Dell Q1FY13 10Q
Table of Contents

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 May 4, 2012
or
o
 
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 R  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R  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.
Large accelerated filer R
 
Accelerated filer o
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No R
As of the close of business on May 24, 2012, 1,749,010,893 shares of common stock, par value $.01 per share, were outstanding.



Table of Contents

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 February 3, 2012. 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.


Table of Contents

Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents


PART I
ITEM 1 — FINANCIAL STATEMENTS
DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions)
 
May 4,
2012
 
February 3,
2012
 
(unaudited)
 
 
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
12,814

 
$
13,852

Short-term investments
901

 
966

Accounts receivable, net
6,289

 
6,476

Short-term financing receivables, net
3,200

 
3,327

Inventories, net
1,472

 
1,404

Other current assets
3,369

 
3,423

Total current assets
28,045

 
29,448

Property, plant, and equipment, net
2,119

 
2,124

Long-term investments
3,501

 
3,404

Long-term financing receivables, net
1,342

 
1,372

Goodwill
6,005

 
5,838

Purchased intangible assets, net
1,801

 
1,857

Other non-current assets
476

 
490

Total assets
$
43,289

 
$
44,533

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 

Short-term debt
$
3,186

 
$
2,867

Accounts payable
10,970

 
11,656

Accrued and other
3,076

 
3,934

Short-term deferred services revenue
3,582

 
3,544

Total current liabilities
20,814

 
22,001

Long-term debt
5,813

 
6,387

Long-term deferred services revenue
3,837

 
3,836

Other non-current liabilities
3,468

 
3,392

Total liabilities
33,932

 
35,616

Commitments and contingencies (Note 11)


 


Stockholders’ equity:
 
 
 

Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 3,407 and 3,390, respectively; shares outstanding: 1,761 for each period presented
12,313

 
12,187

Treasury stock at cost: 1,171 and 1,154 shares, respectively
(31,745
)
 
(31,445
)
Retained earnings
28,871

 
28,236

Accumulated other comprehensive loss
(82
)
 
(61
)
Total stockholders’ equity
9,357

 
8,917

Total liabilities and stockholders’ equity
$
43,289

 
$
44,533


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4
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DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts; unaudited)
 
Three Months Ended
 
May 4,
2012
 
April 29,
2011
Net revenue:
 

 
 

Products
$
11,423

 
$
12,059

Services, including software related
2,999

 
2,958

Total net revenue
14,422

 
15,017

Cost of net revenue:
 
 
 

Products
9,330

 
9,436

Services, including software related
2,025

 
2,149

Total cost of net revenue
11,355

 
11,585

Gross margin
3,067

 
3,432

Operating expenses:
 
 
 

Selling, general, and administrative
2,009

 
2,025

Research, development, and engineering
234

 
195

Total operating expenses
2,243

 
2,220

Operating income
824

 
1,212

Interest and other, net
(32
)

(42
)
Income before income taxes
792

 
1,170

Income tax provision
157

 
225

Net income
$
635

 
$
945

Earnings per share:
 
 
 

Basic
$
0.36

 
$
0.50

Diluted
$
0.36

 
$
0.49

Weighted-average shares outstanding:
 

 
 

Basic
1,759

 
1,908

Diluted
1,774

 
1,923

 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.



5
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DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
 
Three Months Ended
 
May 4, 2012
 
April 29, 2011
Net income
$
635

 
$
945

 
 
 
 
Other comprehensive income, net of tax
 
 
 
Foreign currency translation adjustments
(8
)
 
74

 
 
 
 
Available-for-sale investments
 
 
 
Change in unrealized gain or loss
—

 
1

Less: reclassification adjustment for net (gains) losses included in net income
(2
)
 
(1
)
Net change
(2
)
 
—

 
 
 
 
Cash Flow Hedges
 
 
 
Change in unrealized gain or loss
(25
)
 
(235
)
Less: reclassification adjustment for net (gains) losses included in net income
14

 
167

Net change
(11
)
 
(68
)
 
 
 
 
Total other comprehensive income (loss), net of tax benefit (expense) of $(9) and $0, respectively
(21
)
 
6

Comprehensive income, net of tax
$
614

 
$
951

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6
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DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
 
Three Months Ended
 
May 4,
2012
 
April 29,
2011
Cash flows from operating activities:
 

 
 

Net income
$
635

 
$
945

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
248

 
216

Stock-based compensation expense
95

 
99

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
(10
)
 
—

Deferred income taxes
47

 
(63
)
Provision for doubtful accounts — including financing receivables
63

 
47

Other
(5
)
 
(5
)
Changes in assets and liabilities, net of effects from acquisitions:


 


Accounts receivable
161

 
471

Financing receivables
71

 
21

Inventories
(68
)
 
38

Other assets
48

 
110

Accounts payable
(671
)
 
(925
)
Deferred services revenue
33

 
191

Accrued and other liabilities
(785
)
 
(680
)
Change in cash from operating activities
(138
)
 
465

Cash flows from investing activities:
 

 
 

Investments:
 

 
 

Purchases
(673
)
 
(240
)
Maturities and sales
640

 
222

Capital expenditures
(142
)
 
(137
)
Proceeds from sale of facilities and land
—

 
12

Collections on purchased financing receivables
55

 
67

Acquisitions, net of cash received
(245
)
 
(1,473
)
Change in cash from investing activities
(365
)
 
(1,549
)
Cash flows from financing activities:
 

 
 

Repurchases of common stock
(324
)
 
(450
)
Issuance of common stock under employee plans
38

 
10

Issuance (repayment) of commercial paper (maturity 90 days or less), net
13

 
—

Proceeds from debt
596

 
1,930

Repayments of debt
(863
)
 
(323
)
Other
8

 
3

Change in cash from financing activities
(532
)
 
1,170

Effect of exchange rate changes on cash and cash equivalents
(3
)
 
62

Change in cash and cash equivalents
(1,038
)
 
148

Cash and cash equivalents at beginning of the period
13,852

 
13,913

Cash and cash equivalents at end of the period
$
12,814

 
$
14,061

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7
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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 February 3, 2012 ("Fiscal 2012"). 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 May 4, 2012, the results of its operations and corresponding comprehensive income for the three months ended May 4, 2012, and April 29, 2011, and its cash flows for the three months ended May 4, 2012, and April 29, 2011.
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 and corresponding comprehensive income for the three months ended May 4, 2012, and April 29, 2011, and the cash flows for the three months ended May 4, 2012, and April 29, 2011, 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 1, 2013 ("Fiscal 2013"), will be a 52 week period.
In the first quarter of Fiscal 2013, Dell made certain segment realignments in order to conform to the way Dell now internally manages segment performance. Dell has recast prior period amounts to provide visibility and comparability. None of these changes impact Dell's previously reported consolidated net revenue, gross margin, operating income, net income, or earnings per share. See Note 14 of the Notes to the Condensed Consolidated Financial Statements for more information.
Recently Issued Accounting Pronouncements
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 two separate, but consecutive statements. This new guidance relates only to presentation. Dell began presenting a separate Condensed Consolidated Statement of Comprehensive Income in the first quarter of the fiscal year ending February 1, 2013.

Intangibles- Goodwill and Other — In September 2011, the FASB issued new guidance that simplified 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 the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test becomes optional. Dell adopted this new guidance in the first quarter of the fiscal year ending February 1, 2013. Goodwill is tested for impairment on an annual basis in the second fiscal quarter, or sooner if an indicator of impairment occurs. The adoption of this guidance did not impact Dell's Condensed Consolidated Financial Statements.

Disclosures about Offsetting Assets and Liabilities — In December 2011, the FASB issued new guidance that will enhance disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. This new guidance requires the disclosure of the gross amounts subject to rights of offset, amounts offset in accordance with the accounting standards followed, and the related net exposure. This new guidance will be effective for Dell for the first quarter of the fiscal year ending January 31, 2014. Early adoption is not permitted. Other than requiring additional disclosures, Dell does not expect that this new guidance will impact Dell's Condensed Consolidated Financial Statements.

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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

NOTE 2 — INVENTORIES
 
 
May 4,
2012
 
February 3,
2012
 
 
(in millions)
Inventories, net:
 
 

 
 

Production materials
 
$
785

 
$
753

Work-in-process
 
312

 
239

Finished goods
 
375

 
412

Total
 
$
1,472

 
$
1,404



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 May 4, 2012, and February 3, 2012:
 
May 4, 2012
 
February 3, 2012
 
Level 1(a)
 
Level 2 (a)
 
Level 3
 
Total
 
Level 1 (a)
 
Level 2 (a)
 
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
$
9,246

 
$
—

 
$
—

 
$
9,246

 
$
8,370

 
$
—

 
$
—

 
$
8,370

Commercial paper
—

 
—

 
—

 
—

 
—

 
2,011

 
—

 
2,011

U.S. corporate
—

 
—

 
—

 
—

 
—

 
5

 
—

 
5

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non- U.S. government and agencies
—

 
153

 
—

 
153

 
—

 
94

 
—

 
94

Commercial paper
—

 
314

 
—

 
314

 
—

 
434

 
—

 
434

U.S. corporate
—

 
2,803

 
—

 
2,803

 
—

 
2,668

 
—

 
2,668

International corporate
—

 
1,006

 
—

 
1,006

 
—

 
1,055

 
—

 
1,055

Equity and other securities
2

 
111

 
—

 
113

 
2

 
105

 
—

 
107

Derivative instruments
—

 
84

 
—

 
84

 
—

 
140

 
—

 
140

Total assets
$
9,248

 
$
4,471

 
$
—

 
$
13,719

 
$
8,372

 
$
6,512

 
$
—

 
$
14,884

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative instruments
$
—

 
$
19

 
$
—

 
$
19

 
$
—

 
$
17

 
$
—

 
$
17

Total liabilities
$
—

 
$
19

 
$
—

 
$
19

 
$
—

 
$
17

 
$
—

 
$
17

____________________
(a) Dell did not transfer any securities between levels during the three months ended May 4, 2012 or during the twelve months ended February 3, 2012.

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 and corporate commercial paper, all with original maturities of 90 days or less and valued at fair value.  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. Dell reviews security pricing and assesses liquidity on a quarterly basis.

Debt Securities — The majority of Dell's debt securities consists of various fixed income securities such as U.S. corporate, international corporate, and commercial paper. Valuation is based on pricing models whereby all significant inputs, including

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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

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 reviews security pricing and assesses liquidity on a quarterly basis. See Note 4 of the Notes to the 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 an equity investment which began trading during Fiscal 2012.  The valuation is based on quoted prices in active markets.  This investment was 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.  See Note 7 of the Notes to the Condensed Consolidated Financial Statements for a description of Dell's derivative financial instrument activities.

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 $12 million, as of May 4, 2012, and February 3, 2012, 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 the Notes to the Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets.

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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.
 
May 4, 2012
 
February 3, 2012
 
Fair Value
 
  Cost
 
Unrealized Gain
 
Unrealized (Loss)
 
Fair Value
 
  Cost
 
Unrealized Gain
 
Unrealized (Loss)
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non- U.S. government and agencies
$
30

 
$
30

 
$
—

 
$
—

 
$
24

 
$
24

 
$
—

 
$
—

Commercial paper
314

 
314

 
—

 
—

 
434

 
434

 
—

 
—

U.S. corporate
394

 
393

 
1

 
—

 
336

 
335

 
1

 
—

International corporate
163

 
163

 
—

 
—

 
172

 
172

 
—

 
—

Total short-term investments
901

 
900

 
1

 
—

 
966

 
965

 
1

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non- U.S. government and agencies
123

 
123

 
—

 
—

 
70

 
70

 
—

 
—

U.S. corporate
2,409

 
2,395

 
15

 
(1
)
 
2,332

 
2,322

 
12

 
(2
)
International corporate
843

 
838

 
5

 
—

 
883

 
880

 
4

 
(1
)
Equity and other securities
126

 
126

 
—

 
—

 
119

 
119

 
—

 
—

Total long-term investments
3,501

 
3,482

 
20

 
(1
)
 
3,404

 
3,391

 
16

 
(3
)
Total investments
$
4,402

 
$
4,382

 
$
21

 
$
(1
)
 
$
4,370

 
$
4,356

 
$
17

 
$
(3
)

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.  The remaining equity and other securities are initially recorded at cost and reduced for any impairment losses. 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 three years or less.


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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

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 primarily related to the purchase of Dell products and services. In some cases, Dell may originate financing activities for its commercial customers related to the purchase of third-party technology products that complement Dell's portfolio of products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including third-party originations, were approximately $812 million and $855 million for the three months ended May 4, 2012, and April 29, 2011, respectively. The results of DFS are included in the business segment where the customer receivable was originated.

Dell's financing receivables are aggregated into the following categories:

•
Revolving loans — Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell. These private label credit financing programs are referred to as Dell Preferred Account (“DPA”) and Dell Business Credit (“DBC”). The DPA product is primarily offered to individual customers, and the DBC product is primarily offered to small and medium commercial customers. 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. As of May 4, 2012, and February 3, 2012, receivables under these special programs were $295 million and $328 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 May 4, 2012, were as follows: Fiscal 2013 - $936 million; Fiscal 2014 - $833 million; Fiscal 2015 - $411 million; Fiscal 2016 - $73 million; Fiscal 2017 and beyond - $8 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years.

Customer receivables include revolving loans and fixed-term leases and loans resulting primarily from the sale of Dell products and services. Based on how Dell assesses risk and determines the appropriate allowance levels, Dell has two portfolio segments, (1) fixed-term leases and loans and (2) revolving loans. Portfolio segments are further segregated into classes. During the first quarter of Fiscal 2013, Dell re-aligned the presentation of these classes based on products, customer type, credit risk evaluation, and whether the receivable was owned by Dell since its inception or was purchased subsequent to its inception. Prior to the first quarter of Fiscal 2013, portfolio classes were based on operating segment and whether the receivable was owned by Dell since its inception or was purchased subsequent to its inception. This change in presentation during the first quarter of Fiscal 2013 affected disclosures only and had no impact on how credit risk is assessed or on reserve rates.


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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table summarizes the components of Dell's financing receivables segregated by portfolio segment as of May 4, 2012, and February 3, 2012:
 
 
May 4, 2012
 
February 3, 2012
 
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
 
(in millions)
Financing Receivables, net:
 
 

 
 

 
 
 
 
 
 
 
 
Customer receivables, gross
 
$
1,956

 
$
2,415

 
$
4,371

 
$
2,096

 
$
2,443

 
$
4,539

Allowances for losses
 
(169
)
 
(23
)
 
(192
)
 
(179
)
 
(23
)
 
(202
)
Customer receivables, net
 
1,787

 
2,392

 
4,179

 
1,917

 
2,420

 
4,337

Residual interest
 
—

 
363

 
363

 
—

 
362

 
362

Financing receivables, net
 
$
1,787

 
$
2,755

 
$
4,542

 
$
1,917

 
$
2,782

 
$
4,699

Short-term
 
$
1,787

 
$
1,413

 
$
3,200

 
$
1,917

 
$
1,410

 
$
3,327

Long-term
 
—

 
1,342

 
1,342

 
—

 
1,372

 
1,372

Financing receivables, net
 
$
1,787

 
$
2,755

 
$
4,542

 
$
1,917

 
$
2,782

 
$
4,699


The following table summarizes the changes in the allowance for financing receivable losses for the respective periods:
 
 
Three Months Ended
 
 
May 4, 2012
 
April 29, 2011
 
 
Revolving
 
Fixed- term
 
Total
 
Revolving
 
Fixed- term
 
Total
 
 
(in millions)
Allowance for financing receivable losses:
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
179

 
$
23

 
$
202

 
$
214

 
$
27

 
$
241

Principal charge-offs
 
(49
)
 
(2
)
 
(51
)
 
(58
)
 
(2
)
 
(60
)
Interest charge-offs
 
(9
)
 
—

 
(9
)
 
(11
)
 
—

 
(11
)
Recoveries
 
12

 
1

 
13

 
19

 
1

 
20

Provision charged to income statement
 
36

 
1

 
37

 
27

 
—

 
27

Balance at end of period
 
$
169

 
$
23

 
$
192

 
$
191

 
$
26

 
$
217



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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 May 4, 2012, and February 3, 2012, segregated by class:


 
 
May 4, 2012
 
February 3, 2012
 
 
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 — DPA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned since inception
 
$
1,188

 
$
135

 
$
39

 
$
1,362

 
$
1,249

 
$
148

 
$
49

 
$
1,446

Purchased
 
240

 
38

 
12

 
290

 
272

 
47

 
18

 
337

Fixed-term — Non-Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned since inception
 
37

 
1

 
—

 
38

 
29

 
1

 
—

 
30

Purchased
 
54

 
4

 
1

 
59

 
61

 
5

 
1

 
67

Revolving — DBC(a) 
 
267

 
30

 
7

 
304

 
272

 
33

 
8

 
313

Fixed-term — Small Commercial(a)
 
250

 
13

 
1

 
264

 
234

 
12

 
4

 
250

Fixed-term —
Medium and Large Commercial(a)
 
1,942

 
107

 
5

 
2,054

 
1,946

 
136

 
14

 
2,096

Total customer receivables, gross
 
$
3,978

 
$
328

 
$
65

 
$
4,371

 
$
4,063

 
$
382

 
$
94

 
$
4,539

_________________ 
(a) Includes purchased receivables that are not significant to any portfolio class.

DFS Acquisitions

In Fiscal 2012, Dell entered into a definitive agreement to acquire CIT Vendor Finance's Dell-related financing assets portfolio 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, regulatory, and other conditions, Dell expects to complete this transaction in Fiscal 2014.

Purchased Credit-Impaired Loans
 
During the third quarter of Fiscal 2011, Dell purchased a portfolio of revolving loan receivables from CIT Group Inc. Prior to the acquisition, it was evident that Dell would not collect on all contractually required principal and interest payments. As a result, these receivables met the definition of Purchased Credit-Impaired (“PCI”) loans. At May 4, 2012, the outstanding balance of these receivables, including principal and accrued interest, was $388 million and the carrying amount was $156 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.


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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table shows activity for the accretable yield on the PCI loans for the three months ended May 4, 2012, and April 29, 2011. Dell expects the remaining balance of the accretable yield as of May 4, 2012 to accrete over the next three years, using the effective interest method.
 
 
Three Months Ended
 
May 4, 2012
 
April 29, 2011
 
(in millions)
Accretable Yield:
 
 
 
Balance at beginning of period
$
142

 
$
137

Accretion
(20
)
 
(21
)
Prospective yield adjustment
—

 
35

Balance at end of period
$
122

 
$
151


Credit Quality

The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class, as of May 4, 2012, and February 3, 2012. For DPA revolving and fixed-term loans to individual customers, 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 medium and large commercial customers, which includes governmental customers. The credit level scores for DBC and small commercial customers generally range from one to six. The categories shown in the tables below segregate customer receivables based on the relative degrees of credit risk. The credit quality categories cannot be compared between the different classes as loss experience in each class varies substantially. The credit quality indicators for DPA revolving accounts are primarily as of each quarter-end date, and all others are generally updated on a periodic basis.

For the 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 or above. The mid-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.

 
 
May 4, 2012
 
February 3, 2012
 
 
Higher
 
Mid
 
Lower
 
Total
 
Higher
 
Mid
 
Lower
 
Total
 
 
(in millions)
Revolving — DPA
 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
 
Owned since inception
 
$
199

 
$
387

 
$
776

 
$
1,362

 
$
220

 
$
412

 
$
814

 
$
1,446

Purchased
 
$
24

 
$
71

 
$
195

 
$
290

 
$
28

 
$
80

 
$
229

 
$
337

Fixed-term — Non-Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned since inception
 
$
2

 
$
19

 
$
17

 
$
38

 
$
2

 
$
14

 
$
14

 
$
30

Purchased
 
$
4

 
$
29

 
$
26

 
$
59

 
$
4

 
$
32

 
$
31

 
$
67



For the 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 experience higher loss rates. 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 small commercial fixed-term and DBC revolving classes.

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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


 
 
May 4, 2012
 
February 3, 2012
 
 
Higher
 
Mid
 
Lower
 
Total
 
Higher
 
Mid
 
Lower
 
Total
 
 
(in millions)
Revolving — DBC
 
$
105

 
$
95

 
$
104

 
$
304

 
$
111

 
$
98

 
$
104

 
$
313

Fixed-term — Small Commercial(a)
 
$
95

 
$
73

 
$
96

 
$
264

 
$
91

 
$
74

 
$
85

 
$
250

_________________ 
(a) During the first quarter of Fiscal 2013, Dell re-defined its internal scoring categorization for its small Commercial fixed-term customers. In connection with this change, Dell has re-categorized existing customers and has recast prior period credit quality categories for these customers to conform to the current year's classification.  This change has no impact on Dell's allowance for loss rates. 
   
For the 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.

 
May 4, 2012
 
February 3, 2012
 
Investment
 
Non-Investment
 
Sub-Standard
 
Total
 
Investment
 
Non-Investment
 
Sub-Standard
 
Total
 
(in millions)
Fixed-term — Medium and Large Commercial
$
1,430

 
$
396

 
$
228

 
$
2,054

 
$
1,504

 
$
363

 
$
229

 
$
2,096



Asset Securitizations

Dell transfers certain U.S. customer financing receivables to Special Purpose Entities (“SPEs”) which meet the definition of a Variable Interest Entity ("VIE") 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. Customer receivables funded via securitization through SPEs were $536 million and $499 million during the first quarters Fiscal 2013 and Fiscal 2012, respectively.

The following table shows financing receivables held by the consolidated VIEs:
 
 
May 4,
2012
 
February 3,
2012
 
 
(in millions)
Financing receivables held by consolidated VIEs, net:
 
 

 
 

Short-term, net
 
$
1,117

 
$
1,096

Long-term, net
 
455

 
429

Financing receivables held by consolidated VIEs, net
 
$
1,572

 
$
1,525


Dell's securitization programs are generally effective for 12 months and are subject to an annual renewal process. These programs contain standard structural features related to the performance of the securitized receivables. The 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

16
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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

May 4, 2012, these criteria were met.

Structured Financing Debt

The structured financing debt related to the fixed-term lease and loan programs and the revolving loan securitization program was $1.4 billion and $1.3 billion as of May 4, 2012, and February 3, 2012, 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. As of May 4, 2012, the total debt capacity related to the securitization programs was $1.4 billion. Dell's securitization programs are structured to operate near their debt capacity. 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 the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps.


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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

NOTE 6 — BORROWINGS
The following table summarizes Dell's outstanding debt as of the dates indicated:
 
 
May 4,
2012
 
February 3,
2012
 
 
(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)
 
604

 
605

$500 million issued on September 7, 2010, at 1.40% due September 2013 (“2013B Notes”)
 
499

 
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

 
300

$400 million issued on March 28, 2011, at 2.10% due April 2014 (“2014C Notes”)
 
400

 
400

$700 million issued on September 7, 2010, at 2.30% due September 2015 (“2015 Notes”)(b)
 
701

 
701

$400 million issued on March 28, 2011, at 3.10% due April 2016 (“2016 Notes”)(b)
 
401

 
401

$500 million issued on April 17, 2008, at 5.65% due April 2018 (“2018 Notes”)(b)
 
501

 
501

$600 million issued on June 10, 2009, at 5.875% due June 2019 (“2019 Notes”)(b)
 
603

 
602

$400 million issued on March 28, 2011, at 4.625% due April 2021 (“2021 Notes”)
 
398

 
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)
 
384

 
384

Other
 
 

 
 

Long-term structured financing debt
 
969

 
920

Less: current portion of long-term debt
 
(1,547
)
 
(924
)
Total long-term debt
 
5,813

 
6,387

Short-Term Debt
 
 

 
 

Commercial paper
 
1,188

 
1,500

Short-term structured financing debt
 
448

 
440

Current portion of long-term debt
 
1,547

 
924

Other
 
3

 
3

Total short-term debt
 
3,186

 
2,867

Total debt
 
$
8,999

 
$
9,254

____________________ 
(a) Includes the impact of interest rate swap terminations.
(b) Includes hedge accounting adjustments.

The estimated fair value of total debt at May 4, 2012, was approximately $9.5 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 the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps. The weighted average interest rate for the short-term structured financing debt and other as of May 4, 2012, and February 3, 2012, was 0.25% and 0.28%, respectively.
Structured Financing Debt — As of May 4, 2012, Dell had $1.4 billion outstanding in structured financing debt, which was related to the fixed-term lease and loan programs and the revolving loan securitization program. Of the $1.4 billion outstanding in structured financing related debt, $991 million was current as of May 4, 2012. See Note 5 and Note 7 of the Notes to the Condensed Consolidated Financial Statements for further discussion of the structured financing debt and the interest rate swap

18
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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

agreements that hedge a portion of that debt.
 
Commercial Paper — As of May 4, 2012, and February 3, 2012, there was $1.2 billion and $1.5 billion, respectively, outstanding under the commercial paper program. The weighted average interest rate on outstanding commercial paper as of May 4, 2012, and February 3, 2012 was 0.27% and 0.23%, respectively. Dell has $3.0 billion in senior unsecured revolving credit facilities, primarily to support its $2.5 billion commercial paper program. Of these credit facilities, $1.0 billion will expire on April 2, 2013, and $2.0 billion will expire on April 15, 2015. There were no outstanding advances under the revolving credit facilities as of May 4, 2012.

The indentures governing the Notes shown in the above table, 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 May 4, 2012.



19
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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


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 foreign exchange contracts designated as cash flow hedges for the three months ended May 4, 2012, and April 29, 2011, and determined that such ineffectiveness was not material. During the three months ended May 4, 2012 ,and April 29, 2011, Dell did not discontinue any cash flow hedges related to foreign exchange contracts 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 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 gains for the change in fair value of these foreign currency forward contracts for the three months ended May 4, 2012, and April 29, 2011, of $12 million and $42 million, 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 months ended May 4, 2012, and April 29, 2011.

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. As of May 4, 2012, Dell had outstanding interest rate swaps that 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 months ended May 4, 2012. Dell did not have any interest rate contracts designated as fair value hedges at April 29, 2011.


20
Table of Contents
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 as follows as of the dates indicated:

 
 
May 4, 2012
 
February 3, 2012
 
 
(in millions)
Foreign Exchange Contracts
 
 

 
 

Designated as cash flow hedging instruments
 
$
4,230

 
$
4,549

Non-designated as hedging instruments
 
394

 
168

Total
 
$
4,624

 
$
4,717

 
 
 
 
 
Interest Rate Contracts
 
 
 
 
Designated as fair value hedging instruments
 
$
800

 
$
650

Designated as cash flow hedging instruments
 
806

 
751

Non-designated as hedging instruments
 
142

 
132

Total
 
$
1,748

 
$
1,533


Derivative Instruments Additional Information 
The unrealized net loss for interest rate swaps and foreign currency exchange contracts, recorded as a component of accumulated other comprehensive loss in the Condensed Consolidated Statement of Financial Position, as of May 4, 2012, and February 3, 2012, was $51 million and $40 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 May 4, 2012, there had been no such triggering events.

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DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Effect of Derivative Instruments on the Consolidated Statements of Financial Position and the 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 May 4, 2012

 
 

 
 
 
 

 
 
 

 
Total net revenue
 
$
(3
)
 
 
 
 
Foreign exchange contracts
 
$
(25
)
 
Total cost of net revenue
 
(11
)
 
 
 
 
Interest rate contracts
 
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
—

Total
 
$
(25
)
 
 
 
$
(14
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
For the three months ended April 29, 2011

 
 

 
 
 
 

 
 
 

 
Total net revenue
 
$
(150
)
 
 
 
 
Foreign exchange contracts
 
$
(235
)
 
Total cost of net revenue
 
(17
)
 
 
 
 
Interest rate contracts
 
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
—

Total
 
$
(235
)
 
 
 
$
(167
)
 
 
 
$
—


22
Table of Contents
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Fair Value of Derivative Instruments in the Consolidated Statements of Financial Position
Dell presents its foreign exchange derivative instruments on a net basis in the Condensed Consolidated Statements of Financial Position due to the right of offset by its counterparties under master netting arrangements. The fair value of those derivative instruments presented on a gross basis as of each date indicated below was as follows:
 
 
May 4, 2012
 
 
Other Current
Assets
 
Other Non-
Current Assets
 
Other Current
Liabilities
 
Other Non-Current
Liabilities
 
Total
Fair Value
 
 
 
 
(in millions)
 
 
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
$
151

 
$
—

 
$
24

 
$
—

 
$
175

Foreign exchange contracts in a liability position
 
(111
)
 
—

 
(31
)
 
—

 
(142
)
Interest rate contracts in an asset position
 
—

 
9

 
—

 
—

 
9

Interest rate contracts in a liability position
 
—

 
—

 
—

 
(2
)
 
(2
)
Net asset (liability)
 
40

 
9

 
(7
)
 
(2
)
 
40

Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
51

 
—

 
3

 
—

 
54

Foreign exchange contracts in a liability position
 
(16
)
 
—

 
(13
)
 
—

 
(29
)
Net asset (liability)
 
35

 
—

 
(10
)
 
—

 
25

Total derivatives at fair value
 
$
75

 
$
9

 
$
(17
)
 
$
(2
)
 
$
65

 
 
 
 
 
 
 
 
 
 
 
 
 
February 3, 2012
 
 
Other Current
Assets
 
Other Non-
Current Assets
 
Other Current
Liabilities
 
Other Non-Current
Liabilities
 
Total
Fair Value
 
 
 
 
(in millions)
 
 
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
$
266

 
$
—

 
$
2

 
$
—

 
$
268

Foreign exchange contracts in a liability position
 
(140
)
 
—

 
(7
)
 
—

 
(147
)
Interest rate contracts in an asset position
 
—

 
8

 
—

 
—

 
8

Interest rate contracts in a liability position
 
—

 
—

 
—

 
(3
)
 
(3
)
Net asset (liability)
 
126

 
8

 
(5
)
 
(3
)
 
126

Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position
 
67

 
—

 
1

 
—

 
68

Foreign exchange contracts in a liability position
 
(61
)
 
—

 
(10
)
 
—

 
(71
)
Net asset (liability)
 
6

 
—

 
(9
)
 
—

 
(3
)
Total derivatives at fair value
 
$
132

 
$
8

 
$
(14
)
 
$
(3
)
 
$
123




23
Table of Contents
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 8 — ACQUISITIONS

During the three months ended May 4, 2012, Dell completed its acquisitions of all of the outstanding shares of AppAssure Software, Inc. and Clerity Solutions, Inc. Cash used for acquisitions, net of cash acquired, which primarily consisted of AppAssure Software Inc. and Clerity Solutions, Inc.,was $245 million for the three months ended May 4, 2012.

Subsequent to May 4, 2012, Dell completed its acquisitions of SonicWALL Inc. (“SonicWALL”), Wyse Technology, Inc., ("Wyse Technology"), and Make Technologies Inc. The total estimated purchase price for all of the outstanding shares for all of these acquisitions, which primarily consists of SonicWALL and Wyse Technology, was approximately $2.2 billion. As of the date of issuance of these financial statements, the initial purchase accounting was not complete for these acquisitions. SonicWALL is a global technology company that offers advanced network security and data protection. Wyse Technology is a global provider of client computing solutions designed to extend desktop virtualization offerings.

All of the above acquisitions will be integrated into Dell's Commercial segments. There was no contingent consideration related to any of these acquisitions. Dell has not presented pro forma results of operations for the foregoing acquisitions because they are not material to Dell's Condensed Consolidated Results of Operations, Statement of Comprehensive Income, Financial Position, or Cash Flows on either an individual or an aggregate basis.

NOTE 9 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill allocated to Dell's business segments as of May 4, 2012, and February 3, 2012, and changes in the carrying amount of goodwill for the three months ended May 4, 2012, were as follows:
 
 
Large
Enterprise
 
Public
 
Small and
Medium
Business
 
Consumer
 
Total
 
 
(in millions)
Balance at February 3, 2012
 
$
2,222

 
$
2,547

 
$
759

 
$
310

 
$
5,838

Goodwill acquired during the period
 
57

 
56

 
46

 
—

 
159

Adjustments
 
3

 
2

 
3

 
—

 
8

Balance at May 4, 2012
 
$
2,282

 
$
2,605

 
$
808

 
$
310

 
$
6,005

 

Goodwill is tested for impairment on an annual basis during the second fiscal quarter, or sooner if an indicator of impairment occurs. Based on the results of the annual impairment test, no impairment of goodwill existed at July 30, 2011. Further, no triggering events have transpired since July 30, 2011 that would indicate a potential impairment of goodwill as of May 4, 2012. Dell did not have any accumulated goodwill impairment charges as of May 4, 2012.

24
Table of Contents
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Intangible Assets
Dell's intangible assets associated with completed acquisitions at May 4, 2012, and February 3, 2012, were as follows:
 
 
May 4, 2012
 
February 3, 2012
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
 
 
(in millions)
Customer relationships
 
$
1,592

 
$
(552
)
 
$
1,040

 
$
1,569

 
$
(506
)
 
$
1,063

Technology
 
1,183

 
(548
)
 
635

 
1,156

 
(490
)
 
666

Non-compete agreements
 
71

 
(45
)
 
26

 
70

 
(42
)
 
28

Tradenames
 
84

 
(44
)
 
40

 
81

 
(41
)
 
40

Amortizable intangible assets
 
2,930

 
(1,189
)
 
1,741

 
2,876

 
(1,079
)
 
1,797

In-process research and development
 
34

 
—

 
34

 
34

 
—

 
34

Indefinite lived intangible assets
 
26

 
—

 
26

 
26

 
—

 
26

Total intangible assets
 
$
2,990

 
$
(1,189
)
 
$
1,801

 
$
2,936

 
$
(1,079
)
 
$
1,857


Amortization expense related to finite-lived intangible assets was approximately $110 million and $92 million for the three months ended May 4, 2012, and April 29, 2011, respectively. There were no material impairment charges related to intangible assets for the three months ended May 4, 2012, and April 29, 2011.
Estimated future annual pre-tax amortization expense of finite-lived intangible assets as of May 4, 2012, over the next five fiscal years and thereafter is as follows:
Fiscal Years
(in millions)
2013 (remaining nine months)
$
299

2014
376

2015
283

2016
237

2017
195

Thereafter
351

Total
$
1,741


25
Table of Contents
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 10 — WARRANTY AND DEFERRED EXTENDED WARRANTY REVENUE
Dell records liabilities for its standard limited warranties at the time of sale for the estimated costs that may be incurred. The liability for standard warranties is included in accrued and other current liabilities and other non-current liabilities in the Condensed Consolidated Statements of Financial Position. Revenue from the sale of extended warranties is recognized over the term of the contract or when the service is completed, and the costs associated with these contracts are recognized as incurred. Deferred extended warranty revenue is included in deferred services revenue in the Condensed Consolidated Statements of Financial Position. Changes in Dell's liabilities for standard limited warranties and deferred services revenue related to extended warranties are presented in the following tables for the periods indicated:
 
 
Three Months Ended
 
 
May 4,
2012