Dell Q1FY14 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| | |
(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 3, 2013 |
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)
1-800-289-3355
(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 June 6, 2013, 1,756,073,637 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 February 1, 2013. 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) |
| | | | | | | |
| May 3,
2013 | | February 1,
2013 |
| (unaudited) | | |
ASSETS |
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 10,419 |
| | $ | 12,569 |
|
Short-term investments | 486 |
| | 208 |
|
Accounts receivable, net | 6,440 |
| | 6,629 |
|
Short-term financing receivables, net | 2,991 |
| | 3,213 |
|
Inventories, net | 1,387 |
| | 1,382 |
|
Other current assets | 3,936 |
| | 3,967 |
|
Total current assets | 25,659 |
| | 27,968 |
|
Property, plant, and equipment, net | 2,136 |
| | 2,126 |
|
Long-term investments | 2,303 |
| | 2,565 |
|
Long-term financing receivables, net | 1,383 |
| | 1,349 |
|
Goodwill | 9,289 |
| | 9,304 |
|
Purchased intangible assets, net | 3,176 |
| | 3,374 |
|
Other non-current assets | 845 |
| | 854 |
|
Total assets | $ | 44,791 |
| | $ | 47,540 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities: | | | |
|
Short-term debt | $ | 3,133 |
| | $ | 3,843 |
|
Accounts payable | 10,990 |
| | 11,579 |
|
Accrued and other | 3,402 |
| | 3,644 |
|
Short-term deferred revenue | 4,265 |
| | 4,373 |
|
Total current liabilities | 21,790 |
| | 23,439 |
|
Long-term debt | 4,115 |
| | 5,242 |
|
Long-term deferred revenue | 3,963 |
| | 3,971 |
|
Other non-current liabilities | 4,163 |
| | 4,187 |
|
Total liabilities | 34,031 |
| | 36,839 |
|
Commitments and contingencies (Note 11) |
|
| |
|
|
Stockholders’ equity: | | | |
|
Common stock and capital in excess of $.01 par value; shares authorized: 7,000; shares issued: 2,955 and 3,413, respectively; shares outstanding: 1,755 and 1,738, respectively | 12,644 |
| | 12,554 |
|
Treasury stock at cost: 1,200 and 1,200 shares, respectively | (32,145 | ) | | (32,145 | ) |
Retained earnings | 30,317 |
| | 30,330 |
|
Accumulated other comprehensive loss | (77 | ) | | (59 | ) |
Total Dell stockholders’ equity | 10,739 |
| | 10,680 |
|
Noncontrolling interest | 21 |
| | 21 |
|
Total stockholders’ equity | 10,760 |
| | 10,701 |
|
Total liabilities and stockholders’ equity | $ | 44,791 |
| | $ | 47,540 |
|
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 |
| May 3,
2013 | | May 4,
2012 |
Net revenue: | |
| | |
|
Products | $ | 10,902 |
| | $ | 11,423 |
|
Services, including software related | 3,172 |
| | 2,999 |
|
Total net revenue | 14,074 |
| | 14,422 |
|
Cost of net revenue: | | | |
|
Products | 9,244 |
| | 9,330 |
|
Services, including software related | 2,083 |
| | 2,025 |
|
Total cost of net revenue | 11,327 |
| | 11,355 |
|
Gross margin | 2,747 |
| | 3,067 |
|
Operating expenses: | | | |
|
Selling, general, and administrative | 2,208 |
| | 2,009 |
|
Research, development, and engineering | 313 |
| | 234 |
|
Total operating expenses | 2,521 |
| | 2,243 |
|
Operating income | 226 |
| | 824 |
|
Interest and other, net | (68 | ) |
| (32 | ) |
Income before income taxes | 158 |
| | 792 |
|
Income tax provision | 28 |
| | 157 |
|
Net income | $ | 130 |
| | $ | 635 |
|
Earnings per share: | | | |
|
Basic | $ | 0.07 |
| | $ | 0.36 |
|
Diluted | $ | 0.07 |
| | $ | 0.36 |
|
Cash dividends declared per common share | $ | 0.08 |
| | $ | — |
|
Weighted-average shares outstanding: | |
| | |
|
Basic | 1,748 |
| | 1,759 |
|
Diluted | 1,761 |
| | 1,774 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
|
| | | | | | | |
| Three Months Ended |
| May 3,
2013 | | May 4,
2012 |
Net income | $ | 130 |
| | $ | 635 |
|
| | | |
Other comprehensive income, net of tax | | | |
Foreign currency translation adjustments | (31 | ) | | (8 | ) |
| | | |
Available-for-sale investments | | | |
Change in unrealized gains (losses) | 1 |
| | — |
|
Reclassification adjustment for net (gains) losses included in net income | — |
| | (2 | ) |
Net change | 1 |
| | (2 | ) |
| | | |
Cash Flow Hedges | | | |
Change in unrealized gains (losses) | 46 |
| | (25 | ) |
Reclassification adjustment for net (gains) losses included in net income | (34 | ) | | 14 |
|
Net change | 12 |
| | (11 | ) |
| | | |
Total other comprehensive income (loss), net of tax benefit (expense) of $0 and $(9), respectively | (18 | ) | | (21 | ) |
Comprehensive income, net of tax | $ | 112 |
| | $ | 614 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited) |
| | | | | | | |
| Three Months Ended |
| May 3,
2013 | | May 4,
2012 |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 130 |
| | $ | 635 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 323 |
| | 248 |
|
Stock-based compensation expense | 83 |
| | 95 |
|
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies | 19 |
| | (10 | ) |
Deferred income taxes | (28 | ) | | 47 |
|
Provision for doubtful accounts — including financing receivables | 48 |
| | 63 |
|
Other | 12 |
| | (5 | ) |
Changes in assets and liabilities, net of effects from acquisitions: |
|
| |
|
|
Accounts receivable | 71 |
| | 161 |
|
Financing receivables | 129 |
| | 71 |
|
Inventories | (8 | ) | | (68 | ) |
Other assets | 12 |
| | 48 |
|
Accounts payable | (578 | ) | | (671 | ) |
Deferred revenue | (61 | ) | | 1 |
|
Accrued and other liabilities | (191 | ) | | (753 | ) |
Change in cash from operating activities | (39 | ) | | (138 | ) |
Cash flows from investing activities: | |
| | |
|
Investments: | |
| | |
|
Purchases | (329 | ) | | (673 | ) |
Maturities and sales | 317 |
| | 640 |
|
Capital expenditures | (158 | ) | | (142 | ) |
Proceeds from the sale of facilities, land, and other assets | 4 |
| | — |
|
Collections on purchased financing receivables | 29 |
| | 55 |
|
Acquisitions of businesses, net of cash received | — |
| | (245 | ) |
Change in cash from investing activities | (137 | ) | | (365 | ) |
Cash flows from financing activities: | |
| | |
|
Repurchases of common stock | — |
| | (324 | ) |
Cash dividends paid | (142 | ) | | — |
|
Issuance of common stock under employee plans | 24 |
| | 38 |
|
Issuance (repayment) of commercial paper (maturity 90 days or less), net | — |
| | 13 |
|
Proceeds from debt | 547 |
| | 596 |
|
Repayments of debt | (2,384 | ) | | (863 | ) |
Other | (2 | ) | | 8 |
|
Change in cash from financing activities | (1,957 | ) | | (532 | ) |
Effect of exchange rate changes on cash and cash equivalents | (17 | ) | | (3 | ) |
Change in cash and cash equivalents | (2,150 | ) | | (1,038 | ) |
Cash and cash equivalents at beginning of the period | 12,569 |
| | 13,852 |
|
Cash and cash equivalents at end of the period | $ | 10,419 |
| | $ | 12,814 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — PROPOSED MERGER AND BASIS OF PRESENTATION
Proposed Merger
On February 5, 2013, Dell Inc. announced that it had signed a definitive agreement and plan of merger (the “merger agreement”) pursuant to which it would be acquired by Denali Holding Inc. (“Parent”), a Delaware corporation owned by Michael S. Dell, the Chairman, Chief Executive Officer and founder of Dell, and investment funds affiliated with Silver Lake Partners, a global private equity firm. Following completion of the transaction, Mr. Dell would continue to lead Dell as Chairman and Chief Executive Officer and maintain a significant equity investment in Dell by contributing his Dell shares to Parent and making a cash investment in Parent. Subject to the satisfaction or permitted waiver of closing conditions set forth in the merger agreement, the merger is expected to be consummated before the end of the third quarter of the fiscal year ending January 31, 2014.
At the effective time of the merger, each share of Dell's common stock issued and outstanding immediately before the effective time, other than certain excluded shares, will be converted into the right to receive $13.65 in cash, without interest (the “merger consideration”). Shares of common stock held by the Parent and its subsidiaries, shares held by Mr. Dell and certain of Mr. Dell's related parties (together with Mr. Dell, the “MD Investors”), and by Dell or any wholly-owned subsidiary of Dell will not be entitled to receive the merger consideration.
Dell's stockholders will be asked to vote on the adoption of the merger agreement and approval of the merger at a special stockholders meeting that will be held on July 18, 2013. The closing of the merger is subject to a non-waivable condition that the merger agreement be adopted by the affirmative vote of the holders of (1) at least a majority of all outstanding shares of common stock and (2) at least a majority of all outstanding shares of common stock held by stockholders other than Parent and its subsidiaries, the MD Investors, any other officers and directors of Dell or any other person having any equity interest in, or any right to acquire any equity interest in, Parent's merger subsidiary or any person of which the merger subsidiary is a direct or indirect subsidiary. Consummation of the merger is also subject to certain customary conditions. The merger agreement does not contain a financing condition. Dell's definitive proxy statement for the special stockholders meeting was first sent to the stockholders on May 31, 2013.
The merger agreement places limitations on Dell's ability to engage in certain types of transactions without Parent's consent during the period between the signing of the merger agreement and the effective time of the merger. During this period, Dell may not repurchase shares of its common stock or declare dividends in excess of the quarterly rate of $0.08 per share authorized under its current dividend policy. In addition, with limited exceptions, Dell may not incur additional debt other than up to $1.8 billion under its existing commercial paper program, $2.0 billion under its revolving credit facilities, $1.5 billion under its structured financing debt facilities, and up to $25 million of additional indebtedness. Further, other than in transactions in the ordinary course of business or within specified dollar limits and certain other limited exceptions, Dell generally may not acquire other businesses, make investments in other persons, or sell, lease, or encumber its material assets.
Parent has obtained equity and debt financing commitments for the transactions contemplated by the merger agreement, the aggregate proceeds of which, together with the proceeds of a rollover investment of Dell shares in Parent by the MD Investors, an investment in subordinated securities and the available cash of Dell, will be sufficient for Parent to pay the aggregate merger consideration and all related fees and expenses. The commitment of financial institutions to provide debt financing for the transaction is subject to a number of customary conditions, including the execution and delivery by the borrowers and the guarantors of definitive documentation consistent with the debt commitment letter.
Pursuant to the terms of a “go-shop” provision in the merger agreement, during the period which began on the date of the merger agreement and expired after March 22, 2013, Dell and its subsidiaries and their respective representatives had the right to initiate, solicit and encourage any alternative acquisition proposals from third parties, provide nonpublic information to such third parties and participate in discussions and negotiations with such third parties regarding alternative acquisition proposals. The 45-day go-shop period elicited two alternative acquisition proposals. One proposal was submitted by a group led by entities affiliated with Blackstone Management Partners and the other by entities affiliated with Carl Icahn. On April 19, 2013, Blackstone Management Partners withdrew from the process and decided not to submit a definitive acquisition proposal. Under the terms and conditions set forth in the merger agreement, before the company stockholder approvals adopting the merger agreement, the Board of Directors may change its recommendation, including in order to approve, and may authorize Dell to enter into, an alternative acquisition proposal if the Special Committee of the Board of Directors that recommended
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
approval of the merger has determined in good faith, after consultation with outside counsel and its financial advisors, that such alternative acquisition proposal would be more favorable to Dell's stockholders, taking into account all of the terms and conditions of such proposal (including, among other things, the financing, likelihood and timing of its consummation and any adjustments to the merger agreement).
The merger agreement contains certain termination rights for Dell and Parent. Among such rights, and subject to certain limitations, either Dell or Parent may terminate the merger agreement if the merger is not completed by November 5, 2013.
Other than expenses associated with the proposed merger, which include transaction costs as well as special performance-based retention cash awards granted to certain key employees in the first quarter of Fiscal 2014 (the "Merger-Related Costs"), the terms of the merger agreement did not impact Dell's Condensed Consolidated Financial Statements as of and for the three months ended May 3, 2013.
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 1, 2013 ("Fiscal 2013"). 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 3, 2013, the results of its operations and corresponding comprehensive income for the three months ended May 3, 2013, and May 4, 2012, and its cash flows for the three months ended May 3, 2013, and May 4, 2012.
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, comprehensive income, and cash flows for the three months ended May 3, 2013, and May 4, 2012, are not necessarily indicative of the results to be expected for the full fiscal year or for any other fiscal period.
During the first quarter of Fiscal 2014, Dell completed the reorganization of its reportable segments from the customer-centric segments it maintained through Fiscal 2013 to reportable segments based on the following four product and services business units:
| |
• | End-User Computing ("EUC") |
| |
• | Enterprise Solutions Group ("ESG") |
Dell has recast prior period amounts to provide visibility and comparability. The change in Dell's segments did not 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 on Dell's reportable segments.
During the first quarter of Fiscal 2014, Dell retired 475 million shares that were issued to a wholly-owned subsidiary during Fiscal 2007. While legally issued, these shares were not considered outstanding as of February 1, 2013.
Dell's fiscal year is the 52 or 53 week period ending on the Friday nearest January 31. The fiscal year ending January 31, 2014 ("Fiscal 2014"), will be a 52 week period.
Recently Issued Accounting Pronouncements
Disclosures about Offsetting Assets and Liabilities — In January 2013, the Financial Accounting Standards Board (the "FASB") issued amended guidance that enhanced disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its derivative instruments, repurchase agreements, and securities lending transactions. 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 became effective for Dell during the first quarter of Fiscal 2014. Other than requiring additional disclosures, this new guidance did not impact Dell's Condensed
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Consolidated Financial Statements. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for more information on disclosures about offsetting assets and liabilities.
Comprehensive Income — In February 2013, the FASB issued new guidance on reporting reclassifications out of accumulated other comprehensive income. This new guidance became effective for Dell during the first quarter of Fiscal 2014. Other than requiring additional disclosures, this new guidance did not impact Dell's Condensed Consolidated Financial Statements. See Note 10 of the Notes to the Condensed Consolidated Financial Statements for more information on Dell's reclassifications out of accumulated other comprehensive loss.
NOTE 2 — 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 3, 2013, and February 1, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| May 3, 2013 | | February 1, 2013 |
| 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 | $ | 6,679 |
| | $ | — |
| | $ | — |
| | $ | 6,679 |
| | $ | 8,869 |
| | $ | — |
| | $ | — |
| | $ | 8,869 |
|
Non- U.S. government and agencies | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
|
Debt securities: | | | | | | | | | | | | | | | |
Non- U.S. government and agencies | — |
| | 87 |
| | — |
| | 87 |
| | — |
| | 96 |
| | — |
| | 96 |
|
Commercial paper | — |
| | 6 |
| | — |
| | 6 |
| | — |
| | 6 |
| | — |
| | 6 |
|
U.S. corporate | — |
| | 1,651 |
| | — |
| | 1,651 |
| | — |
| | 1,701 |
| | — |
| | 1,701 |
|
International corporate | — |
| | 760 |
| | — |
| | 760 |
| | — |
| | 700 |
| | — |
| | 700 |
|
Equity and other securities | — |
| | 121 |
| | — |
| | 121 |
| | 1 |
| | 112 |
| | — |
| | 113 |
|
Derivative instruments | — |
| | 99 |
| | — |
| | 99 |
| | — |
| | 68 |
| | — |
| | 68 |
|
Total assets | $ | 6,679 |
| | $ | 2,727 |
| | $ | — |
| | $ | 9,406 |
| | $ | 8,870 |
| | $ | 2,683 |
| | $ | — |
| | $ | 11,553 |
|
Liabilities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Derivative instruments | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
Total liabilities | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
____________________
(a) Dell did not transfer any securities between levels during the three months ended May 3, 2013 or during the fiscal year ended February 1, 2013.
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 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 non-U.S. government and agencies. 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 reviews security pricing and assesses liquidity on a quarterly basis. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for additional information about investments.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Equity and Other Securities — The majority of Dell's investments in equity and other securities that are measured at fair value on a recurring basis consist 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 valuation for the Level 1 position is based on quoted prices in active markets.
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 6 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 were $164 million and $157 million as of May 3, 2013, and February 1, 2013, respectively. Goodwill, intangible assets, and investments accounted for under the cost method are measured at fair value initially and subsequently when there is an indicator of impairment and the impairment is recognized. See Note 7 of the Notes to the Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 3 — INVESTMENTS
The following table summarizes, by major security type, the carrying 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 3, 2013 | | February 1, 2013 |
| Carrying Value | | Cost | | Unrealized Gain | | Unrealized (Loss) | | Carrying Value | | Cost | | Unrealized Gain | | Unrealized (Loss) |
| (in millions) |
| | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | |
Non- U.S. government and agencies | $ | 42 |
| | $ | 42 |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | 13 |
| | $ | — |
| | $ | — |
|
Commercial paper | 6 |
| | 6 |
| | — |
| | — |
| | 6 |
| | 6 |
| | — |
| | — |
|
U.S. corporate | 283 |
| | 282 |
| | 1 |
| | — |
| | 113 |
| | 112 |
| | 1 |
| | — |
|
International corporate | 155 |
| | 155 |
| | — |
| | — |
| | 76 |
| | 76 |
| | — |
| | — |
|
Total short-term investments | 486 |
| | 485 |
| | 1 |
| | — |
| | 208 |
| | 207 |
| | 1 |
| | — |
|
| | | | | | | | | | | | | | | |
Non- U.S. government and agencies | 45 |
| | 45 |
| | — |
| | — |
| | 83 |
| | 83 |
| | — |
| | — |
|
U.S. corporate | 1,368 |
| | 1,359 |
| | 9 |
| | — |
| | 1,588 |
| | 1,580 |
| | 9 |
| | (1 | ) |
International corporate | 605 |
| | 601 |
| | 4 |
| | — |
| | 624 |
| | 620 |
| | 4 |
| | — |
|
Equity and other securities | 285 |
| | 285 |
| | — |
| | — |
| | 270 |
| | 270 |
| | — |
| | — |
|
Total long-term investments | 2,303 |
| | 2,290 |
| | 13 |
| | — |
| | 2,565 |
| | 2,553 |
| | 13 |
| | (1 | ) |
Total investments | $ | 2,789 |
| | $ | 2,775 |
| | $ | 14 |
| | $ | — |
| | $ | 2,773 |
| | $ | 2,760 |
| | $ | 14 |
| | $ | (1 | ) |
Dell's investments in debt securities are classified as available-for-sale securities, which are carried at fair value. Equity and other securities primarily relate to investments accounted for under the cost method and investments held in Dell's Deferred Compensation Plan, which are classified as trading securities and carried at fair value. The fair value of Dell's portfolio can be affected by interest rate movements, credit risk, and liquidity risks. Dell's investments in debt securities have contractual maturities of three years or less.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4 — 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. DFS results are allocated to Dell's segments based on the product or services business unit to which the origination relates.
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-sized 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. |
| |
• | 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 3, 2013, were as follows: Fiscal 2014 - $946 million; Fiscal 2015 - $845 million; Fiscal 2016 - $410 million; Fiscal 2017 - $74 million; Fiscal 2018 and beyond - $11 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years. |
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 3, 2013, and February 1, 2013: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 3, 2013 | | February 1, 2013 |
| | Revolving | | Fixed-term | | Total | | Revolving | | Fixed-term | | Total |
| | (in millions) |
Financing Receivables, net: | | |
| | |
| | | | | | | | |
Customer receivables, gross | | $ | 1,701 |
| | $ | 2,470 |
| | $ | 4,171 |
| | $ | 1,834 |
| | $ | 2,535 |
| | $ | 4,369 |
|
Allowances for losses | | (157 | ) | | (22 | ) | | (179 | ) | | (169 | ) | | (23 | ) | | (192 | ) |
Customer receivables, net | | 1,544 |
| | 2,448 |
| | 3,992 |
| | 1,665 |
| | 2,512 |
| | 4,177 |
|
Residual interest | | — |
| | 382 |
| | 382 |
| | — |
| | 385 |
| | 385 |
|
Financing receivables, net | | $ | 1,544 |
| | $ | 2,830 |
| | $ | 4,374 |
| | $ | 1,665 |
| | $ | 2,897 |
| | $ | 4,562 |
|
Short-term | | $ | 1,544 |
| | $ | 1,447 |
| | $ | 2,991 |
| | $ | 1,665 |
| | $ | 1,548 |
| | $ | 3,213 |
|
Long-term | | — |
| | 1,383 |
| | 1,383 |
| | — |
| | 1,349 |
| | 1,349 |
|
Financing receivables, net | | $ | 1,544 |
| | $ | 2,830 |
| | $ | 4,374 |
| | $ | 1,665 |
| | $ | 2,897 |
| | $ | 4,562 |
|
The following table summarizes the changes in the allowance for financing receivable losses for the respective periods:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | May 3, 2013 | | May 4, 2012 |
| | Revolving | | Fixed- term | | Total | | Revolving | | Fixed- term | | Total |
| | (in millions) |
Allowance for financing receivable losses: | | | | | | | | | | | | |
Balance at beginning of period | | $ | 169 |
| | $ | 23 |
| | $ | 192 |
| | $ | 179 |
| | $ | 23 |
| | $ | 202 |
|
Principal charge-offs | | (44 | ) | | (3 | ) | | (47 | ) | | (49 | ) | | (2 | ) | | (51 | ) |
Interest charge-offs | | (8 | ) | | — |
| | (8 | ) | | (9 | ) | | — |
| | (9 | ) |
Recoveries | | 13 |
| | 1 |
| | 14 |
| | 12 |
| | 1 |
| | 13 |
|
Provision charged to income statement | | 27 |
| | 1 |
| | 28 |
| | 36 |
| | 1 |
| | 37 |
|
Balance at end of period | | $ | 157 |
| | $ | 22 |
| | $ | 179 |
| | $ | 169 |
| | $ | 23 |
| | $ | 192 |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table summarizes the aging of Dell's customer financing receivables, gross, including accrued interest, as of May 3, 2013, and February 1, 2013, segregated by class:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 3, 2013 | | February 1, 2013 |
| | 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 | | $ | 1,247 |
| | $ | 125 |
| | $ | 41 |
| | $ | 1,413 |
| | $ | 1,322 |
| | $ | 163 |
| | $ | 54 |
| | $ | 1,539 |
|
Revolving — DBC | | 257 |
| | 26 |
| | 5 |
| | 288 |
| | 264 |
| | 25 |
| | 6 |
| | 295 |
|
Fixed-term — Consumer and Small Commercial | | 304 |
| | 15 |
| | 1 |
| | 320 |
| | 310 |
| | 16 |
| | 1 |
| | 327 |
|
Fixed-term — Medium and Large Commercial | | 1,937 |
| | 201 |
| | 12 |
| | 2,150 |
| | 2,015 |
| | 172 |
| | 21 |
| | 2,208 |
|
Total customer receivables, gross | | $ | 3,745 |
| | $ | 367 |
| | $ | 59 |
| | $ | 4,171 |
| | $ | 3,911 |
| | $ | 376 |
| | $ | 82 |
| | $ | 4,369 |
|
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 during the second half of Fiscal 2014.
Credit Quality
The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class, as of May 3, 2013, and February 1, 2013. 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 DPA revolving receivables shown in the table below, Dell makes credit decisions based on proprietary scorecards, which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720 or above. The mid-category represents the mid-tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S customer FICO scores below 660.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 3, 2013 | | February 1, 2013 |
| | Higher | | Mid | | Lower | | Total | | Higher | | Mid | | Lower | | Total |
| | (in millions) |
Revolving — DPA | | $ | 183 |
| | $ | 397 |
| | $ | 833 |
| | $ | 1,413 |
| | $ | 201 |
| | $ | 435 |
| | $ | 903 |
| | $ | 1,539 |
|
For the receivables shown in the table below, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The higher category includes receivables that are generally within Dell's top credit quality levels, which typically have the lowest loss experience. The middle category generally falls within the mid-tier credit levels, and the lower category generally falls within Dell's bottom
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
credit levels, which experience higher loss rates. The grading criteria and classifications are different between the fixed-term and revolving products as the loss performance varies between these product and customer sets. Therefore, the credit levels are not comparable between the consumer and small commercial fixed-term class and the DBC revolving class.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 3, 2013 | | February 1, 2013 |
| | Higher | | Mid | | Lower | | Total | | Higher | | Mid | | Lower | | Total |
| | (in millions) |
Revolving — DBC | | $ | 94 |
| | $ | 84 |
| | $ | 110 |
| | $ | 288 |
| | $ | 99 |
| | $ | 88 |
| | $ | 108 |
| | $ | 295 |
|
Fixed-term — Consumer and Small Commercial | | $ | 87 |
| | $ | 119 |
| | $ | 114 |
| | $ | 320 |
| | $ | 90 |
| | $ | 117 |
| | $ | 120 |
| | $ | 327 |
|
For the receivables in the table below, an internal grading system is also utilized that assigns a credit level score based on liquidity, operating performance, and industry outlook. 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 3, 2013 | | February 1, 2013 |
| Investment | | Non-Investment | | Sub-Standard | | Total | | Investment | | Non-Investment | | Sub-Standard | | Total |
| (in millions) |
Fixed-term — Medium and Large Commercial | $ | 1,310 |
| | $ | 560 |
| | $ | 280 |
| | $ | 2,150 |
| | $ | 1,355 |
| | $ | 582 |
| | $ | 271 |
| | $ | 2,208 |
|
Asset Securitizations and Sales
Dell transfers certain U.S. customer financing receivables to Special Purpose Entities (“SPEs”) that meet the definition of a Variable Interest Entity ("VIE") and are consolidated into Dell's Condensed Consolidated Financial Statements. These 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 by which Dell's right to receive collections for assets securitized exceeds 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 $534 million and $536 million during the three months ended May 3, 2013, and May 4, 2012, respectively.
The following table shows financing receivables held by the consolidated VIEs:
|
| | | | | | | | |
| | May 3,
2013 | | February 1,
2013 |
| | (in millions) |
Financing receivables held by consolidated VIEs, net: | | |
| | |
|
Short-term, net | | $ | 1,184 |
| | $ | 1,089 |
|
Long-term, net | | 462 |
| | 386 |
|
Financing receivables held by consolidated VIEs, net | | $ | 1,646 |
| | $ | 1,475 |
|
Dell's securitization programs are generally effective for 6 to 12 months and are subject to a periodic 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 May 3, 2013, these criteria were met.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Dell sells selected fixed-term financing receivables to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. For the three months ended May 3, 2013, and May 4, 2012, the amount of the receivables sold was $53 million and $71 million, respectively.
Structured Financing Debt
The structured financing debt related to the fixed-term lease and loan programs and the revolving loan securitization program was $1.5 billion and $1.3 billion as of May 3, 2013, and February 1, 2013, 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 3, 2013, the total debt capacity related to the securitization programs was $1.5 billion. Dell's securitization programs are structured to operate near their debt capacity. See Note 5 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 6 of the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 5 — BORROWINGS
The following table summarizes Dell's outstanding debt as of the dates indicated: |
| | | | | | | | |
| | May 3,
2013 | | February 1,
2013 |
| | (in millions) |
Long-Term Debt | | |
| | |
|
Senior Notes | | |
| | |
|
$600 million issued on April 17, 2008, at 4.70% due April 2013 (“2013A Notes”)(a)(b) | | $ | — |
| | $ | 601 |
|
$500 million issued on September 7, 2010, at 1.40% due September 2013 | | 500 |
| | 500 |
|
$500 million issued on April 1, 2009, at 5.625% due April 2014 (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 | | 400 |
| | 400 |
|
$700 million issued on September 7, 2010, at 2.30% due September 2015 (b) | | 702 |
| | 702 |
|
$400 million issued on March 28, 2011, at 3.10% due April 2016 (b) | | 403 |
| | 402 |
|
$500 million issued on April 17, 2008, at 5.65% due April 2018 (b) | | 503 |
| | 502 |
|
$600 million issued on June 10, 2009, at 5.875% due June 2019(b) | | 604 |
| | 604 |
|
$400 million issued on March 28, 2011, at 4.625% due April 2021 | | 398 |
| | 398 |
|
$400 million issued on April 17, 2008, at 6.50% due April 2038 | | 400 |
| | 400 |
|
$300 million issued on September 7, 2010, at 5.40% due September 2040 | | 300 |
| | 300 |
|
Senior Debentures | | |
| | |
|
$300 million issued on April 3, 1998, at 7.10% due April 2028 ("Senior Debentures")(a) | | 378 |
| | 379 |
|
Other | | |
| | |
|
Long-term structured financing debt | | 999 |
| | 872 |
|
Less: current portion of long-term debt | | (2,272 | ) | | (1,618 | ) |
Total long-term debt | | 4,115 |
| | 5,242 |
|
Short-Term Debt | | |
| | |
|
Commercial paper | | 405 |
| | 1,807 |
|
Short-term structured financing debt | | 454 |
| | 416 |
|
Current portion of long-term debt | | 2,272 |
| | 1,618 |
|
Other | | 2 |
| | 2 |
|
Total short-term debt | | 3,133 |
| | 3,843 |
|
Total debt | | $ | 7,248 |
| | $ | 9,085 |
|
____________________
(a) Includes the impact of interest rate swap terminations.
(b) Includes hedge accounting adjustments.
As of May 3, 2013, the total carrying value and estimated fair value of outstanding senior notes and debentures, including the current portion, was $5.4 billion and $5.3 billion, respectively. This is compared to a carrying value and estimated fair value of $6.0 billion and $5.9 billion, respectively, as of February 1, 2013. The fair value of outstanding senior notes and debentures is determined based on observable market prices in a less active market and is categorized as Level 2 in the fair value hierarchy. The fair values of the structured financing debt, commercial paper, and other short-term debt approximate their carrying values. Interest on the senior notes and debentures is payable semiannually, except for the floating rate 2014B Notes, which accrue interest that is payable quarterly. The carrying value of the Senior Debentures 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 6 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 3, 2013, and February 1, 2013, was 1.10% and 1.00%, respectively.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Structured Financing Debt — As of May 3, 2013, Dell had $1.5 billion outstanding in structured financing debt, which was primarily related to the fixed-term lease and loan, and revolving loan securitization programs. Of the $999 million outstanding in long-term structured financing debt, which is primarily related to the fixed-term lease and loan programs, $572 million was classified as current as of May 3, 2013. See Note 4 and Note 6 of the Notes to the 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 May 3, 2013, and February 1, 2013, there was $405 million and $1.8 billion, respectively, outstanding under the commercial paper program. The weighted average interest rate on outstanding commercial paper as of May 3, 2013, and February 1, 2013, was 0.49% and 0.38%, respectively. Dell has $2.0 billion in senior unsecured revolving credit facilities primarily to support its commercial paper program. These credit facilities will expire on April 15, 2015. There were no outstanding advances under the revolving credit facilities as of May 3, 2013.
The indentures governing the senior notes and debentures and the structured financing debt shown in the above table 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 3, 2013.
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 6 — 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. Hedge ineffectiveness and amounts not included in the assessment of effectiveness were not material for fair value or cash flow hedges for the three months ended May 3, 2013, and May 4, 2012.
Foreign Exchange Risk
Dell uses 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.
During the three months ended May 3, 2013, and May 4, 2012, 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 and purchased options to hedge monetary assets and liabilities denominated in a foreign currency. These contracts generally expire in 3 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 loss of $28 million and a gain of $12 million for the change in fair value of these instruments during the three months ended May 3, 2013, and May 4, 2012, 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.
In addition, Dell may use forward-starting interest rate swaps and interest rate lock agreements to lock in fixed interest rates on its forecasted issuances of debt. The objective of these hedges is to offset the variability of future payments associated with the interest rate on debt instruments. As of May 3, 2013, Dell had $350 million in aggregate notional amounts of forward-starting interest rate swaps outstanding. These swaps were de-designated during the three months ended May 3, 2013. Dell did not have any forward-starting interest rate swaps at May 4, 2012.
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 3, 2013, and May 4, 2012, Dell had outstanding interest rate swaps that economically hedge a portion of its interest rate exposure on certain tranches of long-term debt.
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 3, 2013 | | February 1, 2013 |
| | (in millions) |
Foreign Exchange Contracts | | |
| | |
|
Designated as cash flow hedging instruments | | $ | 2,975 |
| | $ | 2,847 |
|
Non-designated as hedging instruments | | 1,008 |
| | 512 |
|
Total | | $ | 3,983 |
| | $ | 3,359 |
|
| | | | |
Interest Rate Contracts | | | | |
Designated as fair value hedging instruments | | $ | 700 |
| | $ | 800 |
|
Designated as cash flow hedging instruments | | 849 |
| | 1,320 |
|
Non-designated as hedging instruments | | 500 |
| | 127 |
|
Total | | $ | 2,049 |
| | $ | 2,247 |
|
Derivative Instruments Additional Information
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 3, 2013, there had been no such triggering event.
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 May 3, 2013 | | |
| | | | |
|
| | |
| | Total net revenue | | $ | 28 |
| | | | |
Foreign exchange contracts | | $ | 46 |
| | Total cost of net revenue | | 3 |
| | | | |
Interest rate contracts | | — |
| | Interest and other, net | | 1 |
| | Interest and other, net | | $ | 2 |
|
Total | | $ | 46 |
| | | | $ | 32 |
| | | | $ | 2 |
|
| | | | | | | | | | |
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 | ) | | | | $ | — |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Fair Value of Derivative Instruments and Amounts Offset in the Condensed 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 3, 2013 |
| | 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 | | $ | 89 |
| | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 93 |
|
Foreign exchange contracts in a liability position | | (48 | ) | | — |
| | (3 | ) | | — |
| | (51 | ) |
Interest rate contracts in an asset position | | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Interest rate contracts in a liability position | | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Net asset (liability) | | 41 |
| | 15 |
| | 1 |
| | (1 | ) | | 56 |
|
Derivatives not Designated as Hedging Instruments |
Foreign exchange contracts in an asset position | | 126 |
| | — |
| | 6 |
| | — |
| | 132 |
|
Foreign exchange contracts in a liability position | | (83 | ) | | — |
| | (10 | ) | | — |
| | (93 | ) |
Interest rate contracts in a liability position | | — |
| | — |
| | — |
| | (7 | ) | | (7 | ) |
Net asset (liability) | | 43 |
| | — |
| | (4 | ) | | (7 | ) | | 32 |
|
Total derivatives at fair value | | $ | 84 |
| | $ | 15 |
| | $ | (3 | ) | | $ | (8 | ) | | $ | 88 |
|
| | | | | | | | | | |
| | February 1, 2013 |
| | 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 | | $ | 86 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 95 |
|
Foreign exchange contracts in a liability position | | (40 | ) | | — |
| | (3 | ) | | — |
| | (43 | ) |
Interest rate contracts in an asset position | | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
Interest rate contracts in a liability position | | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
Net asset (liability) | | 46 |
| | 12 |
| | 6 |
| | (6 | ) | | 58 |
|
Derivatives not Designated as Hedging Instruments |
Foreign exchange contracts in an asset position | | 118 |
| | — |
| | 16 |
| | — |
| | 134 |
|
Foreign exchange contracts in a liability position | | (108 | ) | | — |
| | (32 | ) | | — |
| | (140 | ) |
Net asset (liability) | | 10 |
| | — |
| | (16 | ) | | — |
| | (6 | ) |
Total derivatives at fair value | | $ | 56 |
| | $ | 12 |
| | $ | (10 | ) | | $ | (6 | ) | | $ | 52 |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents the gross amounts of Dell's derivative instruments, amounts offset due to master netting agreements with Dell's various counterparties, and the net amounts recognized in the Condensed Consolidated Statements of Financial Position.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 3, 2013 |
Description | | Gross Amounts of Recognized Assets/ (Liabilities) | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position | | Gross Amounts not Offset in the Statement of Financial Position | | Net Amount |
| Financial Instruments | | Cash Collateral Received or Pledged | |
| | (in millions) |
Foreign Exchange Contracts | | | | | | | | | | | | |
Financial assets | | $ | 225 |
| | $ | (141 | ) | | $ | 84 |
| | $ | — |
| | $ | — |
| | $ | 84 |
|
Financial liabilities | | (144 | ) | | 141 |
| | (3 | ) | | — |
| | — |
| | (3 | ) |
Total Foreign Exchange Contracts | | | | | | | | | | | | 81 |
|
Interest Rate Contracts | | | | | | | | | | | | |
Financial assets | | 15 |
| | — |
| | 15 |
| | — |
| | — |
| | 15 |
|
Financial liabilities | | (8 | ) | | — |
| | (8 | ) | | — |
| | — |
| | (8 | ) |
Total Interest Rate Contracts | | | | | | | | | | | | 7 |
|
Total Derivative Instruments | | $ | 88 |
| | $ | — |
| | $ | 88 |
| | $ | — |
| | $ | — |
| | $ | 88 |
|
| | | | | | | | | | | | |
| | February 1, 2013 |
Description | | Gross Amounts of Recognized Assets/ (Liabilities) | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position | | Gross Amounts not Offset in the Statement of Financial Position | | Net Amount |
| Financial Instruments | | Cash Collateral Received or Pledged | |
| | (in millions) |
Foreign Exchange Contracts | | | | | | | | | | | | |
Financial assets | | $ | 229 |
| | $ | (173 | ) | | $ | 56 |
| | $ | — |
| | $ | — |
| | $ | 56 |
|
Financial liabilities | | (183 | ) | | 173 |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
Total Foreign Exchange Contracts | | | | | | | | | | | | 46 |
|
Interest Rate Contracts | | | | | | | | | | | | |
Financial assets | | 12 |
| | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
Financial liabilities | | (6 | ) | | — |
| | (6 | ) | | — |
| | — |
| | (6 | ) |
Total Interest Rate Contracts | | | | | | | | | | | | 6 |
|
Total Derivative Instruments | | $ | 52 |
| | $ | — |
| | $ | 52 |
| | $ | — |
| | $ | — |
| | $ | 52 |
|
DELL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 7 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
During the first quarter of Fiscal 2014, Dell completed the reorganization of its reportable segments from the customer-centric segments it maintained through Fiscal 2013 to the following four product and services reportable segments: End-User Computing, the Enterprise Solutions Group, the Dell Software Group, and Dell Services. See Note 14 of the Notes to the Consolidated Financial Statements for additional information on Dell's reportable segments.
As a direct result of this segment change, in the first quarter of Fiscal 2014, the Company's goodwill reporting units also changed. As a result of this change, goodwill was re-allocated to the new reporting units on a relative fair value basis as of February 1, 2013. Dell did not incur any impairment charges to goodwill as a result of this change in reporting units.
The following table presents goodwill allocated to Dell's current reportable segments as of May 3, 2013, and February 1, 2013, and changes in the carrying amount of goodwill for the three months ended May 3, 2013:
|
| | | | | | | | | | | | | | | | | | | | |
| | End User Computing | | Enterprise Solutions Group | | Dell Software Group | | Dell Services | | Total |
| | (in millions) |
Balance at February 1, 2013 | | $ | 1,499 |
| | $ | 2,244 |
| | $ | 890 |
| | $ | 4,671 |
| | $ | 9,304 |
|
Goodwill acquired during the period | | — |
| | — |
| | — |
| | — |
| | — |
|
Adjustments | | (3 | ) | | (3 | ) | | (1 | ) | | (8 | ) | | (15 | ) |
Balance at May 3, 2013 | | $ | 1,496 |
| | $ | 2,241 |
| | $ | 889 |
| | $ | 4,663 |
| | $ | 9,289 |
|
Goodwill is tested for impairment on an annual basis during the second fiscal quarter, or sooner if an indicator of impairment occurs. No other events have transpired since the second quarter of Fiscal 2013 that would indicate a potential impairment of goodwill as of May 3, 2013. In addition, Dell did not have any accumulated goodwill impairment charges as of May 3, 2013.
Intangible Assets
Dell's intangible assets associated with completed acquisitions at May 3, 2013, and February 1, 2013, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 3, 2013 | | February 1, 2013 |
| | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| | (in millions) |
Customer relationships | | $ | 2,180 |
| | $ | (790 | ) | | $ | 1,390 |
| | $ | 2,184 |
| | $ | (721 | ) | | $ | 1,463 |
|
Technology | | 2,502 |
| | (932 | ) | | 1,570 |
| | 2,513 |
| | (827 | ) | | 1,686 |
|
Non-compete agreements | | 75 |
| | (57 | ) | | 18 |
| | 75 |
| | (54 | ) | | 21 |
|
Trade names | | 159 |
| | (65 | ) | | 94 |
| | 159 |
| | (59 | ) | | 100 |
|
Amortizable intangible assets | | 4,916 |
| | (1,844 | ) | | 3,072 |
| | 4,931 |
| | (1,661 | ) | | 3,270 |
|
In-process research and development | | 78 |
| | — |
| | 78 |
| | |