a related party transaction
because Michael Dell and his family held indirect ownership
interests in MessageOne. Consequently, Dells Board
directed management to implement a series of measures designed
to ensure that the transaction was considered, analyzed,
negotiated, and approved objectively and independent of any
control or influence from the related parties.
Dell has recorded all of its acquisitions using the purchase
method of accounting in accordance with SFAS No. 141,
Business Combinations. Accordingly, the results of
operations of the acquired companies have been included in
Dells consolidated results since the date of each
acquisition. Dell allocates the purchase price of its
acquisitions to the tangible assets, liabilities, and intangible
assets acquired, which include in-process research &
development charges, based on their estimated fair values. The
excess of the purchase price over the fair value of the
identified assets and liabilities has been recorded as goodwill.
The fair value assigned to the assets acquired is based on
valuations using managements estimates and assumptions.
Dell does not expect the majority of goodwill related to these
acquisitions to be deductible for tax purposes. Dell has not
presented pro forma results of operations because these
acquisitions are not material to Dells consolidated
results of operations, financial position, or cash flows on
either an individual or an aggregate basis.
|
|
NOTE 9
|
GOODWILL
AND INTANGIBLE ASSETS
|
Goodwill
Dell records the excess of an acquisitions purchase price
over the fair value of the identified assets and liabilities as
goodwill. Goodwill allocated to Dells business segments as
of October 31, 2008, and changes in the carrying amount of
goodwill for the nine months ended October 31, 2008, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
EMEA
|
|
|
APJ
|
|
|
Global
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Balance at February 1, 2008
|
|
$
|
822
|
|
|
$
|
412
|
|
|
$
|
127
|
|
|
$
|
287
|
|
|
$
|
1,648
|
|
Goodwill acquired
|
|
|
72
|
|
|
|
34
|
|
|
|
20
|
|
|
|
-
|
|
|
|
126
|
|
Adjustments to goodwill
|
|
|
(24
|
)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
10
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008
|
|
$
|
870
|
|
|
$
|
437
|
|
|
$
|
139
|
|
|
$
|
297
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill is tested annually during the second fiscal quarter and
whenever events or circumstances indicate an impairment may have
occurred. If the carrying amount of goodwill exceeds its fair
value, estimated based on discounted cash flow analyses, an
impairment charge would be recorded. Based on the results of its
annual impairment tests, Dell determined that no impairment of
goodwill existed at August 1, 2008, and for the fiscal year
ended February 1, 2008. The goodwill adjustments primarily
relate to purchase price allocation adjustments. No triggering
events have transpired since August 1, 2008, that would
indicate a potential impairment of goodwill.
16
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Intangible
Assets
Dells intangible assets as of October 31, 2008, and
February 1, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
February 1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(in millions)
|
|
|
Technology
|
|
$
|
524
|
|
|
$
|
(66
|
)
|
|
$
|
458
|
|
|
$
|
492
|
|
|
$
|
(16
|
)
|
|
$
|
476
|
|
Customer relationships
|
|
|
243
|
|
|
|
(30
|
)
|
|
|
213
|
|
|
|
231
|
|
|
|
(9
|
)
|
|
|
222
|
|
Tradenames
|
|
|
41
|
|
|
|
(8
|
)
|
|
|
33
|
|
|
|
39
|
|
|
|
(6
|
)
|
|
|
33
|
|
Covenants not-to-compete
|
|
|
26
|
|
|
|
(5
|
)
|
|
|
21
|
|
|
|
23
|
|
|
|
(1
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
834
|
|
|
|
(109
|
)
|
|
|
725
|
|
|
|
785
|
|
|
|
(32
|
)
|
|
|
753
|
|
Indefinite lived intangible assets
|
|
|
25
|
|
|
|
-
|
|
|
|
25
|
|
|
|
27
|
|
|
|
-
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
859
|
|
|
$
|
(109
|
)
|
|
$
|
750
|
|
|
$
|
812
|
|
|
$
|
(32
|
)
|
|
$
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future annual pre-tax amortization expense of
finite-lived intangible assets as of October 31, 2008, over
the next five fiscal years and thereafter is as follows:
|
|
|
|
|
Fiscal Years
|
|
(in millions)
|
|
|
2009 (remaining 3 months)
|
|
$
|
27
|
|
2010
|
|
|
160
|
|
2011
|
|
|
144
|
|
2012
|
|
|
122
|
|
2013
|
|
|
100
|
|
Thereafter
|
|
|
172
|
|
|
|
|
|
|
Total
|
|
$
|
725
|
|
|
|
|
|
|
Dells effective income tax rate was 28.0% for the third
quarter of Fiscal 2009, as compared to 18.2% for the same
quarter in the prior year. For the first nine months of Fiscal
2009 and Fiscal 2008, the effective income tax rate was 25.9%
and 23.0%, respectively. The increase in the effective rate in
the third quarter of Fiscal 2009 is primarily due to increased
profitability mix in higher tax rate jurisdictions.
Additionally, the third quarter of Fiscal 2008 included a
$45 million reduction to update Dells estimated
Fiscal 2008 effective annual income tax rate from 25.3% to
23.0%. 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 2009
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 2008. Although the
timing of income tax audit resolution and negotiations with
taxing authorities is highly uncertain, Dell does not anticipate
a significant change to the total amount of unrecognized income
tax benefits within the next 12 months. Dell has received
certain non-income tax assessments and is involved in related
non-income tax litigation matters in certain jurisdictions. Dell
believes its positions are supportable, a liability is not
probable, and that it will ultimately prevail. However,
significant judgment is required in determining the ultimate
outcome of these matters. In the normal course of business,
Dells positions and conclusions related to its non-income
taxes could be challenged and assessments may be made. To the
extent new information is obtained and Dells views on
17
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
its positions, probable outcomes of assessments, or litigation
changes, changes in estimates to Dells accrued liabilities
would be recorded in the period in which the determination is
made.
|
|
NOTE 11
|
COMMITMENTS
AND CONTINGENCIES
|
Severance Costs and Facility Closures In
Fiscal 2008, Dell announced a comprehensive review of costs
which is currently ongoing. Since this announcement and through
the end of the third quarter of Fiscal 2009, Dell reduced
headcount and closed certain Dell facilities. Results of
operations for the third quarter and first nine months of Fiscal
2009 include net pre-tax charges of $17 million and
$148 million, respectively, for these headcount and
facility actions. Additionally, the sales of three facilities
were finalized during the first nine months of Fiscal 2009
resulting in $44 million of proceeds reflected in cash from
investing activities. As of October 31, 2008, and
February 1, 2008, the accrual related to these cost
reductions and efficiency actions was $45 million and
$35 million, respectively, which is included in accrued and
other liabilities in the Condensed Consolidated Statements of
Financial Position.
Restricted Cash Pursuant to an agreement
between DFS and CIT, Dell is required to maintain escrow cash
accounts that are held as recourse reserves for credit losses,
performance fee deposits related to Dells private label
credit card, and deferred servicing revenue. Restricted cash in
the amount of $247 million and $294 million is
included in other current assets at October 31, 2008, and
February 1, 2008, respectively.
Legal Matters Dell is involved in various
claims, suits, investigations, and legal proceedings. As
required by SFAS No. 5, Accounting for
Contingencies, Dell accrues a liability when it believes
that it is both probable that a liability has been incurred and
that it can reasonably estimate the amount of the loss. Dell
reviews these accruals at least quarterly and adjusts them to
reflect ongoing negotiations, settlements, rulings, advice of
legal counsel, and other relevant information. However,
litigation is inherently unpredictable. Therefore, Dell could
incur judgments or enter into settlements of claims that could
adversely affect its operating results or cash flows in a
particular period.
The following is a discussion of Dells significant legal
matters.
|
|
|
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. The SECs requests for
information were joined by a similar request from the United
States Attorney for the Southern District of New York
(SDNY), who subpoenaed documents related to
Dells financial reporting from and after Fiscal 2002. 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 investigations being
conducted by the SEC and the SDNY are ongoing. Dell continues to
cooperate with the SEC and the SDNY.
|
Dell and several of its current and former directors and
officers were named as parties to securities, Employee
Retirement Income Security Act of 1974 (ERISA), and
shareholder derivative lawsuits all arising out of the same
events and facts.
Four putative securities class actions that were filed 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
18
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 filed a notice of appeal to the Fifth
Circuit Court of Appeals with respect to the dismissal of Dell
and the officer defendants.
Four other putative class actions that were also filed in the
Western District, Austin Division, by purported participants in
the Dell 401(k) Plan were consolidated as In re Dell ERISA
Litigation, and lead plaintiffs were appointed by the court.
The lead plaintiffs asserted claims under ERISA based on
allegations that Dell and certain current and former directors
and officers imprudently invested and managed participants
funds and failed to disclose information regarding its stock
held in the 401(k) Plan. On June 23, 2008, the court
granted the defendants motion to dismiss as to the
plaintiffs claims under ERISA based on allegations of
imprudence, but the court denied the motion to dismiss as to the
claims under ERISA based on allegations of a failure to
accurately disclose information. On October 29, 2008, the
court dismissed all of the individual plaintiffs claims
with prejudice.
In addition, seven shareholder derivative lawsuits that were
filed 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.
The Board of Directors received a shareholder demand letter,
dated November 12, 2008, asserting allegations similar to
those made in the securities and derivative lawsuits against
various current and former officers and directors and
PricewaterhouseCoopers LLP, and requesting that the Board of
Directors investigate and assert claims relating to those
allegations on behalf of Dell. The Board of Directors will
consider and address the demand.
|
|
|
Copyright Levies Proceedings against the IT
industry in Germany seek to impose levies on equipment such as
personal computers and multifunction devices that facilitate
making private copies of copyrighted materials. The total levies
due, if imposed, would be based on the number of products sold
and the per-product amounts of the levies, which vary. Dell,
along with other companies and various industry associations,
are opposing these levies and instead are advocating
compensation to rights holders through digital rights management
systems.
|
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 vigorously and does not expect the outcome to have a
material adverse effect on its financial condition or results of
operations.
|
|
|
Lucent v. Dell In February 2003, Lucent
Technologies, Inc. filed a lawsuit against Dell alleging that
Dell infringed 12 patents owned by Lucent and seeking monetary
damages and injunctive relief. The asserted patents are owned by
two parties: Alcatel-Lucent and Multimedia Patent Trust
(MPT). Dell settled with MPT, licensing the patents
asserted by MPT in the lawsuit, but not with Alcatel-Lucent.
Trial as to the Alcatel-Lucent owned patents resulted in a jury
verdict on April 4, 2008. The verdict was in Dells
favor except for a $51,000 liability for infringement of one of
the Alcatel-Lucent owned patents (which is subject to indemnity
by
|
19
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
|
|
|
Microsoft). Given the favorable court rulings and the resolution
of the indemnity coverage related to Microsoft products, Dell
reduced its reserves by $55 million through cost of sales
in the first quarter of Fiscal 2009. In a decision dated
May 8, 2008, the Federal Circuit Court of Appeals reversed
the claim interpretation and remanded to the District Court one
of the patents on which Dell had won summary judgment (which is
also subject to the Microsoft indemnity). Dell does not expect
the outcome of this legal proceeding to have a material adverse
effect on its financial condition, results of operations, or
cash flows.
|
Dell is involved in various other claims, suits, investigations,
and legal proceedings that arise from time to time in the
ordinary course of its business. Although Dell does not expect
that the outcome in any of these other legal proceedings,
individually or collectively, will have a material adverse
effect on its financial condition or results of operations,
litigation is inherently unpredictable. Therefore, Dell could
incur judgments or enter into settlements of claims that could
adversely affect its operating results or cash flows in a
particular period.
|
|
NOTE 12
|
SEGMENT
INFORMATION
|
Dell conducts operations worldwide. Effective the first quarter
of Fiscal 2009, Dell combined the consumer business of EMEA,
APJ, and Americas International (formerly reported through
Americas Commercial) with the U.S. Consumer business and
re-aligned its management and financial reporting structure. As
a result, effective May 2, 2008, Dells operating
segments consisted of the following four segments: Americas
Commercial, EMEA Commercial, APJ Commercial, and Global
Consumer. Dells commercial business includes sales to
corporate, government, healthcare, education, small and medium
business customers, and value-added resellers and is managed
through the Americas Commercial, EMEA Commercial, and APJ
Commercial segments. The Americas Commercial segment, which is
based in Round Rock, Texas, encompasses the U.S., Canada, and
Latin America. The EMEA Commercial segment, based in Bracknell,
England, covers Europe, the Middle East, and Africa; and the APJ
Commercial segment, based in Singapore, encompasses the Asian
countries of the Pacific Rim as well as Australia, New Zealand,
and India. The Global Consumer segment, which is based in Round
Rock, Texas, includes global sales and product development for
individual consumers and retailers around the world. Dell
revised previously reported operating segment information to
conform to its new operating segments in effect as of
May 2, 2008.
Corporate expenses are included in Dells measure of
segment operating income for management reporting purposes;
however, with the adoption of SFAS 123(R), stock-based
compensation expense is not allocated to Dells operating
segments. Beginning in the fourth quarter of Fiscal 2008,
acquisition-related charges such as in-process research and
development and amortization of intangibles are not allocated to
Dells operating segments.
20
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents net revenue by Dells
reportable segments as well as a reconciliation of consolidated
segment operating income to Dells consolidated operating
income for the three and nine-month periods ended
October 31, 2008, and November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Commercial
|
|
$
|
7,229
|
|
|
$
|
7,834
|
|
|
$
|
22,623
|
|
|
$
|
22,765
|
|
EMEA Commercial
|
|
|
3,272
|
|
|
|
3,448
|
|
|
|
10,581
|
|
|
|
9,927
|
|
APJ Commercial
|
|
|
1,818
|
|
|
|
1,790
|
|
|
|
5,896
|
|
|
|
5,262
|
|
Global Consumer
|
|
|
2,843
|
|
|
|
2,574
|
|
|
|
8,573
|
|
|
|
7,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
15,162
|
|
|
$
|
15,646
|
|
|
$
|
47,673
|
|
|
$
|
45,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Commercial
|
|
$
|
763
|
|
|
$
|
663
|
|
|
$
|
2,051
|
|
|
$
|
2,064
|
|
EMEA Commercial
|
|
|
116
|
|
|
|
211
|
|
|
|
409
|
|
|
|
695
|
|
APJ Commercial
|
|
|
123
|
|
|
|
76
|
|
|
|
411
|
|
|
|
304
|
|
Global Consumer
|
|
|
112
|
|
|
|
(24
|
)
|
|
|
142
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated segment operating income
|
|
|
1,114
|
|
|
|
926
|
|
|
|
3,013
|
|
|
|
3,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
(73
|
)
|
|
|
(97
|
)
|
|
|
(201
|
)
|
|
|
(398
|
)
|
In-process research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
Amortization of intangible assets
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
1,015
|
|
|
$
|
829
|
|
|
$
|
2,733
|
|
|
$
|
2,664
|
|
|
|
|
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Commercial Paper
Dell has a commercial paper program with a supporting senior
unsecured revolving credit facility that allows Dell to obtain
favorable short-term borrowing rates. The commercial paper
program and related revolving credit facilities were increased
from $1.0 billion to $1.5 billion on April 4,
2008. Dell pays these facilities commitment fees at rates based
upon Dells credit rating. Unless extended,
$500 million expires on April 3, 2009, and
$1.0 billion expires on June 1, 2011. The facilities
require compliance with conditions that must be satisfied prior
to any borrowing, as well as ongoing compliance with specified
affirmative and negative covenants, including maintenance of a
minimum interest coverage ratio. Amounts outstanding under the
facilities may be accelerated for typical defaults, including
failure to pay principal or interest, breaches of covenants,
non-payment of judgments or debt obligations in excess of
$200 million, occurrence of a change of control, and
certain bankruptcy events.
At October 31, 2008, there was $253 million
outstanding under the commercial paper program and no
outstanding advances under the related revolving credit
facilities. There were no events of default as of
October 31, 2008. At February 1, 2008, there were no
outstanding advances under the commercial paper program or the
related credit facility. Dell uses the proceeds of the program
for general corporate purposes.
21
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
India Credit Facilities
Dell India Pvt Ltd. (Dell India), Dells
wholly-owned subsidiary, maintains unsecured short-term credit
facilities with Citibank N.A. Bangalore Branch India
(Citibank India) that provide a maximum capacity of
$55 million to fund Dell Indias working capital
and import buyers credit needs. The capacity increased
from $30 million to $55 million on August 6,
2008. The incremental $25 million line of credit will
expire by December 31, 2008. Financing is available in both
Indian Rupees and foreign currencies. The borrowings are
extended on an unsecured basis based on Dells guarantee to
Citibank U.S. Citibank India can cancel the facilities in
whole or in part without prior notice, at which time any amounts
owed under the facilities will become immediately due and
payable. Interest on the outstanding loans is charged monthly
and is calculated based on Citibank Indias internal cost
of funds plus 0.25%. At October 31, 2008, and
February 1, 2008, outstanding advances from Citibank India
totaled $12 million and $23 million, respectively, and
are included in short-term debt on Dells Consolidated
Statement of Financial Position.
Long-Term Debt and Interest Rate Risk Management
On April 17, 2008, Dell Inc. issued and sold in a private
placement $600 million aggregate principal amount of
4.70% Notes due 2013 (2013 Notes),
$500 million aggregate principal amount of 5.65% Notes
due 2018 (2018 Notes) and $400 million
aggregate principal amount of 6.50% Notes due 2038
(2038 Notes and, together with the 2013 Notes and
the 2018 Notes, the Notes). The Notes were issued
pursuant to an Indenture dated as of April 17, 2008
(Indenture), between Dell and a trustee. The
Indenture provides that the 2013 Notes will bear interest at the
rate of 4.70% per year, the 2018 Notes will bear interest at the
rate of 5.65% per year, and the 2038 Notes will bear
interest at the rate of 6.50% per year. Interest will be payable
semi-annually on April 15 and October 15. The Notes are
unsecured obligations and rank equally with Dells existing
and future unsecured senior indebtedness. The Notes effectively
rank junior to all indebtedness and other liabilities, including
trade payables, of Dells subsidiaries. The offering of the
Notes was made only to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933
(as amended, Securities Act), and to certain
non-U.S. persons
in accordance with Regulation S under the Securities Act.
The Notes were not registered under the Securities Act or any
state securities laws and, unless so registered, may not be
offered or sold except pursuant to an applicable exemption from
the registration requirements of the Securities Act and
applicable state securities laws. Concurrent with the Notes
issuance, Dell entered into an Exchange and Registration Rights
Agreement as outlined below. The net proceeds from the offering
of the Notes were approximately $1.5 billion after payment
of expenses of the offering.
The Indenture contains customary events of default with respect
to the Notes, including failure to make required payments,
failure to comply with certain agreements or covenants and
certain events of bankruptcy and insolvency. The Indenture also
contains covenants limiting 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 31, 2008, there were no events of default. The
Notes will be redeemable, in whole or in part at any time, at
Dells option, at a make-whole premium
redemption price calculated by Dell equal to the greater of
(i) 100% of the principal amount of the Notes to be
redeemed; and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon
(not including any portion of such payments of interest accrued
as of the date of redemption), discounted to the date of
redemption on a semi-annual basis (assuming a
360-day year
consisting of twelve
30-day
months) at the Treasury Rate (as defined in the Indenture) plus
35 basis points, plus accrued interest thereon to the date
of redemption.
On April 17, 2008, in connection with the sale of the
Notes, Dell entered into an Exchange and Registration Rights
Agreement (Registration Rights Agreement). Under the
Registration Rights Agreement, Dell agreed to file with the SEC
no later than November 7, 2008, and use its reasonable best
efforts to have declared effective within 270 days from the
closing date, an exchange offer registration statement pursuant
to which Dell will issue in exchange for tendered Notes
registered securities containing terms substantially identical
to the Notes in all
22
DELL
INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
material respects. Dell filed the exchange offer registration
statement on September 11, 2008. The exchange offer
registration statement was declared effective and the exchange
offer was commenced on October 29, 2008.
Dell has outstanding the 1998 $300 million 7.10% fixed rate
senior debentures due April 15, 2028 (the Senior
Debentures), which pay interest semi-annually, on April 15
and October 15. The Senior Debentures generally contain no
restrictive covenants, other than a limitation on liens on
Dells assets and a limitation on sale-leaseback
transactions involving Dell property. As of October 31,
2008, there were no events of default. An interest rate swap
agreement entered into concurrently with the issuance of the
Senior Debentures to convert the fixed rate to a floating rate
has a notional amount of $300 million and will mature
April 15, 2028. The floating rates are based on three-month
London Interbank Offered Rates plus 0.79%. As a result of the
interest rate swap agreement, Dells effective interest
rates for the Senior Debentures were 4.03% and 4.17% for the
third quarter and first nine months of Fiscal 2009, respectively.
The Senior Debentures interest rate swap agreement is designated
as a fair value hedge. The changes in the fair value of the
interest rate swap is recorded in accordance with SFAS 133
and reflected in the carrying value of the interest rate swap on
the balance sheet. The carrying value of the debt is adjusted by
an equal and offsetting amount. The estimated fair value of the
debt was approximately $355 million at October 31,
2008, compared to a carrying value of $298 million at that
date.
On April 15, 2008, Dell repaid the principal balance of the
1998 $200 million 6.55% fixed rate senior notes (the
Senior Notes) upon their maturity. An interest rate
swap agreement related to the Senior Notes had a notional amount
of $200 million and also matured April 15, 2008.
Dells effective interest rate for the Senior Notes, prior
to repayment, was 4.03% for the first quarter of Fiscal 2009.
On November 4, 2008, Dell filed a shelf registration
statement with the SEC, which provides Dell with the ability to
issue additional term debt subject to market conditions.
|
|
NOTE 14
|
REDEEMABLE
COMMON STOCK
|
Dell inadvertently failed to register with the SEC the issuance
of some shares under certain employee benefit plans. As a
result, certain purchasers of securities pursuant to those plans
may have had the right to rescind their purchases for an amount
equal to the purchase price paid for the securities, plus
interest from the date of purchase. At February 1, 2008,
approximately 4 million shares ($94 million) were
classified outside stockholders equity because the
redemption features were not within Dells control. These
shares were treated as outstanding for financial reporting
purposes. Dell may also be subject to civil and other penalties
by regulatory authorities as a result of the failure to
register. Dell made a registered rescission offer to eligible
plan participants effective as of August 12, 2008. The
registered rescission offer expired on September 26, 2008,
and payments of $26 million under the offer have been
substantially completed. With the completion of the rescission
offer, $15 million was recorded to Treasury Stock, which
represents the fair market value of the rescinded shares on
September 26, 2008. The remaining shares that were
presented in the mezzanine section of the Condensed Consolidated
Statement of Financial Position have been reclassified to common
stock within shareholders equity on the Condensed
Consolidated Statement of Financial Position as of
October 31, 2008.
23
|
|
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 II Item 1A Risk
Factors.
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 24, 2008. 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
As a leading technology company, we offer a broad range of
product categories, including desktop PCs, notebooks, software
and peripherals, servers and networking products, services, and
storage. We are the number one supplier of personal computer
systems in the United States, and the number two supplier
worldwide.
We have manufacturing locations around the world and
relationships with third-party original equipment manufacturers.
This structure allows us to optimize our global supply chain to
best serve our global customer base. We continue to expand our
supply chain which allows us to enhance product design and
features, shorten product development cycles, improve logistics,
and lower costs, thus improving our competitiveness.
We were founded on the core principle of a direct customer
business model which included build to order hardware for
consumer and commercial customers. The inherent velocity of this
model, which included a highly efficient global supply chain,
allowed for low inventory levels and the ability to be the
industry leader in selling the most relevant technology, at the
best value, to our customers. Our direct relationships with
customers also allowed us to bring to market products that
featured customer driven innovation, thereby allowing us to be
on the forefront of changing user requirements and needs. Over
time we have expanded our business model to include a broader
portfolio of products, including services, and we have also
added new distribution channels, such as consumer retail, system
integrators, and value added resellers, which allow us to reach
even more end-users around the world. We also offer various
financing alternatives, asset management services, and other
customer financial services for business and consumer customers.
As a part of our overall growth strategy, we have executed
targeted acquisitions to augment select areas of our business
with more products, services, and technology.
Our new distribution channels include the launch in Fiscal 2008
of our global retail initiative, offering select products in
retail stores in the Americas; Europe, Middle East, and Africa
(EMEA); and Asia Pacific-Japan (APJ). In
Fiscal 2008, we also launched PartnerDirect, a global program
that will bring our existing value-added reseller programs under
one umbrella including training, certification, deal
registration, focused sales and customer care, and a dedicated
web portal.
We continue to simplify technology and lower costs for our
customers while expanding our business opportunities.
Underpinning these goals is our commitment to achieving
world-class competitiveness, low cost and expense, any-to-any
supply chain, services and solutions, and sales effectiveness.
We are currently focused on five key growth priorities which,
when coupled with our core competencies, we believe will drive
an optimal balance of long-term sustained growth, profitability,
and cash flow:
|
|
|
Global Consumer In the first quarter of
Fiscal 2009, we realigned our management and reporting structure
to focus on worldwide sales to individual consumers and
retailers as a part of an internal consolidation of our consumer
business. Our global consumer business is comprised of on-line
sales, sales over the phone, and sales through our retail
channel. The global consolidation of this business will improve
our global sales execution and coverage through better customer
alignment, targeted sales force investments in rapidly growing
countries, and improved marketing tools. We are also designing
new, innovative products with faster development cycles and
|
24
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|
|
competitive features including the new Studio line of notebooks,
which allow consumers greater personalization and self
expression. Finally, we have rapidly expanded our retail
business in order to reach more consumers.
|
|
|
|
Enterprise In the enterprise, our solution
mission is to help companies of all sizes simplify their IT
environments. The complete solution includes servers, storage,
services, and software. At the core of this simplification
problem is complexity in IT architecture and operations
developed over decades and ineffective services models that
create unnecessary complexity and cost. We are focused on
helping customers identify and remove this unnecessary cost and
complexity. This year we have strengthened our storage portfolio
with expanded EqualLogic solutions, new Power Vault storage
products, and fourth generation DellEMC storage systems. We also
invested in power and cooling solutions for our data center
platforms, including blade servers, and as a result we have
become the industry leader in server virtualization, power, and
cooling performance.
|
|
|
Notebooks Our goal is to reclaim notebook leadership
by creating the best products while shortening our development
cycle and being the most innovative developer of notebooks. To
help meet this goal, we have separated our consumer and
commercial design functions to drive greater focus and launched
several notebook products. Industry analysts expect the sale of
notebook units globally to outpace that of desktops for the
first time next year and for that trend to continue into the
future. In third quarter of Fiscal 2009, we introduced a new
addition to our Dell Inspiron products with our new 3G enabled
Inspiron Mini. This year, we also had the largest global product
launch in our companys history with our new E Series
commercial Latitude and Dell Precision notebooks. We expect to
continue to launch a number of new notebook products throughout
the remainder of Fiscal 2009, targeting various price and
performance bands.
|
|
|
Small and Medium Business We are focused on
providing small and medium businesses the simplest and most
complete IT solution, customized for their needs, by extending
our channel direct program (PartnerDirect) and expanding our
offerings to mid-sized businesses. We are committed to improving
our storage products and services as evidenced by our new
Building IT-as-a-Service solution, which provides businesses
with remote and lifecycle management,
e-mail
backup, and software license management.
|
|
|
Emerging countries We are focused on and
investing resources in emerging countries with an emphasis on
Brazil, Russia, India, and China, where we expect a majority of
the worldwide growth to occur in the next four years. We are
also creating customized products and services to meet the
preferences and demands of individual countries and various
regions, including the new Vostro A notebooks and desktops
designed specifically for cost sensitive growing businesses in
emerging economies.
|
We continue to invest in initiatives that will align our new and
existing products around customers needs in order to drive
long-term, sustainable growth, profitability, and cash flow. We
also continue to grow our business organically and through
acquisitions. During the first nine months of Fiscal 2009, we
acquired two companies, with the larger being MessageOne, Inc.
These acquisitions are targeted to further expand our service
capabilities. We expect to make more acquisitions in the future.
25
Third Quarter Performance
During the third quarter of Fiscal 2009, we faced a challenging
IT end-user demand environment as current economic conditions
influenced global customer spending behavior. We saw a
meaningful decline in global IT end-user demand in September
versus August, and this trend continued into October. Given the
challenging environment, we focused on profitable growth
opportunities, operating expense reductions, and optimizing
product costs. In the third quarter, we also realized greater
than typical declines in component costs. We believe that global
IT industry end-user demand will continue to be challenging, and
we will continue to focus on diversifying our revenue and profit
base, optimizing our product mix, and aggressively managing our
cost structure.
|
|
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|
|
Share position
|
|
|
|
We shipped approximately 10.5 million units, resulting in a
worldwide PC share position of 14.2%, a decrease of
approximately one-half percentage point year-over-year.
|
|
|
|
|
|
Net revenue
|
|
|
|
Net revenue decreased 3% year-over-year to $15.2 billion, with
unit shipments up 3% year-over-year.
|
Operating income
|
|
|
|
Operating income increased 22% year-over-year to $1.0 billion
for the current quarter, or 6.7% of revenue, as compared to $829
million or 5.3% of revenue for the third quarter of Fiscal 2008.
|
|
|
|
|
|
Earnings per share
|
|
|
|
Earnings per share increased 9% to $0.37 for the current quarter
compared to $0.34 for the third quarter of Fiscal 2008.
|
Results
of Operations
The following table summarizes the results of our operations for
the three and nine-month periods ended October 31, 2008,
and November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
October 31, 2008
|
|
November 2, 2007
|
|
October 31, 2008
|
|
November 2, 2007
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except per share amounts and percentages)
|
|
Net revenue
|
|
$
|
15,162
|
|
|
100.0%
|
|
$
|
15,646
|
|
|
100.0%
|
|
$
|
47,673
|
|
|
100.0%
|
|
$
|
45,144
|
|
|
100.0%
|
Gross margin
|
|
$
|
2,853
|
|
|
18.8%
|
|
$
|
2,888
|
|
|
18.5%
|
|
$
|
8,645
|
|
|
18.1%
|
|
$
|
8,677
|
|
|
19.2%
|
Operating expenses
|
|
$
|
1,838
|
|
|
12.1%
|
|
$
|
2,059
|
|
|
13.2%
|
|
$
|
5,912
|
|
|
12.4%
|
|
$
|
6,013
|
|
|
13.3%
|
Operating income
|
|
$
|
1,015
|
|
|
6.7%
|
|
$
|
829
|
|
|
5.3%
|
|
$
|
2,733
|
|
|
5.7%
|
|
$
|
2,664
|
|
|
5.9%
|
Net income
|
|
$
|
727
|
|
|
4.8%
|
|
$
|
766
|
|
|
4.9%
|
|
$
|
2,127
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|
|
4.5%
|
|
$
|
2,268
|
|
|
5.0%
|
Earnings per share diluted
|
|
$
|
0.37
|
|
|
N/A
|
|
$
|
0.34
|
|
|
N/A
|
|
$
|
1.06
|
|
|
N/A
|
|
$
|
1.00
|
|
|
N/A
|
Consolidated Operations
Consolidated revenue decreased 3% year-over-year for the third
quarter of Fiscal 2009 and increased 6%, year-over-year, for the
first nine months of Fiscal 2009. During the third quarter of
Fiscal 2009, our global commercial business revenue declined 6%
year-over-year on a unit shipment decline of 5% due to the
challenging global IT end-user demand environment. Our global
consumer business partially offset the declines in our global
commercial business by posting year-over-year revenue growth of
10% for the third quarter of Fiscal 2009. For the first nine
months of Fiscal 2009, our global commercial business grew 3%
year-over-year and our global consumer business grew 19%
year-over-year. During the third quarter of Fiscal 2009, we grew
revenue in our mobility, software and peripherals, and services
product lines as compared to the third quarter of Fiscal 2008.
For the first nine months of Fiscal 2009, we grew revenue across
all of our product lines with the exception of desktops. Revenue
outside the U.S. comprised 48% of consolidated revenue for
the third quarter of Fiscal 2009, compared to 46% for the same
period last year. Collectively, Brazil, Russia, India, and China
(BRIC) year-over-year revenue growth was 20% on unit
growth of 43% for the third quarter of Fiscal 2009. To continue
to capitalize on and increase international
26
growth, we are tailoring solutions to meet specific regional
needs, enhancing relationships to provide customer choice and
flexibility, and expanding into these and other emerging
countries that represent 85% of the worlds population.
The U.S. Dollar strengthened during the third quarter of
Fiscal 2009 against most major currencies, especially the Euro
and British Pound. In such an environment, foreign denominated
revenues and expenses translate to less U.S. Dollars. We
manage our business on a U.S. Dollar basis and we have a
comprehensive hedging program to substantially mitigate, but not
completely eliminate, the impact of currency fluctuations on our
financial results. We may periodically adjust local currency
product and services pricing in response to currency
fluctuations. The impact of the currency movements on our
revenue growth in the third quarter of Fiscal 2009 was a benefit
of approximately 2% - 3% against the same period of last year.
Operating income increased 22% year-over-year to
$1.0 billion from $829 million for the third quarter
of Fiscal 2009 as compared to the third quarter of Fiscal 2008.
The improvement in operating income was driven by lower
component costs, an improved mix of products and services, and
lower operating expenses as we began to realize the benefits
from our cost-improvement initiatives. Operating expenses
declined 11%, reaching its lowest level in the past seven
quarters. The increase in profitability as a percentage of
revenue was most pronounced in the results of our APJ Commercial
and Global Consumer segments. In the third quarter, the Global
Consumer segment operating income was 4% of revenue. In the
near-term, we expect the operating income percentage for Global
Consumer to be in the 1% - 2% range as we balance profitability
with growth in our expansion in this strategic market. Net
income decreased 5% year-over-year to $727 million during
the third quarter of Fiscal 2009. Impacting net income was a
decline in investment and other, net and a higher effective
income tax rate due to our geographic mix of pre-tax income.
Operating income increased 3% year-over-year to
$2.7 billion for the nine months ended October 31,
2008. The increase in operating income was due to reduced
operating expenses, component cost declines, and an improved mix
of product and services. We continued to carefully manage our
operating expenses while continuing to invest in selected
strategic areas. In addition, for the first nine months of
Fiscal 2009, adjustments to correct items related to prior
periods, in the aggregate, increased income before taxes by
approximately $110 million. The two largest of these
corrections include a reversal of the excess amount of the
provision for Fiscal 2008 employee bonuses and foreign
exchange rate errors. Correcting these errors increased income
before tax by $46 million and $42 million,
respectively. We recorded the correction of these errors in the
first quarter of Fiscal 2009. For the first nine months of
Fiscal 2009, net income decreased 6% year-over-year to
$2.1 billion. Net income was impacted by a decline in
investment and other, and an increase in our effective tax rate
for the first nine months of Fiscal 2009.
Our average selling price (total revenue per unit sold) during
the third quarter and first nine months of Fiscal 2009 decreased
6% and 7%, respectively, year-over-year, which primarily
resulted from our actions to increase our presence in consumer
retail. Our recent market strategy has been to concentrate on
solutions sales to drive a more profitable mix of products and
services, while pricing our products to remain competitive in
the marketplace. In the third quarter and first nine months of
Fiscal 2009, we continued to see competitive pressure,
particularly for lower priced desktops and notebooks, as we
targeted a broader range of products and price bands. We expect
that this competitive pricing environment will continue for the
foreseeable future.
Revenues by Segment
We conduct operations worldwide. Effective the first quarter of
Fiscal 2009, our operating structure consisted of the following
four segments: Americas Commercial, EMEA Commercial, APJ
Commercial, and Global Consumer. Our commercial business
includes sales to corporate, government, healthcare, education,
small and medium business customers, and value-added resellers
and is managed through the Americas Commercial, EMEA Commercial,
and APJ Commercial segments. The Americas Commercial segment,
which is based in Round Rock, Texas, encompasses the U.S.,
Canada, and Latin America. The EMEA Commercial segment, based in
Bracknell, England, covers Europe, the Middle East, and Africa;
and the APJ Commercial segment, based in Singapore, encompasses
the Asian countries of the Pacific Rim as well as Australia, New
Zealand, and India. The Global Consumer segment, which is based
in Round Rock, Texas, includes global sales and product
development for individual consumers and retailers around the
world. See Note 12 of Notes to Consolidated Financial
Statements included in Part I
Item 1 Financial
Statements for additional information about our operating
segments.
27
During the first nine months of Fiscal 2008, we began selling
desktop and notebook computers, printers, ink, and toner through
retail channels in the Americas, EMEA, and APJ in order to
expand our customer base. Our goal is to have strategic
relationships with a number of major retailers in our larger
geographic regions. During the third quarter of Fiscal 2009, we
continued to expand our global retail presence, and we now reach
approximately 20,000 retail locations worldwide.
The following table summarizes our revenue by reportable segment
for three and nine-month period ended October 31, 2008, and
November 2, 2007:
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Three Months Ended
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|
Nine Months Ended
|
|
|
|
|
|
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|
October 31, 2008
|
|
November 2, 2007
|
|
October 31, 2008
|
|
November 2, 2007
|
|
|
|
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% of
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|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
|
|
|
|
|
|
(in millions, except percentages)
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Commercial
|
|
$
|
7,229
|
|
|
48%
|
|
$
|
7,834
|
|
|
50%
|
|
$
|
22,623
|
|
|
48%
|
|
$
|
22,765
|
|
|
50%
|
EMEA Commercial
|
|
|
3,272
|
|
|
21%
|
|
|
3,448
|
|
|
22%
|
|
|
10,581
|
|
|
22%
|
|
|
9,927
|
|
|
22%
|
APJ Commercial
|
|
|
1,818
|
|
|
12%
|
|
|
1,790
|
|
|
11%
|
|
|
5,896
|
|
|
12%
|
|
|
5,262
|
|
|
12%
|
Global Consumer
|
|
|
2,843
|
|
|
19%
|
|
|
2,574
|
|
|
17%
|
|
|
8,573
|
|
|
18%
|
|
|
7,190
|
|
|
16%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
15,162
|
|
|
100%
|
|
$
|
15,646
|
|
|
100%
|
|
$
|
47,673
|
|
|
100%
|
|
$
|
45,144
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Commercial Americas
Commercial revenue decreased 8% and 1% with unit shipments down
14% and 1% year-over-year for the third quarter and first nine
months of Fiscal 2009, respectively. Revenue declined across all
business sectors within Amercias Commercial, except for Latin
America and sales to the U.S. Federal government, due to
the challenging IT end-user demand environment. From a product
perspective, the revenue decline was primarily due to a decrease
in desktop revenue of 14% and 9% for the third quarter and first
nine months of Fiscal 2009, respectively, on a desktop unit
decline of 14% and 4%, for the respective periods. Americas
Commercial also experienced mobility revenue decline of 15% and
5% for the third quarter and first nine months of Fiscal 2009,
respectively, on mobility unit decline of 14% and unit growth of
2% for the respective periods. This decline was offset by strong
revenue growth in services, which increased 10% during the third
quarter of Fiscal 2009 and 17% for the first nine months of
Fiscal 2009. Growth in Latin America was led by Brazil and
Chile, which experienced an 18% and 8%, respectively,
year-over-year increase in revenue during the third quarter of
Fiscal 2009 as compared to Fiscal 2008.
|
|
|
EMEA Commercial EMEA Commercial
experienced a 5% year-over-year decline in revenue on flat unit
shipments for the third quarter of Fiscal 2009. The revenue
decline was primarily a result of a significant decline in
desktop revenue of 16% for the third quarter of Fiscal 2009,
partially offset by revenue growth with our storage products,
software and peripherals, and services. EMEA Commercial also
experienced a mobility revenue decline of 3% on mobility unit
growth of 9% for the third quarter of Fiscal 2009. During the
third quarter of Fiscal 2009, EMEA Commercial continued to
experience weakened demand in Western Europe; however, there was
double digit revenue growth in several emerging countries such
as the Czech Republic, Poland, and Ukraine. This growth, while
consistent with our overall strategy, continued to drive a mix
shift in the EMEA Commercial revenue base. As a result, during
the third quarter of Fiscal 2009, total average revenue per unit
decreased 5%.
|
During the first nine months of Fiscal 2009 EMEA Commercial had
7% year-over-year increase in net revenue with unit shipments up
16%. This growth was due to increases in mobility revenue of 19%
on unit growth of 37% during the first nine months of Fiscal
2009 compared to the same period last year. EMEA Commercial
experienced revenue growth for the first nine months of Fiscal
2009 in emerging countries as well as small and medium
businesses, even though revenue declined for emerging countries
and our small and medium businesses for the third quarter.
|
|
|
APJ Commercial During the third
quarter and first nine months of Fiscal 2009, APJ Commercial
experienced a 2% and 12% year-over-year increase in revenue to
$1.8 billion and $5.9 billion, respectively, on a 15%
and 20% increase in unit shipments, for the respective periods,
driven by strong double digit unit growth in emerging
|
28
|
|
|
countries. For the third quarter of Fiscal 2009, sales of
storage and mobility products increased year-over-year by 25%
and 13%, respectively, with unit growth of 36% for mobility.
Sales of mobility products grew due to the continued shift in
customer preference from desktops to notebooks. For the first
nine months of Fiscal 2009, revenue grew across all product
lines, with mobility and storage leading the growth with
year-over-year revenue increases of 24% and 20%, respectively.
From a country perspective, India, Australia, and New Zealand
experienced strong revenue growth during the third quarter of
Fiscal 2009. During the third quarter of Fiscal 2009,
year-over-year revenue growth for our targeted BRIC countries of
India and China was 16% and 2%, respectively.
|
|
|
|
Global Consumer Global Consumer
revenue increased 10% and 19% year-over-year for the third
quarter of Fiscal 2009 and first nine months of Fiscal 2009,
respectively, on unit growth of 32% and 43% for the third
quarter and first nine months of Fiscal 2009, respectively.
Year-to-date, we have grown over two times the industry rate of
growth on a unit basis and increased our global share to 8.4%,
driven by continued success in the global retail channel and a
more diversified and leading product portfolio. This growth was
led by our APJ consumer business with a 64% year-over-year
increase in revenue. From a product perspective, the increase in
Global Consumer revenue for the third quarter of Fiscal 2009 is
primarily due to strong mobility and services growth of 31% and
16%, respectively. For the first nine months of Fiscal 2009,
mobility and software and peripherals led Global Consumer
revenue growth with year-over-year increases of 46% and 19%,
respectively, and unit growth of 80% for mobility. Our mobility
growth in this segment can be primarily attributed to our
entrance into retail distribution arrangements, which began in
the second half of Fiscal 2008, and the continued shift of
consumer preference from desktops to notebooks. Global
Consumers revenue growth was offset by a 22% and 12%
year-over-year decrease in desktop revenue for the third quarter
and first nine months of Fiscal 2009, on desktop unit decline of
20% and unit growth of 1%, respectively.
|
We believe that global IT industry end-user demand will continue
to be challenging in the foreseeable future, and we will
continue to focus on diversifying our revenue and profit base,
optimizing our product mix, and aggressively managing our cost
structure.
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
desktop computer systems, mobility products, software and
peripherals, servers and networking products, and storage
products. In addition, we offer a range of services.
The following table summarizes our net revenue by product
categories and services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
October 31, 2008
|
|
November 2, 2007
|
|
October 31, 2008
|
|
November 2, 2007
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
Dollars
|
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs
|
|
$
|
4,083
|
|
|
27%
|
|
$
|
4,754
|
|
|
30%
|
|
$
|
13,712
|
|
|
29%
|
|
$
|
14,713
|
|
|
32%
|
Mobility
|
|
|
4,849
|
|
|
32%
|
|
|
4,729
|
|
|
30%
|
|
|
14,624
|
|
|
31%
|
|
|
12,610
|
|
|
28%
|
Software & peripherals
|
|
|
2,586
|
|
|
17%
|
|
|
2,533
|
|
|
16%
|
|
|
8,116
|
|
|
17%
|
|
|
7,254
|
|
|
16%
|
Servers & networking
|
|
|
1,573
|
|
|
10%
|
|
|
1,651
|
|
|
11%
|
|
|
4,928
|
|
|
10%
|
|
|
4,862
|
|
|
11%
|
Services
|
|
|
1,449
|
|
|
10%
|
|
|
1,355
|
|
|
9%
|
|
|
4,359
|
|
|
9%
|
|
|
3,919
|
|
|
9%
|
Storage
|
|
|
622
|
|
|
4%
|
|
|
624
|
|
|
4%
|
|
|
1,934
|
|
|
4%
|
|
|
1,786
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
15,162
|
|
|
100%
|
|
$
|
15,646
|
|
|
100%
|
|
$
|
47,673
|
|
|
100%
|
|
$
|
45,144
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs During the third quarter
and first nine months of Fiscal 2009, revenue from desktop PCs
(which includes desktop computer systems and workstations)
decreased year-over-year 14% and 7%, respectively, on a unit
decline of 10% for the third quarter and a 1% unit growth for
the first nine months of Fiscal 2009. The decline was primarily
due to the on-going competitive pricing pressure for lower
priced desktops and a softening in global IT end-user demand.
Consequently, our average selling price for desktops decreased
5% and 8% year-
|
29
|
|
|
over-year during the third quarter and first nine months of
Fiscal 2009, respectively, as we aligned our prices and product
offerings with the marketplace. Desktop revenue declined
year-over-year across all of our segments for the third quarter
of Fiscal 2009. This decline was the least significant in APJ
Commercial with a 2% year-over-year decline in the third quarter
of Fiscal 2009. For the first nine months of Fiscal 2009,
desktop revenue decreased across all segments except for APJ
Commercial, which experienced year-over-year revenue growth of
7%. Our Americas Commercial, EMEA Commercial, and Global
Consumer segments experienced weaker performance in desktop
sales with year-over-year revenue decreases of 14%, 16%, and
22%, respectively, for the third quarter of Fiscal 2009, and
decreases of 9%, 7%, and 12%, respectively, for the nine months
ending October 31, 2008. 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 outpace desktop growth at a rate of approximately
six-to-one. During the quarter, we introduced four new models of
our OptiPlex commercial desktop systems. These systems cut power
consumption by up to 43%, speed serviceability time by more than
40% versus our competition, and include a portfolio of services
that can be accessed by the user as needed.
|
|
|
|
Mobility During the third quarter and
first nine months of Fiscal 2009, revenue from mobility products
grew 3% and 16%, respectively, on unit growth of 19% and 34%,
respectively. This unit growth rate was slower than the
industrys unit growth of 40% and 39% for the third quarter
and first nine months of calendar 2008, respectively. Our growth
was slower as our commercial businesses transitioned to the new
LatitudeTM
Series E and Dell Precision notebook product lines during
the third quarter combined with slower end-user demand. Our new
product lines range from the lightest ultra-portable in our
history to the most powerful mobile workstation. Partially
offsetting our slower commercial business growth was
year-over-year unit growth in our Global Consumer business of
67% and 80% for the third quarter and first nine months of
Fiscal 2009, respectively, which was better than industry unit
growth. Global Consumer and APJ Commercial led our mobility
revenue growth for the third quarter and first nine months of
Fiscal 2009. As a result, of our expansion into consumer retail,
Global Consumers mobility revenue grew 31% and 46%,
year-over-year, for the first three and nine months of Fiscal
2009, respectively. During the same time period, APJ Commercial
grew revenue by 13% and 24%, respectively, on the strength of
Vostro sales partially offset by weak
LatitudeTM
sales and overall weakening demand in China. EMEA Commercial
mobility revenue declined 3% year-over-year for the third
quarter of Fiscal 2009, but increased 19% year-over-year for the
first nine months of Fiscal 2009. EMEA Commercial continued to
experience competitive pricing pressures as average unit prices
declined 11% and 13% for the third quarter and first nine months
of Fiscal 2009, respectively. EMEA continues to experience
significant unit growth in the lower price bands where we are
expanding our product offering. Americas Commercial mobility
revenue declined 15% and 5% year-over-year for the three and
first nine months of Fiscal 2009, respectively. We continued to
see conservative spending across all business sectors within
Americas Commercial, including Latin America. Competitive
pricing pressures, which were most pronounced in our Global
Consumer and EMEA Commercial segments, drove our average unit
pricing down in Fiscal 2009.
|
In Fiscal 2009, we have launched industry leading mobility
products such as Inspiron 1525, Vostro, and 3G enabled Inspiron
Mini. We have also had success with the recently launched Vostro
A-series. This product was specifically designed for emerging
countries. All of our commercial products in emerging countries
are now cost optimized.
|
|
|
Software and Peripherals Revenue from
sales of software and peripherals consists of Dell-branded
printers, monitors (not sold with systems), projectors, and a
multitude of competitively priced third-party peripherals
including plasma and LCD televisions, software, and other
products. This revenue grew 2% and 12%
year-over-year
for the third quarter and first nine months of Fiscal 2009,
respectively, driven by strength in software licensing primarily
due to our acquisition of ASAP Software (ASAP) in
the fourth quarter of Fiscal 2008. With ASAP, we now offer
products from over 2,000 software publishers. At a segment
level, Global Consumer led the revenue growth with a 6%
year-over-year increase for the third quarter of Fiscal 2009 and
a 19% year-over-year growth rate for the first nine months of
Fiscal 2009. EMEA Commercial and Americas Commercial both
experienced revenue growth of 2% for the third quarter of Fiscal
2009, and 13% and 10%, respectively, for the first nine months
of Fiscal 2009. Software and peripherals revenue for APJ
Commercial decreased 3% year-over-year for the third quarter of
Fiscal 2009, but increased 12% year-over-year for the first nine
months of Fiscal 2009.
|
30
|
|
|
Servers and Networking Revenue and
unit shipments, from sales of servers and networking products,
both declined 5% year-over-year for the third quarter of Fiscal
2009 due to demand challenges across all regions. For the first
nine months of Fiscal 2009, revenue increased 1% on a unit
increase of 11%. For the first nine months of Fiscal 2009, our
server and networking revenue grew slower than units due to our
pricing and product strategy as we shift our product offerings
to lower price bands to drive growth. During Fiscal 2009, we
expanded our server coverage to 88% of the server space, and we
plan to increase our coverage to 95% next year. For the first
nine months of Fiscal 2009, APJ Commercial and Americas
Commercial contributed to the modest revenue growth, and in the
third quarter and first nine months of calendar 2008, we were
again ranked number one in the United States with a 33% and 36%
share, respectively, in server units shipped. During the fiscal
year, we have released our broadest lineup of dedicated
virtualization solutions ever, including more than a dozen new
servers, tools, and services, as a part of our mission to help
companies of all sizes to simplify their IT environments.
|
|
|
Services Services consists of a wide
range of services including assessment, design and
implementation, deployment, asset recovery and recycling,
training, enterprise support, client support, and managed
lifecycle. Services revenue increased 7% and 11% year-over-year
for the third quarter and first nine months of Fiscal 2009
respectively, to $1.4 billion and $4.4 billion,
respectively, mainly due to higher amortization of deferred
service revenue in our Americas Commercial segment and a 12%
year-over-year increase in consulting services revenue for the
third quarter of Fiscal 2009. For the first nine months of
Fiscal 2009, the increase in services revenue was also aided by
our new ProSupport offerings, which distilled ten service
offerings down to two customizable packages spanning our
commercial product and solutions portfolios with flexible
options for service level and proactive management. For the
third quarter of Fiscal 2009, Americas Commercial and Global
Consumer drove the increase in services revenue with
year-over-year revenue growth of 10% and 16%, respectively;
whereas, Americas Commercial and APJ Commercial led
year-over-year revenue growth for the first nine months of
Fiscal 2009, with increases of 17% and 12%, respectively. EMEA
Commercial contributed with year-over-year revenue growth of 1%
for the third quarter and 4% for the first nine months of Fiscal
2009. During Fiscal 2008, we acquired a number of service
technologies and capabilities through acquisitions of certain
companies. These capabilities are being used to build-out our
mix of service offerings. We are continuing to make progress in
services including ProSupport, remote infrastructure management,
and Software as a Service (SaaS), which are aimed at simplifying
IT for our customers. Our deferred service revenue balance
increased from $5.3 billion at February 1, 2008, to
$5.6 billion at October 31, 2008, due to continued
strength in services sales.
|
|
|
Storage Revenue from sales of storage
products remained flat for the third quarter of Fiscal 2009 as
compared to the same period in Fiscal 2008 due to softening
demand in our Americas region as a result of the challenging
demand environment. However, storage revenue increased 8%
year-over-year for the first nine months of Fiscal 2009. For the
first nine months of Fiscal 2009, year-over-year storage growth
was led by strength in our Powervault line and the strong
performance of our EqualLogic iSCSI networked storage solutions.
APJ Commercial and EMEA Commercial experienced strong
year-over-year revenue growth of 25% and 21%, respectively, for
the third quarter of Fiscal 2009, and 20% and 28% revenue
growth, respectively, for the first nine months of Fiscal 2009,
as opposed to Americas Commercial, whose storage revenue
declined 11% during the third quarter and was flat for the first
nine months of Fiscal 2009. During the quarter, we expanded our
storage portfolio by allowing customers to pay as you
grow with EqualLogic and new PowerVault storage products.
|
31
Gross
Margin
The following table presents information regarding our gross
margin for the three and nine-month periods ended
October 31, 2008, and November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008
|
|
|
November 2, 2007
|
|
|
October 31, 2008
|
|
|
November 2, 2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Revenue
|
|
|
|
(in millions, except percentages)
|
|
|
Net revenue
|
|
$
|
15,162
|
|
|
|
100.0%
|
|
|
$
|
15,646
|
|
|
|
100.0%
|
|
|
$
|
47,673
|
|
|
|
100.0%
|
|
|
$
|
45,144
|
|
|
|
100.0%
|
|
Gross margin
|
|
$
|
2,853
|
|
|
|
18.8%
|
|
|
$
|
2,888
|
|
|
|
18.5%
|
|
|
$
|
8,645
|
|
|
|
18.1%
|
|
|
$
|
8,677
|
|
|
|
19.2%
|
|
During the third quarter of Fiscal 2009, our gross margin
decreased in absolute dollars by $35 million from the same
period in the prior year; however, our gross margin percentage
improved from 18.5% to 18.8%. Our gross margin percentage
improvement for the quarter was the result of more profitable
mix of products and services, lower component costs, and in
general, less aggressive unit pricing. The improvement in our
gross margin percentage also reflects continuing progress
against our ongoing cost improvement initiatives. These
initiatives resulted in a number of new product launches during
the third quarter of Fiscal 2009. A significant portion of our
products is now cost optimized, which, depending on the
platform, can yield up to 30% reduction in product costs. For
the first nine months of Fiscal 2009, our gross margin decreased
in absolute dollars by $32 million compared to the same
period in the prior year with a corresponding decrease in gross
margin percentage to 18.1% from 19.2%. For the first nine months
of Fiscal 2009, we were expanding our presence into retail,
which negatively impacted the overall gross margin percentage.
We were also overlapping higher than historical average declines
in component costs in Fiscal 2008, which also negatively
impacted the overall gross margin percentage for the current
year as compared to the prior year. Gross margin was positively
impacted by a favorable ruling in a patent litigation case and
the related reversal of $55 million of litigation reserves
through cost of sales in the first nine months of Fiscal 2009.
In Americas Commercial, gross margin percentage increased
200 basis points year-over-year in the third quarter of
Fiscal 2009; however, gross margin dollars increased only 2% due
to an 8% decrease in revenue. The results can be attributed to
higher average prices due to an improved mix of products and
services and lower costs. Gross margin percentages increased
year-over-year in our servers, storage, services, and software
and peripherals product lines.
For the third quarter and first nine months of Fiscal 2009, our
average selling price decreased and adversely impacted gross
margin in the EMEA Commercial segment. This was primarily due to
weaker western European markets coupled with significant growth
in emerging markets with products focused on lower price and
profitability bands. For the third quarter of Fiscal 2009, gross
margin percentage decreased year-over-year across all product
lines with the exception of storage and software and
peripherals, both of which posted increases in gross margin
percentage and dollars.
For the third quarter and first nine months of Fiscal 2009,
gross margin dollars grew 16% and 19%, respectively, for our APJ
Commercial segment, and gross margin percentage grew as well for
both time periods. The increase in gross margin for APJ
Commercial is a result of unit growth partially offset by a
decrease in the average selling price due to strategic pricing
actions. For the first nine months of Fiscal 2009, gross margin
for APJ Commercial was also positively impacted by higher
mobility shipment volumes, warranty improvement, and favorable
commodity costs.
Global Consumers gross margin percentage was negatively
impacted by year-over-year decreases in average selling prices
for both the third quarter and first nine months of Fiscal 2009
as we participated in a broader spectrum of consumer product
opportunities. Gross margin dollars were up slightly in the
third quarter due to an increase in volumes. Global
Consumers gross margin for the first nine months of Fiscal
2009 was also negatively impacted by an $18 million
increase in litigation reserves.
We continue to evaluate and optimize our global manufacturing
and distribution network, including our relationships with
original design manufacturers, to better meet customer needs and
reduce product cycle times. Our goal is to introduce the latest
relevant technology and to deliver the best value to our
customers worldwide. As we continue to evolve our inventory and
manufacturing business model to capitalize on component cost
declines, we
32
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 direct customer model and real-time
manufacturing. 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 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. We will continue to adjust our
pricing strategy with the goals of remaining in competitive
price position while maximizing margin expansion through new
higher margin products and lower cost optimized design and
services where appropriate.
We are actively reviewing 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.
Two examples of this include the closure of our desktop
manufacturing facility in Austin, Texas, and the sale of our
call center in El Salvador. The cost of these actions and other
headcount and infrastructure reductions was $17 million and
$148 million in the third quarter and first nine months of
Fiscal 2009, respectively, of which approximately
$8 million and $43 million, respectively, affected
gross margin. In addition, we anticipate taking further actions
to reduce total costs in design, materials, and operating
expenses.
Operating
Expenses
The following table summarizes our operating expenses:
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|
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|
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Three Months Ended
|
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Nine Months Ended
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October 31, 2008
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November 2, 2007
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October 31, 2008
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November 2, 2007
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% of
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% of
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|
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% of
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% of
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Dollars
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|
Revenue
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Dollars
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Revenue
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Dollars
|
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|
Revenue
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Dollars
|
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Revenue
|
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(in millions, except percentages)
|
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Operating expenses:
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Selling, general, and
administrative
|
|
$
|
1,671
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|
|
11.0%
|
|
$
|
1,900
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|
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12.2%
|
|
$
|
5,423
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|
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11.4%
|
|
$
|
5,557
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|
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12.3%
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Research, development, and engineering
|
|
|
167
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|
|
1.1%
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|
|
159
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1.0%
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|
|
487
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|
|
0.9%
|
|
|
456
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|
|
1.0%
|
IPR&D
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|
|
-
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|
|
-
|
|
|
-
|
|
|
-
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|
|
2
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|
|
0.1%
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|
|
-
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|
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-
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|
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Operating expenses
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$
|
1,838
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|
|
12.1%
|
|
$
|
2,059
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|
|
13.2%
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|
$
|
5,912
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12.4%
|
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$
|
6,013
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|
|
13.3%
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Selling, general, and administrative
During the third quarter of Fiscal 2009,
selling, general, and administrative (SG&A)
expenses decreased 12% to $1.7 billion compared to
$1.9 billion in the same period of Fiscal 2008. The
decrease in SG&A expenses in the third quarter of Fiscal
2009 from the third quarter of Fiscal 2008 is primarily due to a
reduction in compensation-related expenses of approximately
$140 million, which includes a $24 million decrease in
expenses related to headcount and infrastructure reductions. The
$140 million decrease also includes an approximately
$60 million decrease in bonus-related expenses and an
approximately $22 million decrease in deferred compensation
plan expenses. Additionally, with the increase in retail
volumes, advertising expenses decreased approximately
$50 million in the third quarter of Fiscal 2009 from the
same period in Fiscal 2008. Finally, costs associated with the
ongoing U.S. Securities and Exchange Commission
(SEC) investigation and the Audit Committees
now completed independent investigation decreased by
$21 million from the prior year.
|
For the first nine months of Fiscal 2009, SG&A expenses
decreased 2% to $5.4 billion compared to $5.6 billion
for the same period in Fiscal 2008. The decrease in SG&A
expenses is primarily due to a reduction in compensation-related
expenses of approximately $110 million. This
$110 million decrease is driven by approximately
$150 million reduction in stock-based compensation expense,
which includes approximately
33
$80 million in additional expense incurred during the first
nine months of Fiscal 2008 for cash payments for expiring stock
options. Compensation-related expenses were also affected by a
$38 million reduction related to the reversal of the excess
amount of the Fiscal 2008 bonus accrual in the first nine months
of Fiscal 2009. These decreases were partially offset by an
increase in compensation expense of $59 million related to
headcount and infrastructure reductions as well as increased
healthcare benefit costs. Additionally, with the increase in
retail volumes, advertising expenses decreased approximately
$40 million in the first nine months of Fiscal 2009 from
the same period in Fiscal 2008. Finally, costs associated with
the ongoing SEC and now completed Audit Committee investigations
decreased $98 million, offset by an increase in
depreciation, maintenance, and amortization of intangibles
expenses of approximately $100 million over the prior year.
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Research, development, and engineering
During the third quarter and first nine months
of Fiscal 2009, research, development, and engineering
(RD&E) expenses remained approximately 1% of
revenue. During the third quarter of Fiscal 2009, RD&E
expenses increased approximately $8 million to
$167 million, and for the first nine months of Fiscal 2009,
RD&E expenses increased approximately $31 million to
$487 million. We manage our research, development, and
engineering spending by targeting those innovations, products,
and services most valuable to our customers and by relying upon
the capabilities of our strategic partners. We will continue to
invest in research, development, and engineering activities to
support our growth and to provide for new, competitive products.
We have obtained 2,184 patents worldwide and have applied for
2,469 additional patents worldwide as of October 31, 2008.
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In-Process research and development We
recognized in-process research and development
(IPR&D) charges in connection with acquisitions
accounted for as business combinations. During the first nine
months of Fiscal 2009, we recorded IPR&D charges of
$2 million, primarily related to our acquisition of Message
One, Inc.
|
On May 31, 2007, we announced that we had initiated a
comprehensive review of costs across all processes and
organizations with the goal to simplify structure, eliminate
redundancies, and better align operating expenses with the
current business environment and strategic growth opportunities.
These efforts are continuing. Since the second quarter of Fiscal
2008 and through the end of the third quarter of Fiscal 2009, we
have reduced headcount by approximately 11,000, net of
acquisitions, and closed some of our facilities. We expect to
take further action to reduce costs and invest in strategic
growth areas while focusing on scaling costs and improving
productivity.
Investment
and Other, net
The table below provides a detailed presentation of investment
and other, net for the three and nine months ended
October 31, 2008, and November 2, 2007:
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Three Months Ended
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Nine Months Ended
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October 31,
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November 2,
|
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|
October 31,
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November 2,
|
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|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Investment and other, net:
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|
|
|
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|
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|
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Investment income, primarily interest
|
|
$
|
42
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|
|
$
|
134
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|
|
$
|
146
|
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|
$
|
373
|
|
Gains (losses) on investments, net
|
|
|
1
|
|
|
|
4
|
|
|
|
(10
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)
|
|
|
9
|
|
Interest expense
|
|
|
(28
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)
|
|
|
(9
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)
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|
|
(66
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)
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|
|
(33
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)
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CIT minority interest
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|
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-
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|
(9
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)
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-
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|
(23
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)
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Foreign exchange
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|
|
3
|
|
|
|
(9
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)
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|
|
113
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|
(40
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)
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Other
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|
|
(24
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)
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|
|
(4
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)
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|
|
(46
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)
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|
|
(5
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)
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|
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Investment and other, net
|
|
$
|
(6
|
)
|
|
$
|
107
|
|
|
$
|
137
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
34
The year-over-year decrease in investment income for both the
three and nine-month periods ended October 31, 2008, and
November 2, 2007, is primarily due to decreased earnings on
lower average investment balances. Gain (losses) on investments
decreased for the first nine months of Fiscal 2009 as compared
to the same periods in Fiscal 2008, primarily due to a
$10 million loss recorded for other-than-temporarily
impaired investments during the second quarter of Fiscal 2009
based on a review of factors consistent with those disclosed in
Note 2 of Notes to Consolidated Financial Statements under
Part II Item 8 Financial
Statements and Supplementary Data in our Annual Report on
Form 10-K
for the fiscal year ended February 1, 2008. We continue to
monitor our investment portfolio and take steps to mitigate
impacts from the current volatility in the capital markets. The
year-over-year increase in interest expense is attributable to
interest on the $1.5 billion debt issued in the first
quarter of Fiscal 2009. CIT minority interest was eliminated due
to our purchase of CIT Group Inc.s (CIT) 30%
interest in Dell Financial Services L.L.C. (DFS)
during the fourth quarter of Fiscal 2008. Foreign exchange
increased year-over-year for the third quarter and first nine
months of Fiscal 2009 due to gains realized on our hedge program.
In addition to the gains realized on our hedging program, the
year-over-year increase in foreign exchange for the first nine
months of Fiscal 2009, as compared to the prior year, is due to
a $42 million correction of errors in the remeasurement of
certain local currency balances to the functional currency in
prior periods. A deferred revenue liability was incorrectly
remeasured over time based on changes in currency exchange rates
instead of remaining at historical exchange rates. There was
also a tax liability incorrectly held at a historical rate
instead of being remeasured over time based on changes in
currency exchange rates.
During the first nine months of Fiscal 2009, we recognized a
$31 million decline in the fair market value of our
investments related to our deferred compensation plan. Of the
$31 million expense, $21 million was recorded during
the third quarter of Fiscal 2009. These expenses are included in
Other in the table above.
Income
Taxes
We reported an effective income tax rate of approximately 28.0%
for the third quarter of Fiscal 2009, as compared to 18.2% for
the same quarter in the prior year. For the first nine months of
Fiscal 2009 and Fiscal 2008, our effective tax rate was 25.9%
and 23.0%, respectively. The increase in our effective income
tax rate in the third quarter of Fiscal 2009 is primarily due to
increased profitability mix in higher tax rate jurisdictions.
Additionally, the third quarter of Fiscal 2008 included a
$45 million reduction to update our estimated Fiscal 2008
effective annual income tax rate, from 25.3% to 23.0%. The
differences between our 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 2009 will be impacted by the
actual mix of jurisdictions in which income is generated.
Dell is currently under income tax audit 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 2008. Dell does not
anticipate a significant change to the total amount of
unrecognized income tax benefits within the next twelve months.
Financing
Receivables
Financing Receivables At October 31,
2008, our financing receivables balance was $2.0 billion,
of which $1.4 billion represents customer receivables.
Customer receivables, net, decreased 16% from our balance at
February 1, 2008. This decrease in customer receivables
resulted from a reduction in receivables due from CIT in
connection with promotional programs and an increase in
receivables sold to the conduits. As of October 31, 2008,
and February 1, 2008, the receivables due from CIT in
connection with specified promotional programs were
$31 million and $444 million, respectively. This
decrease in the CIT receivables is primarily due to lower
funding volumes and payments received. As our funding rights
increase, we expect continued growth in customer financing
receivables. To manage this growth, we will continue to balance
the use of our own working capital and other sources of
liquidity. The key decision factors in the analysis are the cost
of funds, required credit enhancements for receivables sold to
the conduits, and the ability to access the capital markets. 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 and our promotional programs.
35
Given the continued volatility in the credit markets, we are
closely monitoring all of our financing receivables and are
actively pursuing strategies to mitigate potential balance sheet
risk. We closely monitor our portfolio performance and have
invested in credit risk management resources, which allow us to
constantly monitor and evaluate credit risk. During Fiscal 2008
and throughout Fiscal 2009, we took underwriting actions,
including reducing our credit approval rate of subprime
customers, in order to protect our portfolio from the
deteriorating credit environment. We continue to assess our
portfolio risk and take additional underwriting actions as we
deem necessary. Subprime consumer receivables comprise
approximately 20% of the gross customer financing receivables
balance at October 31, 2008.
In the third quarter of Fiscal 2009, we continued to experience
year-over-year increased financing receivable credit losses,
consistent with trends in the financial services industry. We
maintain an allowance for losses to cover probable financing
receivable credit losses. The allowance for losses is determined
based on various factors, including historical experience, past
due receivables, receivable type, and customer risk profile.
Substantial changes in the economic environment or any of the
factors mentioned above could change the expectation of
anticipated credit losses. Based on our assessment of the
customer financing receivables and the associated risks, we
believe that we are adequately reserved. As of October 31,
2008, and February 1, 2008, the allowance for financing
receivable losses was $124 million and $96 million,
respectively. A 10% change in this allowance would not be
material to our consolidated results. See Note 5 of Notes
to Consolidated Financial Statements included in
Part I Item 1 Financial
Statements for additional information.
In March 2008, we began a strategic assessment of ownership
alternatives for DFS financing activities. The strategic
assessment focused primarily on U.S. revolving credit
operations for consumer and
small-and-medium
business financing. We considered ownership alternatives that
might strengthen and improve DFSs overall capabilities.
After reviewing proposals and various alternatives, in September
2008 we completed our strategic assessment and decided to retain
the current ownership and operating structure of DFS.
While the financial markets are currently challenged by credit
and capital trends, we made our decision with a long-term view.
The capabilities of the DFS team partner
integration, flexibility, sales optimization and
profitability are a strategic asset in which we
intend to continue to invest. We are committed to strengthening
our financial services products and services to enable revenue
and margin growth.
Off-Balance
Sheet Arrangements
Asset Securitization During the third quarter
of Fiscal 2009, we continued to sell customer 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
sole purpose of the qualifying special purpose entities is to
facilitate the funding of customer receivables in the capital
markets. Once sold, these receivables are off-balance sheet. We
determined the amount of receivables to securitize based on our
funding requirements in conjunction with specific selection
criteria designed for the transaction.
Off-balance sheet securitizations involve the transfer of
customer receivables to unconsolidated qualifying special
purpose entities that are accounted for as a sale in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities, (SFAS 140). Upon the sale of
the customer receivables, we recognize a gain on the sale and
retain an interest in the assets sold. The unconsolidated
qualifying special purpose entities have entered into financing
arrangements with various multi-seller conduits that, in turn,
issue asset-backed debt securities in the capital markets.
During the first nine months of Fiscal 2009 and Fiscal 2008, we
sold $1.1 billion and $950 million, respectively, of
customer receivables to unconsolidated qualifying special
purpose entities. The principal balance of the securitized
receivables at October 31, 2008, and February 1, 2008,
was $1.4 billion and $1.2 billion, respectively.
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). Our retained interest in the securitizations is
determined by calculating the present value of these excess cash
flows over the expected duration of the transactions. Our risk
of loss related to securitized receivables is limited to the
amount of our retained interest. At October 31, 2008, our
retained interest in securitized
36
receivables was $308 million. We service securitized
contracts and earn a servicing fee. Our securitization
transactions generally do not result in servicing assets and
liabilities, as the contractual fees are adequate compensation
based on fair market value.
In estimating the value of the retained interest, we make a
variety of financial assumptions, including pool credit losses,
payment rates, and discount rates. These assumptions are
supported by both our historical experience and anticipated
trends relative to the particular receivable pool. We review our
investments in retained interests periodically for impairment,
based on their estimated fair value. All gains and losses are
recognized in income immediately. Retained interest balances and
assumptions are disclosed in Note 5 of Notes to Condensed
Consolidated Financial Statements included in
Part I Item 1 Financial
Statements.
Our 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 we are unable to restructure the
program, no further funding of receivables will be permitted,
and the timing of expected retained interest cash flows will be
delayed, which would impact the valuation of our retained
interest. Should these events occur, we do not expect a material
adverse effect on the valuation of the retained interest or on
our ability to securitize financing receivables.
Currently, capital markets are experiencing an unusual period of
volatility and reduced liquidity that we expect will continue to
increase costs and credit enhancements required for funding of
financial assets. Our exposure to the capital markets will
increase as we continue to fund additional customer receivables.
We do not expect current capital market conditions will limit
our ability to access liquidity for funding customer receivables
in the future, as we continue to find funding sources in the
capital markets, although at higher costs.
Liquidity
and Capital Commitments
Current
Market Conditions
Current global economic conditions have resulted in increased
volatility in the financial markets. During the third quarter of
Fiscal 2009, we actively monitored the financial health of our
supplier base, tightened requirements for customer credit,
diversified financial partner exposure, and increased spending
controls across the company. We will continue to monitor and
manage these activities depending on current and expected market
developments.
Liquidity
Our cash balances are held in numerous locations throughout the
world, including substantial amounts held outside of the U.S.;
however, the majority of our cash and investments that are
located outside of the U.S. are denominated in the
U.S. dollar. Most of the amounts held outside of the
U.S. could be repatriated to the U.S., but under current
law, would be subject to U.S. federal income taxes, less
applicable foreign tax credits. In some countries repatriation
of certain foreign balances is restricted by local laws. We have
provided for the U.S. federal tax liability on these
amounts for financial statement purposes, except for foreign
earnings that are considered indefinitely reinvested outside of
the U.S. Repatriation could result in additional
U.S. federal income tax payments. We utilize a variety of
tax planning and financing strategies with the objective of
having our worldwide cash available in the locations in which it
is needed.
We ended the third quarter of Fiscal 2009 with $8.9 billion
in cash, cash equivalents, and investments, which is a decrease
of $600 million from $9.5 billion at February 1,
2008, and a decrease of $5.7 billion from
$14.6 billion at the end of the third quarter of Fiscal
2008. Since February 1, 2008, we have spent
$2.9 billion on share repurchases offset primarily by our
$1.5 billion debt issuance and $1.2 billion in cash
flow from operations. The decrease in cash and investments from
the third quarter of Fiscal 2008 was a result of spending
$6.9 billion on share repurchases and $2.3 billion on
acquisitions since the third quarter of Fiscal 2008, partially
offset by issuing $1.5 billion in long-term debt and
internally generated cash flows of $2.4 billion. We use
cash generated by operations as our primary source of liquidity
and believe that internally generated cash flows are sufficient
to support business operations driven mainly by our
profitability, efficient cash conversion cycle, and the growth
in our deferred service offerings. We ended the third quarter of
Fiscal 2009 with a negative cash conversion cycle of
25 days, which is a contraction of
37
4 days from the second quarter of Fiscal 2009 and
10 days from the third quarter of Fiscal 2008. This
contraction is primarily due to a decrease in our accounts
payable balance. A negative cash conversion cycle combined with
a slowdown in revenue growth could result in cash use in excess
of cash generated. Generally, as our growth stabilizes, our cash
generation from operating activities will improve. For further
discussion of the results of our cash conversion cycle, see
Operating Activities below.
We took a number of actions during the third quarter of Fiscal
2009 in order to have continued access to short and long-term
liquidity while being prudent with capital outlays. We have
reprioritized capital expenditures and other discretionary
spending and remained active in the commercial paper market by
issuing debt with maturities extending into calendar year 2009.
We reduced our share repurchase program in the third quarter. We
also increased our committed bank credit facilities by
$500 million to $1.5 billion in April 2008. On
November 4, 2008, we filed a shelf registration statement
with the SEC, which provides us with the ability to issue
additional term debt, subject to market conditions.
We are increasingly relying upon access to the capital markets
and large commercial banking institutions to provide sources of
liquidity in the U.S. for general corporate purposes,
including share repurchases, funding customer receivables, and
acquisitions. Although we believe that we will be able to
maintain sufficient access to the capital markets, changes in
current market conditions, movement in our credit ratings,
deterioration in our business performance, or adverse changes in
the economy could limit our access to these markets and
institutions or could adversely affect the terms on which we may
be able to obtain financing. Recent bankruptcies,
restructurings, or acquisitions of financial institutions did
not have a material impact on our business and financial
results. However, these occurrences, increased volatility in the
credit markets, and the recent downturn in the economy have
resulted in higher financing costs. We intend to establish the
appropriate debt levels based upon cash flow expectations,
overall cost of capital, cash requirements for operations, and
discretionary spending including items such as share
repurchases, funding customer receivables, and acquisitions.
Depending on our requirements and market conditions, we may
access the capital markets under our debt shelf registration
statement that became effective on November 4, 2008. We do
not believe that the overall credit concerns in the markets
would impede our ability to access the capital markets in the
future because of the overall strength of our financial position.
As of October 31, 2008, our investment balance comprised
primarily of money market funds, U.S. treasuries and
corporate bonds. Due to the nature of these investments, we
consider it reasonable to expect that their fair market values
will not be significantly impacted by a change in interest
rates, and that these investments can be liquidated for cash on
short notice. Our exposure to asset and mortgage backed
securities was less than 1%. To mitigate the risks associated
with these types of investments, we invest primarily in high
credit quality securities with AAA and AA ratings and short-term
securities with an
A-1 rating,
limit the amount that can be invested in any single issuer, and
by investing in short to intermediate term investments whose
market value is less sensitive to interest rate changes. We
continue to evaluate our investments for any
other-than-temporary impairments, and during the second quarter
of Fiscal 2009, we recorded a $10 million loss based on a
review of factors consistent with those disclosed in Note 2
of Notes to Consolidated Financial Statements under
Part II Item 8 Financial
Statements and Supplementary Data in our Annual Report on
Form 10-K
for the fiscal year ended February 1, 2008. We did not
record any other-than-temporary impairments during the third
quarter of Fiscal 2009.
38
The following table summarizes the results of our Condensed
Consolidated Statements of Cash Flows for the nine-month periods
ended October 31, 2008, and November 2, 2007:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in millions)
|
|
|
Net change in cash from:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,165
|
|
|
$
|
2,752
|
|
Investing activities
|
|
|
362
|
|
|
|
(85
|
)
|
Financing activities
|
|
|
(1,252
|
)
|
|
|
(86
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(129
|
)
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
146
|
|
|
$
|
2,690
|
|
|
|
|
|
|
|
|
|
|
Operating Activities Cash provided by
operating activities during the first nine-month periods of
Fiscal 2009, was $1.2 billion compared to $2.8 billion
during the first nine months of Fiscal 2008. The decrease in
operating cash flows was primarily led by the deterioration of
our cash conversion cycle and also a decrease in net income.
Although our cash conversion cycle deteriorated from
November 2, 2007, our direct model allows us to maintain an
efficient cash conversion cycle, which compares favorably with
that of others in our industry. We believe that a cash
conversion cycle in the negative 30 day range is
achievable. As our growth stabilizes, more typical cash
generation and a resulting cash conversion cycle is expected to
resume.
The following table presents the components of our cash
conversion cycle at October 31, 2008, and November 2,
2007:
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2008
|
|
|
2007
|
|
|
Days of sales
outstanding(a)
|
|
|
36
|
|
|
|
38
|
|
Days of supply in
inventory(b)
|
|
|
8
|
|
|
|
8
|
|
Days in accounts
payable(c)
|
|
|
(69
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(25
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Days of sales outstanding
(DSO) calculates the average collection period of
our receivables. DSO is based on the ending net trade
receivables and the most recent quarterly revenue for each
period. DSO also includes the effect of product costs related to
customer shipments not yet recognized as revenue that are
classified in other current assets. DSO is calculated by adding
accounts receivable, net of allowance for doubtful accounts, and
customer shipments in transit and dividing that sum by average
net revenue per day for the current quarter (90 days). At
October 31, 2008, and November 2, 2007, DSO and days
of customer shipments not yet recognized were 33 and
3 days, and 35 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 the most recent quarterly cost of sales for each
period. DSI is calculated by dividing inventory by average cost
of goods sold per day for the current quarter (90 days).
|
|
|
(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 the most recent quarterly cost of
sales for each period. DPO is calculated by dividing accounts
payable by average cost of goods sold per day for the current
quarter (90 days).
|
Our cash conversion cycle contracted by ten days at
October 31, 2008, from November 2, 2007, driven by a
twelve day decrease in DPO offset by a 2 day decrease in
DSO. The decrease in DPO from November 2, 2007, is
attributable to a decrease in non-production and production
supplier payables as we continue to control our operating
expense spending and the timing of purchases from and payments
to suppliers during the third quarter of Fiscal 2009 as compared
to the third quarter of Fiscal 2008. The decrease in DSO from
November 2, 2007, is
39
attributable to foreign currency movements due to the
U.S. dollar strengthening, partially offset by our move
into the retail channel and a shift to more customers with
longer payment terms.
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 $456 million and
$477 million at October 31, 2008, and November 2,
2007, respectively.
Investing Activities Cash sourced from
investing activities for the first nine-month period of Fiscal
2009, was $362 million, compared to cash used in investing
activities of $85 million for the same period last year.
Cash generated or used in investing activities principally
consists of net maturities and sales or purchases of
investments, net capital expenditures for property, plant, and
equipment, and cash used to fund acquisitions, which was
approximately $165 million in the first nine months of
Fiscal 2009. In light of continued capital market and interest
rate volatility, we decided to increase liquidity and change the
overall interest rate profile of the portfolio. As a result,
during Fiscal 2009 we began repositioning our investment
portfolio to shorter duration securities, thus impacting the
volume of our sales and purchases of securities.
Financing Activities Cash used for financing
activities during the first nine-month period of Fiscal 2009,
was $1.3 billion, compared to use of $86 million
during the same period last year. The year-over-year increase in
cash used for financing activities is due primarily to the
repurchase of our common stock as our share repurchase program
was reinstated during the fourth quarter of Fiscal 2008 after
being suspended for the majority of Fiscal 2008, offset by
proceeds from the issuance of long-term debt of
$1.5 billion. During the first nine months of Fiscal 2009,
we repurchased approximately 134 million shares at an
aggregate cost of $2.9 billion; no shares were repurchased
related to the program during the first nine months of Fiscal
2008. We also paid the principal on the Senior Notes of
$200 million that matured in April 2008 as discussed in
Note 13 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial Statements.
We also have a commercial paper program that allows us to issue
short-term unsecured notes in an aggregate amount not to exceed
$1.5 billion. We use the proceeds for general corporate
purposes. At October 31, 2008, there was $253 million
outstanding under the commercial paper program and no advances
under the supporting credit facility. See Note 13 of Notes
to Condensed Consolidated Financial Statements included in
Part I Item 1 Financial
Statements for further discussion on our long-term debt
and commercial paper program.
Capital
Commitments
Redeemable Common Stock We inadvertently
failed to register with the SEC the issuance of some shares
under certain employee benefit plans. As a result, certain
purchasers of securities pursuant to those plans may have had
the right to rescind their purchases for an amount equal to the
purchase price paid for the securities, plus interest from the
date of purchase. At February 1, 2008, approximately
4 million shares ($94 million) were classified outside
stockholders equity because the redemption features were
not within our control. These shares were treated as outstanding
for financial reporting purposes. We may also be subject to
civil and other penalties by regulatory authorities as a result
of the failure to register. We made a registered rescission
offer to eligible plan participants effective as of
August 12, 2008. The registered rescission offer expired on
September 26, 2008, and payments of $26 million under
the offer have been substantially completed. With the completion
of the rescission offer, $15 million was recorded to
Treasury Stock, which represents the fair market value of the
rescinded shares on September 26, 2008. The remaining
shares that were presented in the mezzanine section of the
Condensed Consolidated Statement of Financial Position have been
reclassified to common stock within shareholders equity on
the Condensed Consolidated Statement of Financial Position as of
October 31, 2008.
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.
40
We typically repurchase shares of common stock through a
systematic program of open market purchases. During the third
quarter of Fiscal 2009, we repurchased approximately
22 million shares at an aggregate cost of
$420 million, which includes approximately 1 million
shares purchased in the third quarter of Fiscal 2009 for
approximately $20 million, representing the original price
paid by the purchasers for the shares rescinded on
September 26, 2008, as previously discussed. No shares were
repurchased related to the program during the third quarter of
Fiscal 2008 as the program had been temporarily suspended. For
more information regarding share repurchases, see
Part II Item 2
Unregistered Sales of Equity Securities and Use of
Proceeds.
Capital Expenditures During the third quarter
and first nine months of Fiscal 2009, we spent approximately
$137 million and $401 million, respectively, on
property, plant, and equipment as a part of our global expansion
efforts and infrastructure investments in order to support
future growth. Product demand and mix and 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 2009, related to our continued
expansion worldwide, are currently expected to reach
approximately $550 million, which is less than the
$831 million spent during Fiscal 2008. These expenditures
are expected to be funded from our cash flows from operating
activities.
Restricted Cash Pursuant to an agreement
between DFS 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 $247 million and $294 million is included in
other current assets at October 31, 2008, and
February 1, 2008, respectively.
Contractual
Cash Obligations
Purchase Obligations Our purchase obligations
increased from $893 million at February 1, 2008, to
approximately $1.9 billion at October 31, 2008. The
increase is primarily due to us entering into longer-term
purchase commitments with selected suppliers for certain
commodities in order to ensure supply of select key components
at the most favorable pricing. The agreements run through the
end of Fiscal 2009 and allow for some variation in the units we
are required to purchase. These purchase commitments approximate
$845 million for the remainder of Fiscal 2009.
Debt On April 17, 2008, we issued
$1.5 billion of long-term unsecured notes in three
tranches: $600 million aggregate principal amount of
4.70% Notes due 2013, $500 million aggregate principal
amount of 5.65% Notes due 2018 and $400 million
aggregate principal amount of 6.50% Notes due 2038.
Interest is payable semi-annually on April 15 and
October 15. We have outstanding the 1998 $300 million,
7.10% fixed rate senior debentures due April 15, 2028, (the
Senior Debentures), which pay interest semi-annually
on April 15 and October 15. On April 15, 2008, we
repaid the principal balance of the 1998 $200 million,
6.55% fixed rate senior notes (the Senior Notes)
upon their maturity. See Note 13 of Notes to Condensed
Consolidated Financial Statements included in
Part I Item 1 Financial
Statements for further discussion of our debt.
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 accounting pronouncements, including the
expected dates of adoption and estimated effects on our results
of operations, financial position, and cash flows.
As highlighted in Note 6 of Notes to Condensed Consolidated
Financial Statements included in Part I
Item 1 Financial Statements,
we adopted the effective provisions of SFAS No. 157,
Fair Value Measurements (SFAS 157) as
amended by Financial Accounting Standards Board
(FASB) Staff Position (FSP)
FAS 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13 and
FSP
FAS 157-2,
Effective Date of FASB Statement No. 157
on February 2, 2008. The adoption of this statement did not
have a material effect on the consolidated financial statements
for the third quarter and first nine months of Fiscal 2009. The
amount of assets and liabilities measured at fair value on a
recurring basis based on unobservable inputs
(Level 3) are not significant relative to our balance
sheet.
41
On October 10, 2008, the FASB issued FSP
No. FAS 157-3
Determining the Fair Value of a Financial Asset When
the Market for that Asset is Not Active (FSP
FAS 157-3),
which clarifies the application of SFAS 157 in a market
that is not active. Additional guidance is provided regarding
how the reporting entitys own assumptions should be
considered when relevant observable inputs do not exist, how
available observable inputs in a market that is not active
should be considered when measuring fair value, and how the use
of market quotes should be considered when assessing the
relevance of inputs available to measure fair value. FSP
FAS 157-3
became effective immediately upon issuance. We considered the
additional guidance with respect to the valuation of its
financial assets and liabilities and their corresponding
designation within the fair value hierarchy. The adoption did
not have a material effect on our consolidated financial
statements.
|
|
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 February 1, 2008. We have
provided additional market risk disclosure in
Item 2 Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Part II Other Information
Item Item IA Risk Factors in
this
Form 10-Q.
|
|
ITEM 4.
|
Controls
and Procedures
|
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 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 31, 2008. 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 31, 2008.
Changes
in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting during the third quarter of Fiscal 2009 that
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
42
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
Legal
Proceedings
|
The information required by this item is set forth under
Note 11 of Notes to Condensed Consolidated Financial
Statements included in Part I
Item 1 Financial Statements, and is
incorporated herein by reference.
There are many risk factors that affect our business and results
of operations, some of which are beyond our control. The
following is a description of some of the important risk factors
that may cause our actual results in future periods to differ
substantially from those we currently expect or desire.
|
|
|
Weakening global economic conditions and instability in
financial markets could harm our business and result in reduced
net revenue and profitability. We are a global
company with customers in virtually every business and industry.
There has been an erosion of global consumer confidence amidst
concerns over declining asset values, inflation, energy costs,
geopolitical issues, the availability and cost of credit, rising
unemployment, and the stability and solvency of financial
institutions, financial markets, businesses, and sovereign
nations. These concerns have slowed global economic growth and
have resulted in recessions in many countries. If these global
economic issues persist, there could be a number of follow-on
effects on our business, including customers or potential
customers reducing or delaying their technology investments,
insolvency of key suppliers resulting in product delays,
counterparty failures negatively impacting our treasury
operations, the inability of customers to obtain credit to
finance purchases of our products, and customer insolvencies,
all of which could impact our ability to effectively manage
inventory levels and collect customer receivables, could
lengthen our cash conversion cycle and increase our need for
cash, and could ultimately decrease our net revenue and
profitability.
|
|
|
Failure to reestablish a cost and competitive advantage may
result in reduced market share, revenue, and
profitability. Our success has historically been
based on our ability to profitably offer products at a lower
price or with more value than our competitors. However, we
compete with many companies globally in all aspects of our
business. If our increasing reliance on third-party original
equipment manufacturers, original design manufacturing
partnerships, and manufacturing outsourcing relationships fails
to generate cost efficiencies, our profitability could be
adversely impacted. Our profitability is also affected by our
ability to negotiate favorable pricing with our vendors,
including vendor rebates, marketing funds, and other vendor
funding. Because these supplier negotiations are continuous and
reflect the ongoing competitive environment, the variability in
timing and amount of incremental vendor discounts and rebates
can affect our profitability. An inability to reestablish our
cost advantage or determine alternative means to deliver value
to our customers may adversely affect our market share, revenue,
and profitability.
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|
|
Our ability to generate substantial
non-U.S. net
revenue faces many additional risks and
uncertainties. Sales outside the
U.S. accounted for approximately 48% of our consolidated
net revenue in Fiscal 2008. Our future growth rates and success
are dependent on continued growth outside the U.S., including
the key developing countries of Brazil, Russia, India, and China
(BRIC). Our international operations face many risks
and uncertainties, including varied local economic and labor
conditions, political instability, and unexpected changes in the
regulatory environment, trade protection measures, tax laws
(including U.S. taxes on foreign operations), copyright
levies, and foreign currency exchange rates. Any of these
factors could adversely affect our operations and profitability.
|
|
|
Our profitability may be affected by our product, customer,
and geographic sales mix and by seasonal sales
trends. Our profit margins vary among products,
customers, and geographies. In addition, our business is subject
to certain seasonal sales trends. For example, sales to
government customers (particularly the U.S. federal
government) are typically stronger in our third fiscal quarter,
sales in EMEA are often weaker in our third fiscal quarter, and
consumer sales are typically strongest during our fourth fiscal
quarter. As a result of these factors, our overall profitability
for any particular period will be affected by the mix of
products, customers, and geographies reflected in our sales for
that period, as well as by seasonality trends.
|
43
|
|
|
Infrastructure failures and breaches in data security could
harm our business. We depend on our information
technology and manufacturing infrastructure to achieve our
business objectives. If a problem, such as a computer virus,
intentional disruption by a third party, natural disaster,
manufacturing failure, or telephone system failure impairs our
infrastructure, we may be unable to book or process orders,
manufacture, and ship in a timely manner, or otherwise carry on
our business. An infrastructure disruption could damage our
reputation and cause us to lose customers and revenue, result in
the unintentional disclosure of company or customer information,
and require us to incur significant expense to eliminate these
problems and address related data security concerns. The harm to
our business could be even greater if it occurs during a period
of disproportionately heavy demand.
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|
|
Our failure to effectively manage a product transition could
reduce the demand for our products and the profitability of our
operations. Continuing improvements in technology
mean frequent new product introductions, short product life
cycles, and improvement in product performance characteristics.
Product transitions present execution challenges and risks for
any company. If we are unable to effectively manage a product
transition, our business and results of operations could be
unfavorably affected.
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|
|
Disruptions in component or product availability could
unfavorably affect our performance. Our
manufacturing and supply chain efficiencies give us the ability
to operate with reduced levels of component and finished goods
inventories. Our financial success is partly due to our supply
chain management practices, including our ability to achieve
rapid inventory turns. Because we maintain minimal levels of
component and product inventories, a disruption in component or
product availability could harm our financial performance and
our ability to satisfy customer needs.
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|
|
Our reliance on vendors creates risks and
uncertainties. Our manufacturing process requires
a high volume of quality components from third-party suppliers.
Defective parts received from these suppliers could reduce
product reliability and harm the reputation of our products.
Reliance on suppliers subjects us to possible industry shortages
of components and reduced control over delivery schedules (which
can harm our manufacturing efficiencies), as well as increases
in component costs (which can harm our profitability).
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|
|
We could experience manufacturing interruptions, delays, or
inefficiencies if we are unable to timely and reliably procure
components and products from single-source or limited-source
suppliers. We maintain several single-source or
limited-source supplier relationships, either because multiple
sources are not available or the relationship is advantageous
due to performance, quality, support, delivery, capacity, or
price considerations. If the supply of a critical single- or
limited-source product or component is delayed or curtailed, we
may not be able to ship the related product in desired
quantities and in a timely manner. Even where multiple sources
of supply are available, qualification of the alternative
suppliers, and establishment of reliable supplies, could result
in delays and a possible loss of sales, which could harm
operating results.
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|
|
Our business is increasingly dependent on our ability to
access the capital markets. We are increasingly
dependent on access to debt and capital sources to provide
financing for our customers and to obtain funds in the
U.S. for general corporate purposes, including share
repurchases, funding customer receivables, and acquisitions.
Additionally, we have customer financing relationships with
companies whose business models rely on accessing the capital
markets. The inability of these companies to access such markets
could force us to self-fund transactions or forgo customer
financing opportunities, potentially harming our financial
performance. The debt and capital markets have been experiencing
extreme volatility and disruption for more than twelve months.
These issues, along with significant write-offs in the financial
services sector, the re-pricing of credit risk, and the current
weak economic conditions have made, and will likely continue to
make, it difficult to obtain funding. The cost of accessing the
credit markets has increased as many lenders and institutional
investors have increased interest rates, enacted tighter lending
standards, and reduced or ceased to provide funding to
borrowers. We believe that we will be able to obtain appropriate
financing from third parties even in light of the current market
conditions; nevertheless, changes in our credit ratings,
deterioration in our business performance, or adverse changes in
the economy could limit our ability to obtain financing from
debt or capital sources or could adversely affect the terms on
which we may be able to obtain any such financing, which could
unfavorably affect our net revenue and profitability. See
Part I Item 2
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Commitments Liquidity.
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44
|
|
|
We face risks relating to our internal
controls. If management is not successful in
maintaining a strong internal control environment, material
weaknesses could reoccur, causing investors to lose confidence
in our reported financial information. This could lead to a
decline in our stock price, limit our ability to access the
capital markets in the future, and require us to incur
additional costs to improve our internal control systems and
procedures.
|
|
|
Unfavorable results of legal proceedings could harm our
business and result in substantial costs We are
involved in various claims, suits, investigations, and legal
proceedings that arise from time to time in the ordinary course
of our business and that are not yet resolved, including those
that are set forth under Note 11 of Notes to Consolidated
Financial Statements included in Part I
Item 1 Financial Statements. Additional
legal claims or regulatory matters may arise in the future, and
could involve stockholder, consumer, antitrust, tax and other
issues on a global basis. Litigation is inherently
unpredictable. Regardless of the merit of the claims, litigation
may be both time-consuming and disruptive to our business.
Therefore, we could incur judgments or enter into settlements of
claims that could adversely affect our operating results or cash
flows in a particular period. For example, we could be exposed
to enforcement or other actions with respect to the continuing
SEC investigation into certain accounting and financial
reporting matters. In addition, if any infringement or other
intellectual property claim made against us by any third party
is successful, or if we fail to develop non-infringing
technology or license the proprietary rights on commercially
reasonable terms and conditions, our business, operating
results, and financial condition could be materially and
adversely affected.
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|
|
The acquisition of other companies may present new
risks. We have begun to acquire companies as a
part of our overall growth strategy. These acquisitions may
involve significant new risks and uncertainties, including
distraction of management attention away from our current
business operations, insufficient new revenue to offset
expenses, inadequate return of capital, integration challenges,
new regulatory requirements, and issues not discovered in our
due diligence process. No assurance can be given that such
acquisitions will be successful and will not adversely affect
our profitability or operations.
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|
|
Failure to properly manage the distribution of our products
and services may result in reduced revenue and
profitability. We use a variety of distribution
methods to sell our products and services, including directly to
customers and through select retailers and third-party
value-added resellers. As we sell through an increasing number
of indirect channels, inventory management becomes more
challenging as successful demand forecasting becomes more
difficult. Our inability to properly manage and balance
inventory levels and potential conflicts among these various
distribution methods could harm our operating results.
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|
|
If our cost cutting measures are not successful, we may
become less competitive. A variety of factors
could prevent us from achieving our goal of better aligning our
product and service offerings and cost structure with customer
needs in the current business environment through reducing our
operating expenses; reducing total costs in procurement, product
design, and transformation; simplifying our structure; and
eliminating redundancies. For example, we may experience delays
in the anticipated timing of activities related to our cost
savings plans and higher than expected or unanticipated costs to
implement them. As a result, we may not achieve our expected
costs savings in the time anticipated, or at all. In such case,
our results of operations and profitability may be negatively
impaired, making us less competitive and potentially causing us
to lose market share.
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|
|
Failure to effectively hedge our exposure to fluctuations in
foreign currency exchange rates and interest rates could
unfavorably affect our performance. We utilize
derivative instruments to hedge our exposure to fluctuations in
foreign currency exchange rates and interest rates. Some of
these instruments and contracts may involve elements of market
and credit risk in excess of the amounts recognized in our
financial statements.
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|
We are subject to counterparty default
risks. We enter into numerous types of financing
arrangements with a wide array of counterparties, including
foreign currency forward contracts and interest rate swaps. The
terms of these contracts are often customized and complex, and
many of these arrangements occur in markets that are not subject
to regulatory oversight. As a result, we are subject to the risk
that the counterparty to one or more of these contracts
defaults, either voluntarily or involuntarily, on its
performance under the contract. In times of market distress, a
counterparty may default rapidly and without notice to us, and
we may be unable to take action to cover our exposure, either
because we lack the contractual ability or because market
conditions make it difficult to take effective action. In the
event of a counterparty default, we could incur significant
losses, which could
|
45
|
|
|
harm our business, results of operations, and financial
condition. In the event that one of our counterparties becomes
insolvent or files for bankruptcy, our ability to eventually
recover any losses suffered as a result of that
counterpartys default may be limited by the liquidity of
the counterparty or the applicable legal regime governing the
bankruptcy proceeding.
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|
Our continued business success may depend on obtaining
licenses to intellectual property developed by others on
commercially reasonable and competitive terms. If
we or our suppliers are unable to obtain desirable technology
licenses, we may be prevented from marketing products; could be
forced to market products without desirable features; or could
incur substantial costs to redesign products, defend legal
actions, or pay damages. While our suppliers may be
contractually obligated to indemnify us against such expenses,
those suppliers could be unable to meet their obligations. In
addition, our operating costs could increase because of
copyright levies or similar fees by rights holders and
collection agencies in European and other countries. For a
description of potential claims related to copyright levies, see
Note 11 of Notes to Consolidated Financial Statements
included in Part I
Item 1 Financial Statements Legal
Maters Copyright Levies.
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Our success depends on our ability to attract, retain, and
motivate our key employees. We rely on key
personnel to support anticipated continued rapid international
growth and increasingly complex product and service offerings.
There can be no assurance that we will be able to attract,
retain, and motivate the key professional, technical, marketing,
and staff resources we need.
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Loss of government contracts could harm our
business. Government contracts are subject to
future funding that may affect the extension or termination of
programs and are subject to the right of the government to
terminate for convenience or non-appropriation. In addition, if
we violate legal or regulatory requirements, the government
could suspend or disbar us as a contractor, which would
unfavorably affect our net revenue and profitability.
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The expiration of tax holidays or favorable tax rate
structures could result in an increase of our effective tax rate
in the future. Portions of our operations are
subject to a reduced tax rate or are free of tax under various
tax holidays that expire in whole or in part during Fiscal 2010
through Fiscal 2021. Many of these holidays may be extended when
certain conditions are met. If they are not extended, then our
effective tax rate would increase in the future.
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Current environmental laws, or laws enacted in the future,
may harm our business. Our operations are subject
to environmental regulation in all of the areas in which we
conduct business. Our product design and procurement operations
must comply with new and future requirements relating to the
materials composition, energy efficiency and collection,
recycling, treatment, and disposal of our electronics products,
including restrictions on lead, cadmium, and other substances.
If we fail to comply with the rules and regulations regarding
the use and sale of such regulated substances, we could be
subject to liability. While we do not expect that the impact of
these environmental laws and other similar legislation adopted
in the U.S. and other countries will have a substantial
unfavorable impact on our business, the costs and timing of
costs under environmental laws are difficult to predict.
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Armed hostilities, terrorism, natural disasters, or public
health issues could harm our business. Armed
hostilities, terrorism, natural disasters, or public health
issues, whether in the U.S. or abroad, could cause damage
or disruption to us, our suppliers or customers, or could create
political or economic instability, any of which could harm our
business. These events could cause a decrease in demand for our
products, could make it difficult or impossible for us to
deliver products or for our suppliers to deliver components, and
could create delays and inefficiencies in our supply chain.
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46
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ITEM 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Purchases
of Common Stock
Share
Repurchase Program
We have a share repurchase program that authorizes us to
purchase shares of common stock in order to increase shareholder
value and manage dilution resulting from shares issued under our
equity compensation plans. However, we do not currently have a
policy that requires the repurchase of common stock to offset
share-based compensation arrangements. The following table sets
forth information regarding our repurchases or acquisitions of
common stock during the third quarter of Fiscal 2009 and the
remaining authorized amount for future purchases:
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|
|
|
|
|
|
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|
Total
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|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Number of
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|
|
Dollar Value
|
|
|
|
|
|
|
|
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|
Shares
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|
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of Shares that
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|
Total(a)
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|
|
Average
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|
Repurchased
|
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|
May Yet Be
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|
|
|
Number
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|
|
Price
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|
|
as Part of
|
|
|
Repurchased
|
|
|
|
of
|
|
|
Paid
|
|
|
Publicly
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|
|
Under the
|
|
|
|
Shares
|
|
|
per
|
|
|
Announced
|
|
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Announced
|
|
Period
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Repurchased
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|
|
Share
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|
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Plans
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|
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Plan
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|
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|
(in millions, except average price paid per share)
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|
|
Repurchases from August 2, 2008,
through August 29, 2008
|
|
|
9
|
|
|
$
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23.52
|
|
|
|
9
|
|
|
$
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4,755
|
|
Repurchases from August 30, 2008,
through September 26, 2008
|
|
|
6
|
|
|
$
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18.28
|
|
|
|
6
|
|
|
$
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4,652
|
|
Repurchases from September 27, 2008,
through October 31,
2008(b)
|
|
|
7
|
|
|
$
|
15.40
|
|
|
|
7
|
|
|
$
|
4,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
22
|
|
|
$
|
19.53
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(a)
|
8,932 shares were withheld from Dell employees to pay taxes
and fees associated with the employees exercise of stock
options
|
|
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|
(b)
|
Includes 870,132 shares that were repurchased as a part of
our registered rescission offer at an average price of $23.09
per share.
|
(a) 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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|
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DELL INC.
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/s/ THOMAS
W. SWEET
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Date: December 4, 2008
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|
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Thomas W. Sweet
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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|
|
|
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|
|
Exhibit
|
|
|
|
|
No.
|
|
|
|
Description of Exhibit
|
|
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3
|
.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
|
.2
|
|
|
|
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)
|
|
4
|
.1
|
|
|
|
Indenture, dated as of April 27, 1998, between Dell
Computer Corporation and Chase Bank of Texas, National
Association (incorporated by reference to Exhibit 99.2 of
Dells Current Report on
Form 8-K
filed April 28, 1998, Commission File
No. 0-17017)
|
|
4
|
.2
|
|
|
|
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)
|
|
4
|
.3
|
|
|
|
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)
|
|
4
|
.4
|
|
|
|
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)
|
|
4
|
.5
|
|
|
|
Exchange and Registration Rights Agreement, dated as of
April 17, 2008, among Dell Inc. and Barclays Capital Inc.,
Goldman, Sachs & Co. and J.P. Morgan Securities
Inc., as representatives of the several purchasers named therein
(incorporated by reference to Exhibit 4.2 of Dells
Current Report on
Form 8-K
filed April 17, 2008, Commission File
No. 0-17017)
|
|
31
|
.1
|
|
|
|
Certification of Michael S. Dell, President 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
|
|
31
|
.2
|
|
|
|
Certification of Brian T. Gladden, Senior Vice President and
Chief Financial Officer, pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
|
|
Certifications of Michael S. Dell, Chairman and Chief Executive
Officer, and Brian T. Gladden, Senior Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
|
Filed herewith. |
|
|
|
Furnished herewith. |
49