Dell Q3FY12 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
| | |
(Mark One) | | |
| | |
[x] | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended October 28, 2011 |
OR |
[ ] | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 0-17017
Dell Inc.
(Exact Name of Registrant as Specified in its Charter)
|
| | |
Delaware | | 74-2487834 |
(State or Other Jurisdiction of Incorporation or Organization)
| | (I.R.S. Employer Identification No.) |
One Dell Way, Round Rock, Texas 78682
(Address of Principal Executive Offices) (Zip Code)
1-800-BUY-DELL
(Registrant's 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 [ü ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ü ] No [ ]
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. |
| | |
Large accelerated filer [ü] | | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | | Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ]No [ü ]
As of the close of business on November 18, 2011, 1,796,509,489 shares of common stock, par value $.01 per share, were outstanding.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements.” The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in “Part I - Item 1A - Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended January 28, 2011. Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date as of which such statement was made.
PART I
ITEM 1 — FINANCIAL STATEMENTS
DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions)
|
| | | | | | | |
| October 28,
2011 | | January 28,
2011 |
| (unaudited) | | |
ASSETS |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 13,293 |
| | $ | 13,913 |
|
Short-term investments | 545 |
| | 452 |
|
Accounts receivable, net | 6,690 |
| | 6,493 |
|
Short-term financing receivables, net | 3,326 |
| | 3,643 |
|
Inventories, net | 1,397 |
| | 1,301 |
|
Other current assets | 3,005 |
| | 3,219 |
|
Total current assets | 28,256 |
| | 29,021 |
|
Property, plant, and equipment, net | 2,123 |
| | 1,953 |
|
Long-term investments | 2,183 |
| | 704 |
|
Long-term financing receivables, net | 1,279 |
| | 799 |
|
Goodwill | 5,943 |
| | 4,365 |
|
Purchased intangible assets, net | 1,957 |
| | 1,495 |
|
Other non-current assets | 302 |
| | 262 |
|
Total assets | $ | 42,043 |
| | $ | 38,599 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | |
| | |
|
Short-term debt | $ | 1,831 |
| | $ | 851 |
|
Accounts payable | 11,107 |
| | 11,293 |
|
Accrued and other | 3,816 |
| | 4,181 |
|
Short-term deferred services revenue | 3,465 |
| | 3,158 |
|
Total current liabilities | 20,219 |
| | 19,483 |
|
Long-term debt | 6,430 |
| | 5,146 |
|
Long-term deferred services revenue | 3,744 |
| | 3,518 |
|
Other non-current liabilities | 2,987 |
| | 2,686 |
|
Total liabilities | 33,380 |
| | 30,833 |
|
Commitments and contingencies (Note 11) |
|
| |
|
|
Stockholders’ equity: | |
| | |
|
Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,388 and 3,369, respectively; shares outstanding: 1,795 and 1,918, respectively | 12,071 |
| | 11,797 |
|
Treasury stock at cost: 1,118 and 976 shares, respectively | (30,884 | ) | | (28,704 | ) |
Retained earnings | 27,472 |
| | 24,744 |
|
Accumulated other comprehensive income (loss) | 4 |
| | (71 | ) |
Total stockholders’ equity | 8,663 |
| | 7,766 |
|
Total liabilities and stockholders’ equity | $ | 42,043 |
| | $ | 38,599 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts; unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28,
2011 | | October 29,
2010 | | October 28,
2011 | | October 29,
2010 |
Net revenue: | |
| | |
| | | | |
Products | $ | 12,312 |
| | $ | 12,520 |
| | $ | 36,981 |
| | $ | 37,251 |
|
Services, including software related | 3,053 |
| | 2,874 |
| | 9,059 |
| | 8,551 |
|
Total net revenue | 15,365 |
| | 15,394 |
| | 46,040 |
| | 45,802 |
|
Cost of net revenue: | |
| | |
| | |
| | |
|
Products | 9,797 |
| | 10,415 |
| | 29,168 |
| | 31,731 |
|
Services, including software related | 2,099 |
| | 1,976 |
| | 6,446 |
| | 5,966 |
|
Total cost of net revenue | 11,896 |
| | 12,391 |
| | 35,614 |
| | 37,697 |
|
Gross margin | 3,469 |
| | 3,003 |
| | 10,426 |
| | 8,105 |
|
Operating expenses: | |
| | |
| | |
| | |
|
Selling, general, and administrative | 2,107 |
| | 1,816 |
| | 6,306 |
| | 5,325 |
|
Research, development, and engineering | 220 |
| | 163 |
| | 620 |
| | 492 |
|
Total operating expenses | 2,327 |
| | 1,979 |
| | 6,926 |
| | 5,817 |
|
Operating income | 1,142 |
| | 1,024 |
| | 3,500 |
| | 2,288 |
|
Interest and other, net | (70 | ) | | 52 |
| | (167 | ) | | (65 | ) |
Income before income taxes | 1,072 |
| | 1,076 |
| | 3,333 |
| | 2,223 |
|
Income tax provision | 179 |
| | 254 |
| | 605 |
| | 515 |
|
Net income | $ | 893 |
| | $ | 822 |
| | $ | 2,728 |
| | $ | 1,708 |
|
Earnings per share: | |
| | |
| | |
| | |
|
Basic | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.47 |
| | $ | 0.88 |
|
Diluted | $ | 0.49 |
| | $ | 0.42 |
| | $ | 1.46 |
| | $ | 0.87 |
|
Weighted-average shares outstanding: | |
| | |
| | |
| | |
|
Basic | 1,813 |
| | 1,939 |
| | 1,860 |
| | 1,950 |
|
Diluted | 1,828 |
| | 1,949 |
| | 1,874 |
| | 1,961 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
|
| | | | | | | |
| Nine Months Ended |
| October 28,
2011 | | October 29,
2010 |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 2,728 |
| | $ | 1,708 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 687 |
| | 745 |
|
Stock-based compensation | 261 |
| | 225 |
|
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | (19 | ) | | 23 |
|
Deferred income taxes | (91 | ) | | (35 | ) |
Provision for doubtful accounts — including financing receivables | 167 |
| | 299 |
|
Other | 46 |
| | 4 |
|
Changes in assets and liabilities, net of effects from acquisitions: | |
| | |
|
Accounts receivable | (190 | ) | | (588 | ) |
Financing receivables | (162 | ) | | (459 | ) |
Inventories | (46 | ) | | (241 | ) |
Other assets | 223 |
| | 743 |
|
Accounts payable | (231 | ) | | (175 | ) |
Deferred services revenue | 540 |
| | 402 |
|
Accrued and other liabilities | (223 | ) | | (165 | ) |
Change in cash from operating activities | 3,690 |
| | 2,486 |
|
Cash flows from investing activities: | |
| | |
|
Investments: | |
| | |
|
Purchases | (2,419 | ) | | (1,186 | ) |
Maturities and sales | 856 |
| | 1,184 |
|
Capital expenditures | (510 | ) | | (284 | ) |
Proceeds from sale of facility and land | 12 |
| | 18 |
|
Purchase of financing receivables | — |
| | (430 | ) |
Collections on purchased financing receivables | 204 |
| | 20 |
|
Acquisitions, net of cash received | (2,564 | ) | | (246 | ) |
Change in cash from investing activities | (4,421 | ) | | (924 | ) |
Cash flows from financing activities: | |
| | |
|
Repurchase of common stock | (2,180 | ) | | (600 | ) |
Issuance of common stock under employee plans | 34 |
| | 11 |
|
Issuance of commercial paper (maturity 90 days or less), net | — |
| | (176 | ) |
Proceeds from debt | 3,317 |
| | 2,554 |
|
Repayments of debt | (1,055 | ) | | (1,115 | ) |
Other | 3 |
| | 2 |
|
Change in cash from financing activities | 119 |
| | 676 |
|
Effect of exchange rate changes on cash and cash equivalents | (8 | ) | | 16 |
|
Change in cash and cash equivalents | (620 | ) | | 2,254 |
|
Cash and cash equivalents at beginning of the period | 13,913 |
| | 10,635 |
|
Cash and cash equivalents at end of the period | $ | 13,293 |
| | $ | 12,889 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — BASIS OF PRESENTATION
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of Dell Inc. (individually and together with its consolidated subsidiaries, "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 Dell's Annual Report on Form 10-K for the fiscal year ended January 28, 2011 ("Fiscal 2011"). 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 28, 2011, the results of its operations for the three and nine months ended October 28, 2011, and October 29, 2010, and the cash flows for the nine months ended October 28, 2011, and October 29, 2010.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in Dell's 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 months ended October 28, 2011, and October 29, 2010, and the cash flows for the nine months ended October 28, 2011, and October 29, 2010, are not necessarily indicative of the results to be expected for the full fiscal year or for any other fiscal period.
Dell's fiscal year is the 52 or 53 week period ending on the Friday nearest January 31. The fiscal year ending February 3, 2012 ("Fiscal 2012"), will be a 53 week period.
Recent Accounting Pronouncements
Credit Quality of Financing Receivables and the Allowance for Credit Losses — In July 2010, the Financial Accounting Standards Board ("FASB") issued a new pronouncement that requires enhanced disclosures regarding the nature of credit risk inherent in an entity's portfolio of financing receivables, how that risk is analyzed, and the changes and reasons for those changes in the allowance for credit losses. The new disclosures require information for both the financing receivables and the related allowance for credit losses at more disaggregated levels. Disclosures related to information as of the end of a reporting period became effective for Dell in Fiscal 2011. Specific disclosures regarding activities that occur during a reporting period are now required for Dell beginning in the first quarter of Fiscal 2012. As these changes relate only to disclosures, they did not have an impact on Dell's consolidated financial results. See Note 5 of Notes to Condensed Consolidated Financial Statements for more information about Dell's disclosures relating to the credit quality of its financing receivables.
Fair Value Measurements — In May 2011, the FASB issued new guidance on fair value measurements, which clarifies how a principal market is determined, how and when the valuation premise of highest and best use applies, and how premiums and discounts are applied, as well as requiring new disclosures. This new guidance is effective for Dell for the fiscal year ending February 1, 2013. Early application is not permitted. Other than requiring additional disclosures, Dell does not expect this new guidance to impact Dell's consolidated financial statements.
Comprehensive Income — In June 2011, the FASB issued new guidance on presentation of comprehensive income. The new guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires an entity to present either one continuous statement of net income and other comprehensive income or in two separate, but consecutive statements. This new guidance relates only to presentation and is effective for Dell for the first quarter of the fiscal year ending February 1, 2013. Early adoption is permitted.
Intangibles- Goodwill and Other — In September 2011, the FASB issued new guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount, entities must perform a quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test becomes optional. This new guidance is effective for Dell for the first quarter of the fiscal year ending February 1, 2013. Early adoption is permitted. Dell does not expect this new guidance to impact Dell's consolidated financial statements.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 2 — INVENTORIES
|
| | | | | | | | |
| | October 28,
2011 | | January 28,
2011 |
| | (in millions) |
Inventories, net: | | |
| | |
|
Production materials | | $ | 747 |
| | $ | 593 |
|
Work-in-process | | 217 |
| | 232 |
|
Finished goods | | 433 |
| | 476 |
|
Total | | $ | 1,397 |
| | $ | 1,301 |
|
NOTE 3 — FAIR VALUE MEASUREMENTS
The following table presents Dell's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of October 28, 2011, and January 28, 2011:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 28, 2011 | | January 28, 2011 |
| Level 1(a) | | Level 2 (a) | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | |
| | | | | | | (in millions) | | | | | | |
Assets: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Cash equivalents: | | | | | | | | | | | | | | | |
Money market funds | $ | 8,881 |
| | $ | — |
| | $ | — |
| | $ | 8,881 |
| | $ | 6,261 |
| | $ | — |
| | $ | — |
| | $ | 6,261 |
|
Commercial paper | — |
| | 816 |
| | — |
| | 816 |
| | — |
| | 2,945 |
| | — |
| | 2,945 |
|
U.S. government and agencies | — |
| | — |
| | — |
| | — |
| | — |
| | 1,699 |
| | — |
| | 1,699 |
|
Debt Securities: | | | | | | | | | | | | | | | |
U.S. government and agencies | — |
| | — |
| | — |
| | — |
| | — |
| | 79 |
| | — |
| | 79 |
|
U.S. corporate | — |
| | 1,740 |
| | — |
| | 1,740 |
| | — |
| | 464 |
| | 32 |
| | 496 |
|
International corporate | — |
| | 806 |
| | — |
| | 806 |
| | — |
| | 457 |
| | — |
| | 457 |
|
Equity and other securities | 63 |
| | 106 |
| | — |
| | 169 |
| | — |
| | 109 |
| | — |
| | 109 |
|
Derivative instruments | — |
| | 157 |
| | — |
| | 157 |
| | — |
| | 27 |
| | — |
| | 27 |
|
Total assets | $ | 8,944 |
| | $ | 3,625 |
| | $ | — |
| | $ | 12,569 |
| | $ | 6,261 |
| | $ | 5,780 |
| | $ | 32 |
| | $ | 12,073 |
|
Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative instruments | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
|
Total liabilities | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 28 |
| | $ | — |
| | $ | 28 |
|
____________________
(a) Dell did not transfer any securities between levels during the nine months ended October 28, 2011.
The following section describes the valuation methodologies Dell uses to measure financial instruments at fair value:
Cash Equivalents - The majority of Dell's cash equivalents in the above table consists of money market funds, commercial paper, including corporate and asset-backed commercial paper, and U.S. government and agencies, all with original maturities of less than 90 days and valued at fair value, which approximates cost. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. When quoted prices are not available, Dell utilizes a pricing service to assist in obtaining fair value pricing. Dell conducts reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
Debt Securities - The majority of Dell's debt securities consists of various fixed income securities such as U.S. government and
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
agencies, and U.S. and international corporate. Dell utilizes a pricing service to assist management in measuring fair value pricing for the majority of this investment portfolio. Valuation is based on pricing models whereby all significant inputs, including benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers and other market related data, are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset. Inputs are documented in accordance with the fair value measurements hierarchy. Dell conducts reviews on a quarterly basis to verify pricing, assess liquidity, and determine if significant valuation inputs have changed that would impact the fair value hierarchy disclosure. The Level 3 position as of January 28, 2011, represented a convertible debt security that Dell was unable to corroborate with observable market data. The investment was valued at cost plus accrued interest as this was management's best estimate of fair value. As a result of events in the third quarter of Fiscal 2012, the investment was determined to be fully impaired and its cost basis was reduced to zero. See Note 4 of Notes to Condensed Consolidated Financial Statements for additional information about investments.
Equity and Other Securities - The majority of Dell's investments in equity and other securities consists of various mutual funds held in Dell's Deferred Compensation Plan. The valuation of these securities is based on pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Level 1 position consists of equity investments which began trading during the first nine months of Fiscal 2012. The valuations are based on quoted prices in active markets. These investments were previously accounted for under the cost method.
Derivative Instruments - Dell's derivative financial instruments consist primarily of foreign currency forward and purchased option contracts and interest rate swaps. The fair value of the portfolio is determined using valuation models based on market observable inputs, including interest rate curves, forward and spot prices for currencies, and implied volatilities. Credit risk is factored into the fair value calculation of Dell's derivative instrument portfolio. For interest rate derivative instruments, credit risk is determined at the contract level with the use of credit default spreads of either Dell, when in a net liability position, or the relevant counterparty, when in a net asset position. For foreign exchange derivative instruments, credit risk is determined in a similar manner, except that the credit default spread is applied based on the net position of each counterparty with the use of the appropriate credit default spreads.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis - Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the recurring fair value table above. These assets consist primarily of investments accounted for under the cost method and non-financial assets such as goodwill and intangible assets. Investments accounted for under the cost method included in equity and other securities, approximated $13 million and $15 million, on October 28, 2011, and January 28, 2011, respectively. Goodwill and intangible assets are measured at fair value initially and subsequently when there is an indicator of impairment and the impairment is recognized. See Note 9 of Notes to Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4 — INVESTMENTS
The following table summarizes, by major security type, the fair value and amortized cost of Dell's investments. All debt security investments with remaining maturities in excess of one year and substantially all equity and other securities are recorded as long-term investments in the Condensed Consolidated Statements of Financial Position.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 28, 2011 | | January 28, 2011 |
| Fair Value | | Cost | | Unrealized Gain | | Unrealized (Loss) | | Fair Value | | Cost | | Unrealized Gain | | Unrealized (Loss) |
| (in millions) |
Investments: | | | | | | | | | | | | | | | |
U.S. government and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 58 |
| | $ | 58 |
| | $ | — |
| | $ | — |
|
U.S. corporate | 260 |
| | 260 |
| | — |
| | — |
| | 254 |
| | 253 |
| | 1 |
| | — |
|
International corporate | 285 |
| | 285 |
| | — |
| | — |
| | 140 |
| | 140 |
| | — |
| | — |
|
Total short-term investments | 545 |
| | 545 |
| | — |
| | — |
| | 452 |
| | 451 |
| | 1 |
| | — |
|
| | | | | | | | | | | | | | | |
U.S. government and agencies | — |
| | — |
| | — |
| | — |
| | 21 |
| | 20 |
| | 1 |
| | — |
|
U.S. corporate | 1,480 |
| | 1,481 |
| | 2 |
| | (3 | ) | | 242 |
| | 243 |
| | — |
| | (1 | ) |
International corporate | 521 |
| | 522 |
| | 1 |
| | (2 | ) | | 317 |
| | 317 |
| | — |
| | — |
|
Equity and other securities | 182 |
| | 122 |
| | 60 |
| | — |
| | 124 |
| | 124 |
| | — |
| | — |
|
Total long-term investments | 2,183 |
| | 2,125 |
| | 63 |
| | (5 | ) | | 704 |
| | 704 |
| | 1 |
| | (1 | ) |
Total investments | $ | 2,728 |
| | $ | 2,670 |
| | $ | 63 |
| | $ | (5 | ) | | $ | 1,156 |
| | $ | 1,155 |
| | $ | 2 |
| | $ | (1 | ) |
Dell's investments in debt securities are classified as available-for-sale. Equity and other securities primarily relate to investments held in Dell's Deferred Compensation Plan, which are classified as trading securities. Equity and other securities also include equity investments that began trading during the first nine months of Fiscal 2012 which are classified as available-for-sale securities. Dell recorded unrealized gains of $60 million as of October 28, 2011, for these investments in accumulated other comprehensive income. The remaining equity and other securities are initially recorded at cost and reduced for any impairment losses. During the three months ended October 28, 2011, Dell recognized a $39 million impairment charge associated with one of its investments, which is included in Interest and other, net on the Condensed Consolidated Statements of Income. Security classes reported at fair value use the specific identification method. The fair value of Dell's portfolio can be affected by interest rate movements, credit, and liquidity risks. Dell's investments in debt securities have contractual maturities of less than five years.
NOTE 5 — FINANCIAL SERVICES
Dell Financial Services
Dell offers or arranges various financing options and services for its business and consumer customers in the U.S. and Canada through Dell Financial Services (“DFS”). DFS's key activities include the origination, collection, and servicing of customer receivables related to the purchase of Dell products and services. New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services through DFS, were approximately $0.8 billion and $0.9 billion for the three months ended October 28, 2011, and October 29, 2010, respectively, and $2.5 billion and $2.8 billion for the nine months ended October 28, 2011, and October 29, 2010, respectively.
During the second quarter of Fiscal 2012, Dell acquired Dell Financial Services Canada Limited ("DFS Canada") from CIT Group Inc. The purchase included a portfolio of $367 million in gross contractual fixed-term leases and loans, Consumer installment, and Consumer revolving loans with a fair value at purchase of $309 million. Of the gross contractual amounts, $23 million was expected to be uncollectible at the date of acquisition. Dell also acquired a liquidating portfolio of computer equipment operating leases. The gross amount of the equipment associated with these operating leases at the date of acquisition was $67 million and is included in property, plant, and equipment in the Condensed Consolidated Statements of Financial Position. See Note 8 of Notes to Condensed Consolidated Financial Statements for additional information
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
about Dell's acquisitions.
In the first quarter of Fiscal 2012, Dell entered into a definitive agreement to acquire CIT Vendor Finance's Dell-related assets and sales and servicing functions in Europe. The acquisition of these assets will enable global expansion of Dell's direct finance model. Subject to customary closing conditions, Dell expects to close substantially all of this acquisition in the fiscal year ending February 1, 2013.
Dell transfers certain U.S. customer financing receivables to special purpose entities (“SPEs”) which meet the definition of a variable interest entity and are consolidated into Dell's Condensed Consolidated Financial Statements. The SPEs are bankruptcy remote legal entities with separate assets and liabilities. The purpose of the SPEs is to facilitate the funding of customer receivables in the capital markets. These SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. Dell's risk of loss related to securitized receivables is limited to the amount of Dell's right to receive collections for assets securitized exceeding the amount required to pay interest, principal, and other fees and expenses related to the asset-backed securities. Dell provides credit enhancement to the securitization in the form of over-collateralization.
Dell's securitization programs contain standard structural features related to the performance of the securitized receivables. These structural features include defined credit losses, delinquencies, average credit scores, and excess collections above or below specified levels. In the event one or more of these criteria are not met and Dell is unable to restructure the program, no further funding of receivables will be permitted and the timing of Dell's expected cash flows from over-collateralization will be delayed. At October 28, 2011, these criteria were met.
Financing Receivables
The following table summarizes the components of Dell's financing receivables segregated by portfolio segment:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | October 28, 2011 | | January 28, 2011 |
| | Revolving | | Fixed-term | | Total | | Revolving | | Fixed-term | | Total |
| | (in millions) |
Financing Receivables, net: | | |
| | |
| | | | | | | | |
Customer receivables, gross | | $ | 2,111 |
| | $ | 2,348 |
| | $ | 4,459 |
| | $ | 2,396 |
| | $ | 1,992 |
| | $ | 4,388 |
|
Allowances for losses | | (175 | ) | | (22 | ) | | (197 | ) | | (214 | ) | | (27 | ) | | (241 | ) |
Customer receivables, net | | 1,936 |
| | 2,326 |
| | 4,262 |
| | 2,182 |
| | 1,965 |
| | 4,147 |
|
Residual interest | | — |
| | 343 |
| | 343 |
| | — |
| | 295 |
| | 295 |
|
Financing receivables, net | | $ | 1,936 |
| | $ | 2,669 |
| | $ | 4,605 |
| | $ | 2,182 |
| | $ | 2,260 |
| | $ | 4,442 |
|
Short-term | | $ | 1,936 |
| | $ | 1,390 |
| | $ | 3,326 |
| | $ | 2,182 |
| | $ | 1,461 |
| | $ | 3,643 |
|
Long-term | | — |
| | 1,279 |
| | 1,279 |
| | — |
| | 799 |
| | 799 |
|
Financing receivables, net | | $ | 1,936 |
| | $ | 2,669 |
| | $ | 4,605 |
| | $ | 2,182 |
| | $ | 2,260 |
| | $ | 4,442 |
|
Included in financing receivables, net, are receivables that are held by consolidated variable interest entities ("VIEs") as shown in the table below:
|
| | | | | | | | |
| | October 28,
2011 | | January 28,
2011 |
| | (in millions) |
Financing receivables held by consolidated VIEs, net: | | |
| | |
|
Short-term, net | | $ | 1,055 |
| | $ | 1,087 |
|
Long-term, net | | 483 |
| | 262 |
|
Financing receivables held by consolidated VIEs, net | | $ | 1,538 |
| | $ | 1,349 |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following tables summarizes the changes in the allowance for financing receivable losses for the respective periods:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | October 28, 2011 | | October 29, 2010 |
| | Revolving | | Fixed-term | | Total | | Revolving | | Fixed-term | | Total |
| | (in millions) |
Allowance for financing receivable losses: | | | | | | | | | | | | |
Balance at the beginning of period | | $ | 189 |
| | $ | 21 |
| | $ | 210 |
| | $ | 248 |
| | $ | 29 |
| | $ | 277 |
|
Principal charge-offs | | (45 | ) | | (2 | ) | | (47 | ) | | (66 | ) | | (3 | ) | | (69 | ) |
Interest charge-offs | | (8 | ) | | — |
| | (8 | ) | | (12 | ) | | — |
| | (12 | ) |
Recoveries | | 9 |
| | 1 |
| | 10 |
| | 9 |
| | — |
| | 9 |
|
Provision and adjustments charged to income statement | | 30 |
| | 2 |
| | 32 |
| | 49 |
| | 3 |
| | 52 |
|
Balance at end of period | | $ | 175 |
| | $ | 22 |
| | $ | 197 |
| | $ | 228 |
| | $ | 29 |
| | $ | 257 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | October 28, 2011 | | October 29, 2010 |
| | Revolving | | Fixed-term | | Total | | Revolving | | Fixed-term | | Total |
| | (in millions) |
Allowance for financing receivable losses: | | | | | | | | | | | | |
Balance at the beginning of period | | $ | 214 |
| | $ | 27 |
| | $ | 241 |
| | $ | 224 |
| | $ | 13 |
| | $ | 237 |
|
Incremental allowance due to VIE consolidation | | — |
| | — |
| | — |
| | — |
| | 16 |
| | 16 |
|
Principal charge-offs | | (152 | ) | | (6 | ) | | (158 | ) | | (175 | ) | | (14 | ) | | (189 | ) |
Interest charge-offs | | (28 | ) | | — |
| | (28 | ) | | (29 | ) | | — |
| | (29 | ) |
Recoveries | | 39 |
| | 3 |
| | 42 |
| | 20 |
| | — |
| | 20 |
|
Provision and adjustments charged to income statement | | 102 |
| | (2 | ) | | 100 |
| | 188 |
| | 14 |
| | 202 |
|
Balance at end of period | | $ | 175 |
| | $ | 22 |
| | $ | 197 |
| | $ | 228 |
| | $ | 29 |
| | $ | 257 |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes the aging of Dell's customer receivables, gross, including accrued interest, as of October 28, 2011, and January 28, 2011, segregated by class: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 28, 2011 | | January 28, 2011 |
| | Current | | Past Due 1 — 90 Days | | Past Due > 90 Days | | Total | | Current | | Past Due 1 — 90 Days | | Past Due > 90 Days | | Total |
| | (in millions) |
Revolving — Consumer | | |
| | |
| | | | | | | | | | | | |
Owned since inception | | $ | 1,204 |
| | $ | 148 |
| | $ | 46 |
| | $ | 1,398 |
| | $ | 1,302 |
| | $ | 153 |
| | $ | 48 |
| | $ | 1,503 |
|
Purchased | | 324 |
| | 58 |
| | 19 |
| | 401 |
| | 447 |
| | 88 |
| | 35 |
| | 570 |
|
Fixed-term — Consumer | | | | | | | | | | | | | | | | |
Owned since inception | | 19 |
| | 1 |
| | — |
| | 20 |
| | — |
| | — |
| | — |
| | — |
|
Purchased | | 79 |
| | 6 |
| | 1 |
| | 86 |
| | — |
| | — |
| | — |
| | — |
|
Fixed-term — Large Enterprise | | | | | | | | | | | | | | | | |
Owned since inception | | 1,233 |
| | 15 |
| | 3 |
| | 1,251 |
| | 1,077 |
| | 47 |
| | 7 |
| | 1,131 |
|
Purchased | | 21 |
| | 4 |
| | — |
| | 25 |
| | — |
| | — |
| | — |
| | — |
|
Fixed-term — Public | | | | | | | | | | | | | | | | |
Owned since inception | | 408 |
| | 6 |
| | — |
| | 414 |
| | 463 |
| | 12 |
| | 1 |
| | 476 |
|
Purchased | | 18 |
| | 1 |
| | — |
| | 19 |
| | — |
| | — |
| | — |
| | — |
|
Revolving — SMB | | | | | | | | | | | | | | | | |
Owned since inception | | 254 |
| | 22 |
| | 5 |
| | 281 |
| | 246 |
| | 26 |
| | 5 |
| | 277 |
|
Purchased | | 24 |
| | 5 |
| | 2 |
| | 31 |
| | 34 |
| | 9 |
| | 3 |
| | 46 |
|
Fixed-term — SMB | | | | | | | | | | | | | | | | |
Owned since inception | | 476 |
| | 11 |
| | 3 |
| | 490 |
| | 371 |
| | 11 |
| | 3 |
| | 385 |
|
Purchased | | 40 |
| | 3 |
| | — |
| | 43 |
| | — |
| | — |
| | — |
| | — |
|
Total customer receivables, gross | | $ | 4,100 |
| | $ | 280 |
| | $ | 79 |
| | $ | 4,459 |
| | $ | 3,940 |
| | $ | 346 |
| | $ | 102 |
| | $ | 4,388 |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class as of October 28, 2011, and January 28, 2011. For revolving loans to consumers, Dell makes credit decisions based on propriety scorecards which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. For Commercial customers, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. These credit level scores range from one to sixteen for Public and Large Enterprise customers, and generally from one to six for small and medium business ("SMB") customers. The categories shown in the tables below segregate customer receivables based on the relative degrees of credit risk within each segment and product group. As loss experience varies substantially between financial products and customer segments, the credit quality categories cannot be compared between the different classes. The credit quality indicators for Consumer revolving accounts are primarily as of each quarter end date, and all others are generally updated on a periodic basis.
For the Consumer receivables shown in the below table, the higher quality category includes prime accounts which are generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720+. The middle category represents the mid-tier accounts that are comparable to U.S. FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to FICO scores below 660.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 28, 2011 | | January 28, 2011 |
| | Higher | | Mid | | Lower | | Total | | Higher | | Mid | | Lower | | Total |
| | (in millions) |
Revolving — Consumer | | | | |
| | | | | | | | |
| | | | |
Owned since inception | | $ | 201 |
| | $ | 407 |
| | $ | 790 |
| | $ | 1,398 |
| | $ | 251 |
| | $ | 415 |
| | $ | 837 |
| | $ | 1,503 |
|
Purchased | | $ | 33 |
| | $ | 95 |
| | $ | 273 |
| | $ | 401 |
| | $ | 50 |
| | $ | 127 |
| | $ | 393 |
| | $ | 570 |
|
Fixed-term — Consumer | | | | | | | | | | | | | | | | |
Owned since inception | | $ | 1 |
| | $ | 9 |
| | $ | 10 |
| | $ | 20 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchased | | $ | 5 |
| | $ | 40 |
| | $ | 41 |
| | $ | 86 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
For the Large Enterprise and Public commercial receivables shown in the below table, Dell's internal credit level scoring has been aggregated to their most comparable external commercial rating agency equivalents. Investment grade generally represents the highest credit quality accounts, non-investment grade represents middle quality accounts, and sub-standard represents the lowest quality accounts.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 28, 2011 | | January 28, 2011 |
| Investment | | Non-Investment | | Sub-Standard | | Total | | Investment | | Non-Investment | | Sub-Standard | | Total |
| (in millions) |
Fixed-term — Large Enterprise | |
| | |
| | | | | | |
| | |
| | | | |
Owned since inception | $ | 968 |
| | $ | 183 |
| | $ | 100 |
| | $ | 1,251 |
| | $ | 806 |
| | $ | 166 |
| | $ | 159 |
| | $ | 1,131 |
|
Purchased | $ | 11 |
| | $ | 10 |
| | $ | 4 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Fixed-term — Public | | | | | | | | | | | | | | | |
Owned since inception | $ | 371 |
| | $ | 34 |
| | $ | 9 |
| | $ | 414 |
| | $ | 438 |
| | $ | 30 |
| | $ | 8 |
| | $ | 476 |
|
Purchased | $ | 15 |
| | $ | 3 |
| | $ | 1 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
For the SMB receivables shown in the table below, the higher quality category includes receivables that are generally within Dell's top two internal credit quality levels, which typically have the lowest loss experience. The middle category generally falls within credit levels three and four, and the lower category generally falls within Dell's bottom two credit levels, which
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
experience higher loss rates. The revolving product is sold primarily to small business customers and the fixed-term products are more weighted toward medium-sized businesses. Although both fixed-term and revolving products generally rely on a six-level internal rating system, the grading criteria and classifications are different as the loss performance varies between these product and customer sets. Therefore, the credit levels are not comparable between the SMB fixed-term and revolving classes.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 28, 2011 | | January 28, 2011(a) |
| | Higher | | Mid | | Lower | | Total | | Higher | | Mid | | Lower | | Total |
| | (in millions) |
Revolving — SMB | | |
| | |
| | | | | | |
| | |
| | | | |
Owned since inception | | $ | 101 |
| | $ | 83 |
| | $ | 97 |
| | $ | 281 |
| | $ | 108 |
| | $ | 85 |
| | $ | 84 |
| | $ | 277 |
|
Purchased | | $ | 11 |
| | $ | 16 |
| | $ | 4 |
| | $ | 31 |
| | $ | 16 |
| | $ | 24 |
| | $ | 6 |
| | $ | 46 |
|
Fixed-term — SMB | | | | | | | | | | | | | | | | |
Owned since inception | | $ | 49 |
| | $ | 173 |
| | $ | 268 |
| | $ | 490 |
| | $ | 55 |
| | $ | 122 |
| | $ | 208 |
| | $ | 385 |
|
Purchased | | $ | 4 |
| | $ | 34 |
| | $ | 5 |
| | $ | 43 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
____________________
(a) Amounts as of January 28, 2011 have been reclassified due to adjustments between credit quality categories.
Customer Receivables
The following is a description of the components of Dell's customer receivables:
| |
• | Revolving loans — Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell. Revolving loans in the U.S. bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within 12 months on average. Revolving loans are included in short-term financing receivables. From time to time, account holders may have the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full by a specific date, no interest is charged. These special programs generally range from 6 to 12 months. At October 28, 2011, and January 28, 2011, receivables under these special programs were $299 million and $398 million, respectively. |
| |
• | Fixed-term sales-type leases and loans — Dell enters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments at October 28, 2011, were as follows: Fiscal 2012 - $307 million; Fiscal 2013 - $985 million; Fiscal 2014 - $587 million; Fiscal 2015 - $194 million; Fiscal 2016 and beyond - $22 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities and certain consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years. |
Purchased Credit-Impaired Loans
Purchased Credit-Impaired (“PCI”) loans are acquired loans which showed evidence of deterioration in credit quality prior to their acquisition and for which it is probable that Dell will not collect all contractually required principal and interest payments. During the third quarter of Fiscal 2011, Dell purchased a portfolio of revolving loan receivables from CIT Group Inc. that consisted of revolving Dell customer account balances that met the definition of PCI loans. At October 28, 2011, the outstanding balance of these receivables, including principal and accrued interest, was $436 million and the carrying amount was $228 million.
The excess of cash flows expected to be collected over the carrying value of PCI loans is referred to as the accretable yield and is accreted into interest income using the effective yield method based on the expected future cash flows over the estimated lives of the PCI loans. Due to improved expectations of the amount of expected cash flows and higher post
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
charge-off recoveries, Dell increased the accretable yield associated with these PCI loans by $8 million and $67 million for the three and nine months ended October 28, 2011, respectively. The increases in accretable yield will be amortized over the remaining life of the loans.
The following table shows activity for the accretable yield on the PCI loans for the three and nine months ended October 28, 2011:
|
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 28, 2011 | | October 28, 2011 |
| (in millions) |
Accretable Yield: | | | |
Balance at beginning of period | $ | 152 |
| | $ | 137 |
|
Additions/ Purchases | — |
| | — |
|
Accretion | (23 | ) | | (67 | ) |
Prospective yield adjustment | 8 |
| | 67 |
|
Balance at end of period | $ | 137 |
| | $ | 137 |
|
Residual Interest
Dell retains a residual interest in equipment leased under its fixed-term lease programs. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, Dell assesses the carrying amount of its recorded residual values for impairment. Anticipated declines in specific future residual values that are considered to be other-than-temporary are recorded in earnings.
Asset Securitizations
Customer receivables funded via securitization through SPEs were $501 million and $510 million, during the third quarters of Fiscal 2012 and Fiscal 2011, respectively, and $1.6 billion and $1.5 billion for the nine months ended October 28, 2011, and October 29, 2010, respectively. The programs are effective for 12 month periods and subject to an annual renewal process.
The structured financing debt related to the fixed-term lease and loan, and revolving loan securitization programs was $1.3 billion and $1.0 billion as of October 28, 2011, and January 28, 2011, respectively. The debt is collateralized solely by the financing receivables in the programs. The debt has a variable interest rate and an average duration of 12 to 36 months based on the terms of the underlying financing receivables. The total debt capacity related to the securitization programs is $1.4 billion. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the structured financing debt.
Dell enters into interest rate swap agreements to effectively convert a portion of the structured financing debt from a floating rate to a fixed rate. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information about interest rate swaps.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 6 — BORROWINGS
The following table summarizes Dell's outstanding debt at the dates indicated: |
| | | | | | | | |
| | October 28,
2011 | | January 28,
2011 |
| | (in millions) |
Long-Term Debt | | |
| | |
|
Notes | | |
| | |
|
$400 million issued on June 10, 2009, at 3.375% due June 2012 (“2012 Notes”)(a) | | $ | 400 |
| | $ | 400 |
|
$600 million issued on April 17, 2008, at 4.70% due April 2013 (“2013A Notes”)(a)(b) | | 606 |
| | 609 |
|
$500 million issued on September 7, 2010, at 1.40% due September 2013 (“2013B Notes”) | | 500 |
| | 499 |
|
$500 million issued on April 1, 2009, at 5.625% due April 2014 (“2014A Notes”)(b) | | 500 |
| | 500 |
|
$300 million issued on March 28, 2011, with a floating rate due April 2014 (“2014B Notes”) | | 300 |
| | — |
|
$400 million issued on March 28, 2011, at 2.10% due April 2014 (“2014C Notes”) | | 400 |
| | — |
|
$700 million issued on September 7, 2010, at 2.30% due September 2015 (“2015 Notes”)(b) | | 700 |
| | 700 |
|
$400 million issued on March 28, 2011, at 3.10% due April 2016 (“2016 Notes”)(b) | | 399 |
| | — |
|
$500 million issued on April 17, 2008, at 5.65% due April 2018 (“2018 Notes”)(b) | | 498 |
| | 499 |
|
$600 million issued on June 10, 2009, at 5.875% due June 2019 (“2019 Notes”)(b) | | 600 |
| | 600 |
|
$400 million issued on March 28, 2011, at 4.625% due April 2021 (“2021 Notes”) | | 398 |
| | — |
|
$400 million issued on April 17, 2008, at 6.50% due April 2038 (“2038 Notes”) | | 400 |
| | 400 |
|
$300 million issued on September 7, 2010, at 5.40% due September 2040 (“2040 Notes”) | | 300 |
| | 300 |
|
Senior Debentures | | |
| | |
|
$300 million issued on April 3, 1998, at 7.10% due April 2028 ("Senior Debentures")(a) | | 385 |
| | 389 |
|
Other | | |
| | |
|
Structured financing debt | | 1,372 |
| | 1,100 |
|
Less: current portion of long-term debt | | (1,328 | ) | | (850 | ) |
Total long-term debt | | 6,430 |
| | 5,146 |
|
Short-Term Debt | | |
| | |
|
Commercial paper | | 500 |
| | — |
|
Current portion of long-term debt | | 1,328 |
| | 850 |
|
Other | | 3 |
| | 1 |
|
Total short-term debt | | 1,831 |
| | 851 |
|
Total debt | | $ | 8,261 |
| | $ | 5,997 |
|
____________________
(a) Includes the impact of interest rate swap terminations.
(b) Includes hedge accounting adjustments.
During the nine months ended October 28, 2011, Dell issued the 2014B Notes, the 2014C Notes, the 2016 Notes and the 2021 Notes (collectively, the “Issued Notes”) under a shelf registration statement that was originally filed in November 2008 and amended in March 2011. The net proceeds from the Issued Notes, after payment of expenses, were approximately $1.5 billion. The Issued Notes are unsecured obligations and rank equally in right of payment with Dell's existing and future unsecured senior indebtedness. The Issued Notes effectively rank junior to all indebtedness and other liabilities, including trade payables, of Dell's subsidiaries. The Issued Notes were issued pursuant to a Supplemental Indenture dated March 31, 2011, between Dell and a trustee, with terms and conditions substantially the same as those governing the Notes outstanding as of January 28, 2011 (such outstanding Notes, together with the Issued Notes, the "Notes").
The estimated fair value of total debt at October 28, 2011, was approximately $8.2 billion. The fair values of the structured financing debt and other short-term debt approximate their carrying values as their interest rates vary with the market. The carrying value of the Senior Debentures, the 2012 Notes and the 2013A Notes includes an unamortized amount related to the termination of interest rate swap agreements, which were previously designated as hedges of the debt. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information about interest rate swaps. The weighted average
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
interest rate for the current portion of long term debt and other as of October 28, 2011, was 1.40%. The weighted average interest rate on outstanding commercial paper as of October 28, 2011 was 0.33%.
Structured Financing Debt — As of October 28, 2011, Dell had $1.4 billion outstanding in structured financing related debt, of which $1.3 billion was through the fixed-term lease and loan, and revolving loan securitization programs. Of the $1.4 billion outstanding in structured financing related debt, $928 million was current as of October 28, 2011. See Note 5 and Note 7 of the Notes to Condensed Consolidated Financial Statements for further discussion of the structured financing debt and the interest rate swap agreements that hedge a portion of that debt.
Commercial Paper — As of October 28, 2011, there was $500 million outstanding under the commercial paper program. At January 28, 2011, Dell had no outstanding commercial paper. Dell has $3.0 billion in senior unsecured revolving credit facilities, primarily to support a $2.0 billion commercial paper program. Dell replaced the five-year $1.0 billion credit facility expiring on June 1, 2011, with a four-year $2.0 billion credit facility that will expire on April 15, 2015. Dell's remaining credit facility for $1.0 billion will expire on April 2, 2013. There were no outstanding advances under the revolving credit facilities as of October 28, 2011.
The indentures governing the Notes, the Senior Debentures, and the structured financing debt contain customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, and certain events of bankruptcy and insolvency. The indentures also contain covenants limiting Dell's ability to create certain liens; enter into sale-and-lease back transactions; and consolidate or merge with, or convey, transfer or lease all or substantially all of its assets to, another person. The senior unsecured revolving credit facilities require compliance with conditions that must be satisfied prior to any borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including maintenance of a minimum interest coverage ratio. Dell was in compliance with all financial covenants as of October 28, 2011.
NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Instruments
As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and purchased options, to hedge certain foreign currency exposures and interest rate swaps to manage the exposure of its debt portfolio to interest rate risk. Dell's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Dell assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, in earnings as a component of interest and other, net.
Foreign Exchange Risk
Dell uses a combination of forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The majority of these contracts typically expire in 12 months or less.
Dell assessed hedge ineffectiveness for cash flow hedges for the three and nine months ended October 28, 2011, and determined that it was not material. During the three and nine months ended October 28, 2011, Dell did not discontinue any cash flow hedges that had a material impact on Dell's results of operations, as substantially all forecasted foreign currency transactions were realized in Dell's actual results.
In addition, Dell uses forward contracts to hedge monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. These contracts generally expire in three months or less, are considered economic hedges and are not designated. The change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. Dell recognized a gain of $55 million and a loss of $6 million during the third quarters of Fiscal 2012 and 2011, respectively, for the change in fair value of these foreign currency forward contracts, and gains of $65 million and $52 million during the nine months ended October 28, 2011, and October 29, 2010, respectively.
Interest Rate Risk
Dell uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed term customer leases and loans. The duration of these contracts typically ranges from 30 to 42 months. Certain of these swaps are designated as cash flow hedges. Hedge ineffectiveness for interest rate swaps designated as cash flow hedges was not material for the three and nine months ended October 28, 2011, and October 29, 2010.
The amount of change in fair value for interest rate hedges recognized in interest and other, net, was not material for the three and nine months ended October 28, 2011, and October 29, 2010.
Periodically, Dell also uses interest rate swaps designated as fair value hedges to modify the market risk exposures in connection with long-term debt to achieve primarily LIBOR-based floating interest expense. During the three months ended October 28, 2011, Dell entered into interest rate swaps to economically hedge a portion of its interest rate exposure on certain tranches of its long-term debt. Hedge ineffectiveness for interest rate swaps designated as fair value hedges was not material for the three and nine months ended October 28, 2011, and October 29, 2010.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Notional Amounts of Outstanding Derivative Instruments
The notional amounts of Dell's outstanding derivative instruments are summarized as follows:
|
| | | | | | | | |
| | October 28, 2011 | | January 28, 2011 |
| | (in millions) |
Foreign Exchange Contracts | | |
| | |
|
Designated as cash flow hedging instruments | | $ | 4,854 |
| | $ | 5,364 |
|
Non-designated as hedging instruments | | 186 |
| | 250 |
|
Total | | $ | 5,040 |
| | $ | 5,614 |
|
| | | | |
Interest Rate Contracts | | | | |
Designated as fair value hedging instruments | | $ | 500 |
| | $ | — |
|
Designated as cash flow hedging instruments | | 669 |
| | 625 |
|
Non-designated as hedging instruments | | 121 |
| | 145 |
|
Total | | $ | 1,290 |
| | $ | 770 |
|
Derivative Instruments Additional Information
The aggregate unrealized net gain or loss for interest rate swaps and foreign currency exchange contracts, recorded as a component of comprehensive income, for the third quarters of Fiscal 2012 and 2011, was a gain of $63 million and a loss of $105 million, respectively, and for the nine months ended October 28, 2011, and October 29, 2010, a gain of $85 million and a loss of $219 million, respectively.
Dell has reviewed the existence and nature of credit-risk-related contingent features in derivative trading agreements with its counterparties. Certain agreements contain clauses under which, if Dell's credit ratings were to fall below investment grade upon a change of control of Dell, counterparties would have the right to terminate those derivative contracts where Dell is in a net liability position. As of October 28, 2011, there had been no such triggering events.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Effect of Derivative Instruments on the Condensed Consolidated Statements of Financial Position and the Condensed Consolidated Statements of Income
|
| | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Gain (Loss) Recognized in Accumulated OCI, Net of Tax, on Derivatives (Effective Portion) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion) | | Gain (Loss) Recognized in Income on Derivative (Ineffective Portion) |
(in millions) |
For the three months ended October 28, 2011 | | |
| | | | |
|
| | |
| | Total net revenue | | $ | (15 | ) | | | | |
Foreign exchange contracts | | $ | 55 |
| | Total cost of net revenue | | 8 |
| | | | |
Interest rate contracts | | — |
| | Interest and other, net | | — |
| | Interest and other, net | | $ | 1 |
|
Total | | $ | 55 |
| | | | $ | (7 | ) | | | | $ | 1 |
|
| | | | | | | | | | |
For the three months ended October 29, 2010 | | |
| | | | |
|
| | |
| | Total net revenue | | $ | (120 | ) | | | | |
Foreign exchange contracts | | $ | (234 | ) | | Total cost of net revenue | | (9 | ) | | | | |
Interest rate contracts | | — |
| | Interest and other, net | | — |
| | Interest and other, net | | $ | — |
|
Total | | $ | (234 | ) | | | | $ | (129 | ) | | | | $ | — |
|
| | | | | | | | | | |
For the nine months ended October 28, 2011 | | |
| | | | |
|
| | |
| | Total net revenue | | $ | (257 | ) | | | | |
Foreign exchange contracts | | $ | (194 | ) | | Total cost of net revenue | | (20 | ) | | | | |
Interest rate contracts | | — |
| | Interest and other, net | | — |
| | Interest and other, net | | $ | 3 |
|
Total | | $ | (194 | ) | | | | $ | (277 | ) | | | | $ | 3 |
|
| | | | | | | | | | |
For the nine months ended October 29, 2010 | | |
| | | | |
|
| | |
| | Total net revenue | | $ | 2 |
| | | | |
Foreign exchange contracts | | $ | (253 | ) | | Total cost of net revenue | | |