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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 1, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
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Commission file
number: 0-17017
Dell Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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74-2487834
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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One Dell Way, Round Rock, Texas 78682
(Address of principal executive
offices) (Zip Code)
Registrants telephone number, including area code:
(512) 338-4400
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which
registered
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Common Stock, par value $.01 per share
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The NASDAQ Stock Market LLC
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer, and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check One):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(do not check if smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes o No þ
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Approximate aggregate market value of the registrants
common stock held by non-affiliates as of
August 3, 2007, based upon the closing price reported for
such date on The NASDAQ Stock Market
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$54.0 billion
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Number of shares of common stock outstanding as of
March 14, 2008
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2,042,291,533
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DOCUMENTS
INCORPORATED BY REFERENCE
The information required by Part III of this report, to the
extent not set forth herein, is incorporated by reference from
the registrants proxy statement relating to the 2008
annual meeting of stockholders. Such proxy statement will be
filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year to which this
report relates.
This report contains forward-looking statements that are
based on Dells current expectations. Actual results in
future periods may differ materially from those expressed or
implied by those forward-looking statements because of a number
of risks and uncertainties. For a discussion of risk factors
affecting our business and prospects, see
Part I Item 1A
Risk Factors.
All percentage amounts and ratios were calculated using
the underlying data in thousands. Unless otherwise noted, all
references to industry share and total industry growth data are
for personal computers (including desktops, notebooks, and x86
servers), and are based on information provided by IDC Worldwide
Quarterly PC Tracker, March 3, 2008. Share data is for the
full calendar year and all our growth rates are on a fiscal
year-over-year basis. Unless otherwise noted, all references to
time periods refer to our fiscal periods.
General
Dell listens to customers and delivers innovative technology and
services they trust and value. As a leading technology company,
we offer a broad range of product categories, including desktop
PCs, servers and networking products, storage, mobility
products, software and peripherals, and services. According to
IDC, we are the number one supplier of personal computer systems
in the United States, and the number two supplier worldwide.
Our company is a Delaware corporation and was founded in 1984 by
Michael Dell on a simple concept: by selling computer systems
directly to customers, we can best understand their needs and
efficiently provide the most effective computing solutions to
meet those needs. Our corporate headquarters are located in
Round Rock, Texas, and we conduct operations worldwide through
subsidiaries. When we refer to our company and its business in
this report, we are referring to the business and activities of
our consolidated subsidiaries. We operate principally in one
industry, and we manage our business in three geographic
regions: the Americas; Europe, Middle East and Africa
(EMEA); and Asia Pacific-Japan (APJ).
See Part I Item 1
Business Geographic Areas of Operations.
We are committed to managing and operating our business in a
responsible and sustainable manner around the globe. This
includes our commitment to environmental responsibility in all
areas of our business. In June 2007, we announced an ambitious
long-term goal to be the greenest technology company on
the planet and have a number of efforts that take the
environment into account at every stage of the product
lifecycle. See Part I
Item 1 Business
Sustainability. This also includes our focus on
maintaining a strong control environment, high ethical
standards, and financial reporting integrity. See
Part II Item 9A Controls
and Procedures.
Business
Strategy
Our core business strategy is built around our direct customer
model, relevant technologies and solutions, and highly efficient
manufacturing and logistics; and we are expanding that core
strategy by adding new distribution channels to reach even more
commercial customers and individual consumers around the world.
Using this strategy, we strive to provide the best possible
customer experience by offering superior value; high-quality,
relevant technology; customized systems and services; superior
service and support; and differentiated products and services
that are easy to buy and use. Historically, our growth has been
driven organically from our core businesses. Recently, we have
begun to pursue a targeted acquisition strategy designed to
augment select areas of our business with more products,
services, and technology that our customers value. For example,
with our recent acquisition of EqualLogic, Inc., a leading
provider of high-performance storage area network solutions, and
the subsequent expansion of Dells PartnerDirect channel,
we are ready to deliver customers an easier and more affordable
solution for storing and processing data.
Our core values include the following:
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We simplify information technology for
customers. Making quality personal computers,
servers, storage, and services affordable is Dells legacy.
We are focused on making information technology affordable for
millions of customers around the world. As a result of our
direct relationships with customers, or customer
intimacy, we are best positioned to simplify how customers
implement and maintain information technology and deliver
hardware, services, and software solutions tailored for their
businesses and homes.
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We offer customers choice. Customers can
purchase systems and services from Dell via telephone, at a
growing number of retail stores, and through our website,
www.dell.com, where they may review, configure, and price
systems within our entire product line; order systems online;
and track orders from manufacturing through shipping. Customers
may offer suggestions for current and future Dell products and
services through an interactive portion of our website called
Dell IdeaStorm. Commercial customers also can interact with
dedicated account teams. We plan to continue to expand our
recently launched indirect initiative by adding new distribution
channels to reach additional consumers and small businesses
through retail partners and value-added resellers globally.
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Customers can purchase custom-built products and
custom-tailored services. Historically our
flexible, build-to-order manufacturing process enabled us to
turn over inventory quickly, thereby reducing inventory levels,
and rapidly bring the latest technology to our customers. The
global IT industry and our competition have evolved, and we are
continuing to expand our utilization of original design
manufacturers, manufacturing outsourcing relationships, and new
distribution strategies to better meet customer needs and reduce
product cycle times. Our goal is to introduce the latest
relevant technology more quickly and to rapidly pass on
component cost savings to a broader set of our customers
worldwide.
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We are committed to being environmentally responsible in all
areas of our business. We have built
environmental consideration into every stage of the Dell product
life cycle from developing and designing
energy-efficient products, to reducing the footprint of our
manufacturing and operations, to customer use and product
recovery.
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Product
Development
We focus on developing standards-based technologies that
incorporate highly desirable features and capabilities at
competitive prices. We employ a collaborative approach to
product design and development, where our engineers, with direct
customer input, design innovative solutions and work with a
global network of technology companies to architect new system
designs, influence the direction of future development, and
integrate new technologies into our products. Through this
collaborative, customer-focused approach, we strive to deliver
new and relevant products and services to the market quickly and
efficiently. Our research, development, and engineering expenses
were $693 million for Fiscal 2008, $498 million for
Fiscal 2007, and $458 million for Fiscal 2006, including
in-process research and development of $83 million related
to acquisitions in Fiscal 2008.
Products
and Services
We design, develop, manufacture, market, sell, and support a
wide range of products that in many cases are customized to
individual customer requirements. Our product categories include
desktop PCs, servers and networking products, storage, mobility
products, and software and peripherals. In addition, we offer a
wide range of services. See Part II
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations Revenue by Product and Service
Categories and Note 11 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial Statements and Supplementary
Data.
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Desktop PCs The
XPStm
and Alienware lines are targeted at customers seeking the best
experiences and designs available, from multimedia capability to
the highest gaming performance. The
OptiPlextm
line is designed to help business, government, and institutional
customers manage their total cost of ownership by offering a
portfolio of secure, manageable, and stable lifecycle products.
The
Inspirontm
line of desktop computers is designed for mainstream PC users
requiring the latest features for their productivity and
entertainment needs. In July 2007, we introduced the
Vostrotm
line, which is designed to provide technology and services to
suit the specific needs of small businesses.
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Dell
Precisiontm
desktop workstations are intended for professional users who
demand exceptional performance from hardware platforms optimized
and certified to run sophisticated applications, such as those
needed for three-dimensional computer-aided design, digital
content creation, geographic information systems, computer
animation, software development, computer-aided engineering,
game development, and financial analysis.
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Servers and Networking Our standards-based
PowerEdgetm
line of servers is designed to offer customers affordable
performance, reliability, and scalability. Options include high
performance rack, blade, and tower servers for enterprise
customers and aggressively priced tower servers for small
organizations, networks, and remote offices. We also offer
customized Dell server solutions for very large data center
customers.
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Our
PowerConnecttm
switches connect computers and servers in small-to-medium-sized
networks.
PowerConnecttm
products offer customers enterprise-class features and
reliability at a low cost.
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Storage We offer a comprehensive portfolio of
advanced storage solutions, including storage area networks,
network-attached storage, direct-attached storage, disk and tape
backup systems, and removable disk backup. With our advanced
storage solutions for mainstream buyers, we offer customers
functionality and value while reducing complexity in the
enterprise. Our storage systems are easy to deploy, manage, and
maintain. The flexibility and scalability offered by Dell
PowerVaulttm,
Dell EqualLogic, and Dell EMC storage systems helps
organizations optimize storage for diverse environments with
varied requirements.
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Mobility The
XPStm
and Alienware lines of laptop computers are targeted at
customers seeking the best experiences and designs available
from sleek, elegant, thin, and light laptops to the highest
performance gaming systems. In Fiscal 2008, we introduced the
XPS M1330, an innovative mobile platform featuring a 13.3-inch
high definition display and ultra-portable form factor that
received awards for its unique design. The
Inspirontm
line of laptop computers is designed for users seeking the
latest technology and high performance in a stylish and
affordable package. The
Latitudetm
line is designed to help business, government, and institutional
customers manage their total cost of ownership through managed
product lifecycles and the latest offerings in performance,
security, and communications. The
Vostrotm
line, introduced in July 2007, is designed to customize
technology, services, and expertise to suit the specific needs
of small businesses. The
Precisiontm
line of mobile workstations is intended for professional users
who demand exceptional performance to run sophisticated
applications.
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Software and Peripherals We offer
Dell-branded printers and displays and a multitude of
competitively priced third-party peripheral products, including
software titles, printers, televisions, laptop accessories,
networking and wireless products, digital cameras, power
adapters, scanners, and other products.
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Software. We sell a wide range of third-party
software products, including operating systems, business and
office applications, anti-virus and related security software,
entertainment software, and products in various other
categories. We finalized the acquisition of ASAP Software
Express Inc., a leading software solutions and licensing
services provider, in the fourth quarter of Fiscal 2008. As a
result of this acquisition, we now offer products from over
2,000 software publishers.
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Printers. We offer a wide array of
Dell-branded printers, ranging from ink-jet
all-in-one
printers for consumers to large multifunction devices for
corporate workgroups. All of our printers feature the Dell Ink
and Toner Management
Systemtm,
which simplifies the purchasing process for supplies by
displaying ink or toner levels on the status window during every
print job and proactively prompting users to order replacement
cartridges directly from Dell.
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Displays. We offer a broad line of branded and
non-branded display products, including flat panel monitors and
projectors. In Fiscal 2008, we extended our consumer monitor
line-up and
introduced new innovations such as True Life and
integrated camera and microphone into some of our monitors. We
added the 1201MP projector to our existing projector portfolio.
Across our monitors and projector product lines, we continue to
win awards for quality, performance, and value.
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Services Our global services business offers
a broad range of configurable IT services that help commercial
customers and channel partners plan, implement and manage IT
operations and consumers install, protect, and maintain their
PCs and accessories. Our service solutions help customers
simplify IT, maximizing the performance, reliability, and
cost-effectiveness of IT operations. During Fiscal 2008, we
acquired a number of service technologies and capabilities
through strategic acquisitions of certain companies. These are
being used to build-out our service capabilities.
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Infrastructure Consulting Services. Our
consulting services help customers evaluate, design, and
implement standards-based IT infrastructures. These
customer-oriented consulting services are designed to be
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focused and efficient, providing customers access to our
experience and guidance on how to best architect and operate IT
operations.
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Deployment Services. Our deployment services
simplify and accelerate the deployment of new systems, PCs, and
TVs in customers environments. Our processes and
deployment technologies enable customers to get systems up and
running quickly and reliably, with minimal end-user disruption.
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Asset Recovery and Recycling Services. We
offer a variety of flexible services for the secure and
environmentally safe recovery and disposal of owned and leased
IT equipment. Various options, including resale, recycling,
donation, redeployment, employee purchase, and lease return,
help customers retain value while facilitating regulatory
compliance and minimizing storage costs.
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Training Services. We help customers develop
the skills and knowledge of key technologies and systems needed
to increase their productivity. Courses include hardware and
software training as well as PC skills and professional
development classes available through instructor-led, virtual,
or self-directed online courses.
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Support Services. Our suite of scalable
support services is designed for IT professionals and end-users
whose needs range from basic phone support to rapid response and
resolution of complex problems. We offer flexible levels of
support that span from desktop and laptop PCs to complex servers
and storage systems, helping customers maximize uptime and stay
productive. Our support services include warranty services and
proactive maintenance offerings to help prevent problems as well
as rapid response and resolution of problems. These services are
supported by our network of Global Command Centers in the U.S.,
Ireland, China, Japan, and Malaysia, providing rapid,
around-the-clock support for critical commercial systems.
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Managed Services. We offer a full suite of
managed service solutions for companies who desire outsourcing
of some or all of their IT management. From planning to
deployment to ongoing technical support, our managed services
are modular in nature so that customers can customize a plan
based on their current and future needs. We can manage a portion
of their IT tasks or provide an end-to-end solution.
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Financial
Services
We offer or arrange various customer financial services for our
business and consumer customers in the U.S. through Dell
Financial Services L.P. (DFS), a wholly-owned
subsidiary of Dell as of January 2008. DFS was formerly a joint
venture between Dell and CIT Group Inc. (CIT), and
has been included in our consolidated financial statements since
the third quarter of Fiscal 2004. On December 31, 2007, we
purchased CITs remaining 30% interest in DFS, making it a
wholly-owned subsidiary. Financing through DFS is one of many
sources of funding that our customers may select. For additional
information about our financing arrangements, see
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Off-Balance Sheet
Arrangements and Note 6 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial Statements and Supplementary
Data.
Sales and
Marketing
We sell our products and services directly to customers through
dedicated sales representatives, telephone-based sales, online
at www.dell.com, and through a variety of indirect sales
channels. Our customers include large corporate, government,
healthcare, and education accounts, as well as small-to-medium
businesses and individual consumers. Within each of our
geographic regions, we have divided our sales and marketing
resources among these various customer groups. No single
customer accounted for more than 10% of our consolidated net
revenue during any of the last three fiscal years.
Our sales and marketing efforts are organized around the needs,
trends, and characteristics of our customers. Our direct
business model provides direct and continuous feedback from
customers, thereby allowing us to develop and refine our
products and marketing programs for specific customer groups.
Customers may offer suggestions for current and future Dell
products, services, and operations on an interactive portion of
our website called Dell IdeaStorm. This constant flow of
communication allows us to rapidly gauge customer satisfaction
and target new or existing products.
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For large business and institutional customers, we maintain a
field sales force throughout the world. Dedicated account teams,
which include field-based system engineers and consultants, form
long-term relationships to provide our largest customers with a
single source of assistance and develop specific tailored
solutions for these customers. For large, multinational
customers, we offer several programs designed to provide single
points of contact and accountability with global account
specialists, special global pricing, and consistent service and
support programs across all global regions. We also maintain
specific sales and marketing programs targeted at federal,
state, and local governmental agencies, as well as at specific
healthcare and educational customers.
We market our products and services to small-to-medium
businesses and consumers primarily by advertising on television
and the Internet, advertising in a variety of print media, and
mailing a broad range of direct marketing publications, such as
promotional pieces, catalogs, and customer newsletters.
Our business strategy also includes indirect sales channels.
Outside the U.S., we sell products indirectly through selected
partners to benefit from the partners existing customer
relationships and valuable knowledge of traditional customs and
logistics in the country, to mitigate credit and country risk,
and because sales in some countries may be too small to warrant
a direct sales business unit. In the U.S., we sell products
indirectly through third-party solution providers, system
integrators, and third-party resellers. In Fiscal 2008, we
announced PartnerDirect, a global program that brings our
existing partner initiatives under one umbrella in the
U.S. PartnerDirect includes partner training and
certification, deal registration, dedicated sales and customer
care, and a dedicated web portal. We intend to expand the
program globally. Continuing our strategy and efforts of better
meeting customers needs and demands, we began offering
select products in retail stores in several countries in the
Americas, EMEA, and APJ during Fiscal 2008. These actions
represent the first steps in our retail strategy, which will
allow us to extend our business model to reach customers that we
have not been able to reach directly.
Competition
We face intense price and product feature competition from
branded and generic competitors when selling our services. In
addition to several large branded companies, there are other
smaller branded and generic competitors. Historically, we
competed primarily based on the customer value that a direct
relationship can bring technology, performance,
customer service, quality, and reliability. Our general practice
is to rapidly pass on cost declines to our customers to enhance
customer value.
As a result of the intensely competitive environment, we lost
1.9 points of share during calendar 2007. We lost share, both in
the U.S. and internationally, as our growth did not meet
overall personal computer systems growth. This was mainly due to
intense competitive pressure in our U.S. Consumer business,
particularly in lower priced desktops and notebooks, as well as
a slight decline in our worldwide desktop shipments (compared to
5% worldwide industry growth in desktops). At the end of
calendar 2007, we remained the number one supplier of personal
computer systems in the U.S. and the number two supplier
worldwide.
We expect that the competitive pricing environment will continue
to be challenging. However, we believe that the strength of our
evolving business strategy and indirect distribution channels,
as well as our strong liquidity position, makes us well
positioned to continue profitable growth over the long term in
any business climate. For consumers, we recognize the increasing
importance of product ID, which is the appearance,
ease of use, and ability to interact with peripheral products
like cameras and MP3 players, and we are focusing more resources
to improve in this area.
In our financial services business we compete with the captive
financing businesses of some of our competitors as well as with
banks and financial institutions. While DFS is one of the many
potential sources for arranging funding that may be available to
our customers, we believe that our ability to offer or arrange
financing for products, services, and solutions makes us
competitive with banks and financial institutions.
Manufacturing
and Materials
We manufacture many of the products we sell and have
manufacturing locations worldwide to service our global customer
base. See Part I Item 2
Properties for information about our manufacturing
locations. We believe that our manufacturing processes and
supply-chain management techniques provide us a competitive
advantage.
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Our manufacturing process consists of assembly, software
installation, functional testing, and quality control. Testing
and quality control processes are also applied to components,
parts, sub-assemblies, and systems obtained from third-party
suppliers. Quality control is maintained through the testing of
components, subassemblies, and systems at various stages in the
manufacturing process. Quality control also includes a burn-in
period for completed units after assembly, on-going production
reliability audits, failure tracking for early identification of
production and component problems, and information from
customers obtained through services and support programs. We are
certified, worldwide, by the International Standards
Organization to the requirements of ISO 9001: 2000. This
certification includes our design, manufacture, and service of
computer products in all of our locations.
We have relationships with third-party original equipment
manufacturers that build some of our products to our
specifications. In addition, we are continuing to expand our use
of original design manufacturing partnerships and manufacturing
outsourcing relationships in order to generate cost
efficiencies, deliver products faster, and better serve our
customers in certain segments and geographical areas.
We purchase materials, supplies, product components, and
products from a large number of vendors. In some cases, multiple
sources of supply are not available and we have to rely on
single-source vendors. In other cases, we may establish a
working relationship with a single source or a limited number of
sources if we believe it is advantageous due to performance,
quality, support, delivery, capacity, or price considerations.
This relationship and dependency has not caused material
disruptions in the past, and we believe that any disruptions
that may occur because of our dependency on single- or
limited-source vendors would not disproportionately disadvantage
us relative to our competitors. See
Part I Item 1A Risk
Factors for information about the risks associated with
single- or limited-sourced suppliers.
Patents,
Trademarks, and Licenses
As of February 1, 2008, we held a worldwide portfolio of
1,954 patents and had an additional 2,196 patent applications
pending. We also hold licenses to use numerous third party
patents. To replace expiring patents, we obtain new patents
through our ongoing research and development activities. The
inventions claimed in our patents and patent applications cover
aspects of our current and possible future computer system
products, manufacturing processes, and related technologies. Our
product, business method, and manufacturing process patents may
establish barriers to entry in many product lines. While we use
our patented inventions and also license them to others, we are
not substantially dependent on any single patent or group of
related patents. We have entered into a variety of intellectual
property licensing and cross-licensing agreements. We have also
entered into various software licensing agreements with other
companies. We anticipate that our worldwide patent portfolio
will be of value in negotiating intellectual property rights
with others in the industry.
We have obtained U.S. federal trademark registration for
the DELL word mark and the Dell logo mark. We own registrations
for 66 of our other marks in the U.S. At February 1,
2008, we had pending applications for registration of 47 other
trademarks. We believe that establishment of the DELL word mark
and logo mark in the U.S. is material to our operations. We
have also applied for or obtained registration of the DELL mark
and several other marks in approximately 184 other countries.
We have entered into a variety of intellectual property
licensing and cross-licensing agreements. We have also entered
into various software licensing agreements with a variety of
other companies.
From time to time, other companies and individuals assert
exclusive patent, copyright, trademark, or other intellectual
property rights to technologies or marks that are important to
the technology industry or our business. We evaluate each claim
relating to our products and, if appropriate, seek a license to
use the protected technology. The licensing agreements generally
do not require the licensor to assist us in duplicating its
patented technology, nor do these agreements protect us from
trade secret, copyright, or other violations by us or our
suppliers in developing or selling these products.
Employees
At the end of Fiscal 2008, we had approximately 88,200 total
employees (consisting of 82,700 regular employees and 5,500
temporary employees), compared to approximately 91,500 total
employees (consisting of 83,100 regular
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employees, 7,200 temporary employees, and 1,200 DFS employees)
at the end of Fiscal 2007. In December 2007, we purchased CIT
Group Inc.s 30% interest in DFS. As such, the total of
regular employees at February 1, 2008, includes DFS
employees. Approximately 29,300 of the regular employees at the
end of Fiscal 2008 were located in the U.S., and approximately
53,400 were located in other countries.
In the first quarter of Fiscal 2008, we initiated a
comprehensive review of costs across all processes and
organizations, from product development and procurement through
service and support delivery, with the goal to simplify
structure, eliminate redundancies, and better align operating
expenses with the current business environment and strategic
growth opportunities. As part of this overall effort, we expect
to further reduce headcount, exclusive of additions due to
acquisitions.
Government
Regulation and Environment
Our business is subject to regulation by various federal and
state governmental agencies. Such regulation includes the radio
frequency emission regulatory activities of the
U.S. Federal Communications Commission; the anti-trust
regulatory activities of the U.S. Federal Trade Commission,
the Department of Justice, and the European Union; the consumer
protection laws of the Federal Trade Commission; the export
regulatory activities of the U.S. Department of Commerce
and the U.S. Department of Treasury; the import regulatory
activities of U.S. Customs and Border Protection; the
product safety regulatory activities of the U.S. Consumer
Product Safety Commission; and environmental regulation by a
variety of regulatory authorities in each of the areas in which
we conduct business. We are also subject to regulation in other
countries where we conduct business. We were not assessed any
environmental fines, nor did we have any material environmental
remediation or other environmental costs during Fiscal 2008.
Sustainability
Our focus on business efficiencies and customer satisfaction
drives our environmental stewardship program in all areas of our
business reducing product energy consumption,
reducing or eliminating materials for disposal, prolonging
product life spans, and providing effective and convenient
equipment recovery solutions. We are committed to becoming the
greenest technology company on the planet, a
long-term initiative we announced in June 2007. This
multi-faceted campaign focuses on driving internal business
innovations and efficiencies, enhancing customer satisfaction,
and partnering with suppliers and people of all ages who care
about the environment.
In Fiscal 2008, we announced our commitment to becoming carbon
neutral in calendar year 2008. In partnership with The
Conservation Fund and Carbonfund.org, we launched the
Plant a Tree for Me program, which enables customers
to offset the electricity required to power their computers. We
also extended our commitment to design the most energy efficient
products in our industry. Several of our workstations, desktops
and laptops met Energy Star 4.0 ahead of a deadline set by the
EPA. We are a founding partner of Green Grid, a global
consortium dedicated to developing and promoting energy
efficiency for data centers and information services.
We are committed to making recycling free and easy, and remain
focused on raising consumer awareness about the importance of
recycling and increasing the volume of products we recover from
consumers. During Fiscal 2007, we voluntarily initiated a
no-charge recycling program for our U.S. customers. This
recycling offer is designed for consumers and includes
responsible recycling of used Dell-branded computers and
peripheral equipment at no-charge; this service does not require
a replacement purchase. We also help commercial customers
responsibly and securely manage the retirement of used
information technology through our product recovery services.
Since November 2003, we have offered a no-charge recycling
program for Dell-branded products in Europe and also currently
offer no-charge consumer recycling in Canada. Since 2004, we
have offered U.S. consumers no-charge recycling of any
brand of used computer or printer with the purchase of a new
Dell computer or printer.
Backlog
We believe that backlog is not a meaningful indicator of net
revenue that can be expected for any period. There can be no
assurance that the backlog at any point in time will translate
into net revenue in any subsequent period, as unfilled orders
can generally be canceled at any time by the customer. Our
business model generally gives us
7
flexibility to manage backlog at any point in time by expediting
shipping or prioritizing customer orders toward products that
have shorter lead times, thereby reducing backlog and increasing
current period revenue. Even though backlog at the end of Fiscal
2008 was considerably higher than at the end of Fiscal 2007 and
2006, it was not material.
Geographic
Areas of Operations
We conduct operations worldwide, and we manage our business in
three geographic regions: the Americas, EMEA, and APJ. The
Americas region, which is based in Round Rock, Texas, covers the
U.S., Canada, and Latin America. Within the Americas, our
business is further segmented into Americas Business and
U.S. Consumer. The Americas Business segment includes sales
to corporate, government, healthcare, and education customers,
while the U.S. Consumer segment includes sales primarily to
individual consumers and selected retailers within the
U.S. We have developed and started implementing a plan to
combine the consumer business of both EMEA and APJ with the
U.S. Consumer business and re-align our management and
financial reporting structure. We will begin reporting worldwide
Consumer once we complete the global consolidation of this
business, which we expect to be the first quarter of Fiscal
2009. The changes have had no impact on our operating segment
structure to date. This segment will include worldwide sales to
individual consumers and select retailers.
The EMEA region, which is based in Bracknell, England,
encompasses Europe, the Middle East, and Africa. The APJ region,
based in Singapore, covers the Asian countries of the Pacific
Rim as well as Australia, New Zealand, and India.
We have invested in high growth countries such as Brazil,
Russia, India, and China to design, manufacture, and support our
customers, and we expect to continue our global expansion in the
years ahead. Our investment in international growth
opportunities contributed to an increase in
non-U.S. revenue,
as a percentage of consolidated net revenue, from 44% in Fiscal
2007 to 47% during Fiscal 2008, representing 14% year-over-year
growth. Our continued expansion outside of the U.S. creates
additional complexity in coordinating the design, development,
procurement, manufacturing, distribution, and support of our
increasingly complex product and service offerings. As a result,
we plan to continue to add additional resources to our offices
in Singapore to better coordinate certain global activities,
including the management of our original design manufacturers
and utilization of
non-U.S. Dell
and supplier production capacity where most needed in light of
product demand levels that vary by region. The expanded global
operations in Singapore also coordinate product design and
development efforts with procurement activities and sources of
supply. We intend to continue to expand our global
infrastructure as our international business continues to grow.
For financial information about the results of our reportable
operating segments for each of the last three fiscal years, see
Note 11 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data.
Our corporate headquarters are located in Round Rock, Texas. Our
manufacturing and distribution facilities are located in Austin,
Texas; Winston-Salem, North Carolina; Lebanon and Nashville,
Tennessee; Reno, Nevada; West Chester, Ohio; Miami, Florida;
Limerick and Athlone, Ireland; Penang, Malaysia; Xiamen, China;
Hortolândia, Brazil; Chennai, India; and Lodz, Poland.
During Fiscal 2008, we opened business centers in Quezon City,
Philippines and Kuala Lumpur, Malaysia. For additional
information see Part I
Item 2 Properties.
Trademarks
and Service Marks
Unless otherwise noted, trademarks appearing in this report are
trademarks owned by us. We disclaim proprietary interest in the
marks and names of others. EMC is a registered trademark of EMC
Corporation.
Available
Information
We maintain an Internet website at www.dell.com. All of our
reports filed with the Securities and Exchange Commission
(SEC) (including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and Section 16 filings) are accessible through the Investor
Relations section of our website at www.dell.com/investor, free
of charge, as soon as reasonably practicable after electronic
filing. The public may read and copy any materials that we file
with the SEC at the SECs Public Reference Room at
100 F Street, NE, Room 1580, Washington, DC
20549. You may obtain information on the operation of the Public
Reference
8
Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding
issuers that file electronically with the SEC at www.sec.gov.
Information on our website is not incorporated by reference into
this report.
Executive
Officers of Dell
The following table sets forth the name, age, and position of
each of the persons who were serving as our executive officers
as of March 1, 2008:
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Name
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Age
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Title
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Michael S. Dell
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43
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Chairman of the Board and Chief Executive Officer
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Donald J. Carty
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61
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Vice Chairman and Chief Financial Officer
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Bradley R. Anderson
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48
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Senior Vice President, Business Product Group
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Paul D. Bell
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47
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Senior Vice President and President, Americas
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Michael R. Cannon
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55
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President, Global Operations
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Jeffrey W. Clarke
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45
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Senior Vice President, Business Product Group
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Andrew C. Esparza
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49
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Senior Vice President, Human Resources
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Stephen J. Felice
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50
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Senior Vice President and President, Asia Pacific-Japan
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Ronald G. Garriques
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44
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President, Global Consumer Group
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Mark Jarvis
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44
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Senior Vice President, Chief Marketing Officer
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David A. Marmonti
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48
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Senior Vice President and President, Europe, Middle East, and
Africa
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Stephen F. Schuckenbrock
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47
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Senior Vice President and President, Global Services and Chief
Information Officer
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Lawrence P. Tu
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53
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Senior Vice President, General Counsel and Secretary
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Set forth below is biographical information about each of our
executive officers.
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Michael S. Dell Mr. Dell currently
serves as Chairman of the Board of Directors and Chief Executive
Officer. He has held the title of Chairman of the Board since he
founded the Company in 1984. Mr. Dell served as Chief
Executive Officer of Dell from 1984 until July 2004 and resumed
that role in January 2007. He serves on the Foundation Board of
the World Economic Forum, serves on the executive committee of
the International Business Council, and is a member of the
U.S. Business Council. He also serves on the
U.S. Presidents Council of Advisors on Science and
Technology and sits on the governing board of the Indian School
of Business in Hyderabad, India.
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Donald J. Carty Mr. Carty joined us as
Vice Chairman and Chief Financial Officer in January 2007. In
that role, he is responsible for all finance functions,
including controller, corporate planning, tax, treasury
operations, investor relations, corporate development, risk
management, and internal audit. Mr. Carty has served as a
member of our Board of Directors since 1992 and continues to
serve in that capacity. Mr. Carty was the Chairman and
Chief Executive Officer of AMR Corporation and American Airlines
from 1998 until his retirement in 2003. Prior to that, he served
in a variety of executive positions with AMR Airline Group and
American Airlines from 1978 to 1985 and from 1987 to 1999.
Mr. Carty was President and Chief Executive Officer of CP
Air in Canada from 1985 to 1987. After his retirement from AMR
and American in 2003, Mr. Carty engaged in numerous
business and private investment activities with a variety of
companies. Mr. Carty is a graduate of Queens
University in Kingston, Ontario and of the Harvard Graduate
School of Business Administration. He is also a director of CHC
Helicopter Corp. and Barrick Gold Corporation and serves as
Chairman of the Board of Virgin America Airlines.
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Bradley R. Anderson Mr. Anderson joined
us in July 2005 and serves as Senior Vice President, Business
Product Group. In this role, he is responsible for worldwide
engineering, design, development, and marketing of our
enterprise products, including servers, networking, and storage
systems. Prior to joining Dell, Mr. Anderson was Senior
Vice President and General Manager of the Industry Standard
Servers business at Hewlett-Packard Company (HP),
where he was responsible for HPs server solutions.
Previously, he was Vice President of Server, Storage, and
Infrastructure for HP, where he led the team responsible for
server, storage, peripheral, and infrastructure products. Before
joining HP in 1996, Mr. Anderson held top management
positions at Cray Research in executive staff, field marketing,
sales, finance, and corporate marketing. Mr. Anderson
earned a
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bachelor of science in Petroleum Engineering from Texas A&M
University and a Master of Business Administration from Harvard
University. He serves on the Texas A&M Look College of
Engineering Advisory Council.
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Paul D. Bell Mr. Bell has been with us
since 1996 and has served as Senior Vice President and
President, Americas since March 2007. In this role,
Mr. Bell is responsible for all sales and customer support
operations across the Americas region other than our consumer
business. From February 2000 until March 2007, Mr. Bell
served as Senior Vice President and President, Europe, Middle
East, and Africa. Prior to this, Mr. Bell served as Senior
Vice President, Home and Small Business. Prior to joining Dell
in July 1996, Mr. Bell was a management consultant with
Bain & Company for six years, including two years as a
consultant on our account. Mr. Bell received
bachelors degrees in Fine Arts and Business Administration
from Pennsylvania State University and a Master of Business
Administration degree from the Yale School of Organization and
Management.
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Michael R. Cannon Mr. Cannon joined us
in February 2007 as President, Global Operations. In this role,
he is responsible for our manufacturing, procurement, supply
chain, and facilities activities worldwide. Prior to joining
Dell, Mr. Cannon was President, Chief Executive Officer,
and a director of Solectron Corporation from January 2003 to
February 2007, and President, Chief Executive Officer, and a
director of Maxtor Corporation (now a part of Seagate
Technology) from July 1996 to January 2003. Mr. Cannon has
also worked at IBMs Storage Systems Division. He began his
career in engineering at The Boeing Company, where he held a
management position with the Manufacturing Research and
Development organization. Mr. Cannon studied mechanical
engineering at Michigan State University and completed Harvard
Business Schools Advanced Management Program. He currently
serves on the board of Adobe Systems.
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Jeffrey W. Clarke Mr. Clarke has served
as Senior Vice President, Business Product Group since January
2003. In this role, he is responsible for worldwide engineering,
design, development, and marketing of our business client
products, including Dell
OptiPlextm
desktops,
Latitudetm
notebooks,
Precisiontm
workstations, and
Vostrotm
desktops and notebooks. Mr. Clarke joined Dell in 1987 as a
quality engineer and has served in a variety of engineering and
management roles. In 1995 Mr. Clarke became the director of
desktop development, and from November 2001 to January 2003 he
served as Vice President and General Manager, Relationship
Product Group. Mr. Clarke received a bachelors degree
in Electrical Engineering from the University of Texas at
San Antonio.
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Andrew C. Esparza Mr. Esparza joined us
in 1997 as a director of Human Resources in the Product Group.
He was named Senior Vice President, Human Resources in March
2007 and was named an executive officer in September 2007. In
this role, he is responsible for driving the strategy and
supporting initiatives to attract, motivate, develop, and retain
world-class talent in support of our business goals and
objectives. He also has responsibility for corporate security
and corporate responsibility on a worldwide basis. He currently
is an executive sponsor for aDellante, our internal networking
group responsible for the development of Hispanic employees
within the company. Prior to joining Dell, he held human
resource positions with NCR Corporation from 1985 until 1997 and
Bechtel Power Corporation from 1981 until 1985. Mr. Esparza
earned a bachelors degree in business administration with
a concentration in human resource management from San Diego
State University.
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Stephen J. Felice Mr. Felice serves as
Senior Vice President and President, Asia Pacific-Japan. He was
named Senior Vice President in March 2007, after having served
as Vice President, Asia Pacific-Japan since August 2005.
Mr. Felice leads our operations throughout the APJ region,
including sales and customer service centers in Penang,
Malaysia, and Xiamen, China. Mr. Felice joined us in
February 1999 and has held various executive roles in our sales
and consulting services organizations. From February 2002 until
July 2005, Mr. Felice was Vice President, Corporate
Business Group, Dell Americas. Prior to joining Dell,
Mr. Felice served as Chief Executive Officer and President
of DecisionOne Corp. Mr. Felice also served as Vice
President, Planning and Development, with Bell Atlantic Customer
Services. He spent five years with Shell Oil in Houston.
Mr. Felice holds a bachelors degree in business
administration from the University of Iowa and a Master of
Business Administration degree from the University of Houston.
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Ronald G. Garriques Mr. Garriques joined
us in February 2007 as President, Global Consumer Group. In this
role he is responsible for all aspects of our consumer business,
including sales, marketing, and product design.
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Before joining Dell, Mr. Garriques served in various
leadership roles at Motorola from February 2001 to February
2007, where he was most recently Executive Vice President and
President, responsible for the Mobile Devices division. He was
also Senior Vice President and General Manager of the Europe,
Middle East, and Africa region for the Personal Communications
Services division, and Senior Vice President and General Manager
of Worldwide Products Line Management for the Personal
Communications Services division. Prior to joining Motorola,
Mr. Garriques held management positions at AT&T
Network Systems, Lucent Technologies, and Philips Consumer
Communications. Mr. Garriques holds a masters degree
in business administration from The Wharton School at the
University of Pennsylvania, a masters degree in mechanical
engineering from Stanford University, and a bachelors
degree in mechanical engineering from Boston University.
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Mark Jarvis Mr. Jarvis joined us in
October 2007 as Senior Vice President, Chief Marketing Officer.
He is responsible for our global marketing efforts, spanning the
consumer and commercial businesses, and including global brand,
online, and communications. From April 2007 until October 2007,
Mr. Jarvis served as a consultant to Dell in the Chief
Marketing Officer role. Prior to joining Dell, Mr. Jarvis
spent 14 years at Oracle, where he launched numerous
products and drove highly innovative marketing programs,
including Oracles
E-Business
Network and Oracle Technology Network, and also managed
Oracles showcase OpenWorld Conference.
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David A. Marmonti Mr. Marmonti serves as
Senior Vice President and President, Europe, Middle East, and
Africa, having been appointed to that position in March 2007. In
this role, he is responsible for all business operations across
the EMEA region, including sales and customer call centers in
the region. Mr. Marmonti joined us in 1998 and has held a
variety of roles, including Vice President and General Manager
of our Public Business Group; Vice President and General Manager
of our Mid-Markets and Preferred Corporate Accounts segments;
Vice President and General Manager of our EMEA Home and Small
Business division; Vice President of Marketing &
e-business
for the U.S. Consumer segment; and Director and General
Manager of the U.S. Asset Recovery Business. Prior to
joining Dell, Mr. Marmonti spent 16 years at AT&T
in a variety of senior roles, including executive positions in
sales and marketing, serving corporate customers.
Mr. Marmonti holds a bachelors degree in business
administration and marketing from the University of Missouri at
St. Louis.
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Stephen F. Schuckenbrock
Mr. Schuckenbrock joined us in January 2007
as Senior Vice President and President, Global Services. In
September 2007, he assumed the additional role of Chief
Information Officer. He is responsible for all aspects of our
services business, with worldwide responsibility for Dell
enterprise service offerings, and is also responsible for our
global information systems and technology structure. Prior to
joining us, Mr. Schuckenbrock served as Co-Chief Operating
Officer and Executive Vice President of Global Sales and
Services for Electronic Data Systems Corporation
(EDS). Before joining EDS in 2003, he was Chief
Operating Officer of The Feld Group, an information technology
consulting organization. Mr. Schuckenbrock served as Global
Chief Information Officer for PepsiCo from 1998 to 2000.
Mr. Schuckenbrock earned a bachelors degree in
business administration from Elon University.
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Lawrence P. Tu Mr. Tu joined us as
Senior Vice President, General Counsel and Secretary in July
2004, and is responsible for overseeing Dells global legal
department and governmental affairs. Before joining Dell,
Mr. Tu served as Executive Vice President and General
Counsel at NBC Universal for three years. Prior to his position
at NBC, he was a partner with the law firm of
OMelveny & Myers LLP, where he focused on high
technology, internet, and media related transactions. He also
served five years as managing partner of the firms Hong
Kong office. Mr. Tus prior experience also includes
serving as General Counsel Asia-Pacific for Goldman Sachs,
attorney for the U.S. State Department, and law clerk for
U.S. Supreme Court Justice Thurgood Marshall. Mr. Tu
holds Juris Doctor and bachelor of arts degrees from Harvard
University, as well as a masters degree from Oxford
University, where he was a Rhodes Scholar.
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There are many risk factors that affect our business and results
of operations, some of which are beyond our control. The
following is a description of some of the important risk factors
that may cause our actual results in future periods to differ
substantially from those we currently expect or desire.
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Declining general economic, business, or industry conditions
may cause reduced net revenue. We are a global
company with customers in virtually every business and industry.
If the economic climate in the U.S. or abroad deteriorates,
customers or potential customers could reduce or delay their
technology investments, which could impact our ability to manage
inventory levels, collect customer receivables, and ultimately
decrease our net revenue and profitability.
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Failure to reestablish a cost advantage may result in reduced
market share, revenue, and profitability. Our
success has historically been based on our ability to profitably
offer products at a lower price than our competitors. However,
we compete with many companies globally in all aspects of our
business. If our increasing reliance on third-party original
equipment manufacturers, original design manufacturing
partnerships, and manufacturing outsourcing relationships fails
to generate cost efficiencies, our profitability could be
adversely impacted. Our profitability is also affected by our
ability to negotiate favorable pricing with our vendors,
including vendor rebates, marketing funds, and other vendor
funding. Because these supplier negotiations are continuous and
reflect the ongoing competitive environment, the variability in
timing and amount of incremental vendor discounts and rebates
can affect our profitability. An inability to reestablish our
cost advantage or determine alternative means to deliver value
to our customers may adversely affect our market share, revenue,
and profitability.
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Our ability to generate substantial
non-U.S. net
revenue faces many additional risks and
uncertainties. Sales outside the
U.S. accounted for approximately 47% of our consolidated
net revenue in Fiscal 2008. Our future growth rates and success
are dependent on continued growth outside the U.S., including
the key developing countries of Brazil, Russia, India, and China
(BRIC). Our international operations face many risks
and uncertainties, including varied local economic and labor
conditions, political instability, and unexpected changes in the
regulatory environment, trade protection measures, tax laws
(including U.S. taxes on foreign operations), copyright
levies, and foreign currency exchange rates. Any of these
factors could adversely affect our operations and profitability.
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Our profitability may be affected by our product, customer,
and geographic sales mix and by seasonal sales
trends. Our profit margins vary among products,
customers, and geographies. In addition, our business is subject
to certain seasonal sales trends. For example, sales to
government customers (particularly the U.S. federal
government) are typically stronger in our third fiscal quarter,
sales in EMEA are often weaker in our third fiscal quarter, and
consumer sales are typically strongest during our fourth fiscal
quarter. As a result of these factors, our overall profitability
for any particular period will be affected by the mix of
products, customers, and geographies reflected in our sales for
that period, as well as by seasonality trends.
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Infrastructure failures and breaches in data security could
harm our business. We depend on our information
technology and manufacturing infrastructure to achieve our
business objectives. If a problem, such as a computer virus,
intentional disruption by a third party, natural disaster,
manufacturing failure, or telephone system failure impairs our
infrastructure, we may be unable to book or process orders,
manufacture, and ship in a timely manner, or otherwise carry on
our business. An infrastructure disruption could damage our
reputation and cause us to lose customers and revenue, result in
the unintentional disclosure of company or customer information,
and require us to incur significant expense to eliminate these
problems and address related data security concerns. The harm to
our business could be even greater if it occurs during a period
of disproportionately heavy demand.
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Our failure to effectively manage a product transition could
reduce the demand for our products and the profitability of our
operations. Continuing improvements in technology
mean frequent new product introductions, short product life
cycles, and improvement in product performance characteristics.
Product transitions present execution challenges and risks for
any company. If we are unable to effectively manage a product
transition, our business and results of operations could be
unfavorably affected.
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Disruptions in component or product availability could
unfavorably affect our performance. Our
manufacturing and supply chain efficiencies give us the ability
to operate with reduced levels of component and finished goods
inventories. Our financial success is partly due to our supply
chain management practices, including our ability to achieve
rapid inventory turns. Because we maintain minimal levels of
component and product
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inventories, a disruption in component or product availability,
such as the current industry shortage of laptop batteries, could
harm our financial performance and our ability to satisfy
customer needs.
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Our reliance on vendors creates risks and
uncertainties. Our manufacturing process requires
a high volume of quality components from third-party suppliers.
Defective parts received from these suppliers could reduce
product reliability and harm the reputation of our products.
Reliance on suppliers subjects us to possible industry shortages
of components and reduced control over delivery schedules (which
can harm our manufacturing efficiencies), as well as increases
in component costs (which can harm our profitability).
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We could experience manufacturing interruptions, delays, or
inefficiencies if we are unable to timely and reliably procure
components and products from single-source or limited-source
suppliers. We maintain several single-source or
limited-source supplier relationships, either because multiple
sources are not available or the relationship is advantageous
due to performance, quality, support, delivery, capacity, or
price considerations. If the supply of a critical single- or
limited-source product or component is delayed or curtailed, we
may not be able to ship the related product in desired
quantities and in a timely manner. For example, the current
industry shortage of notebook batteries could prevent us from
meeting customer demand for notebooks. Even where multiple
sources of supply are available, qualification of the
alternative suppliers, and establishment of reliable supplies,
could result in delays and a possible loss of sales, which could
harm operating results.
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Our business is increasingly dependent on our ability to
access the capital markets. We are increasingly
dependent on access to debt and capital sources to provide
financing for our customers and to obtain funds in the
U.S. for general corporate purposes, including share
repurchases and acquisitions. Additionally, we have customer
financing relationships with companies whose business models
rely on accessing the capital markets. The inability of these
companies to access such markets could force us to self-fund
transactions or forgo customer financing opportunities,
potentially harming our financial performance. We believe that
we will be able to obtain appropriate financing from third
parties even in light of the current market conditions;
nevertheless, changes in our credit ratings, deterioration in
our business performance, or adverse changes in the economy
could limit our ability to obtain financing from debt or capital
sources or could adversely affect the terms on which we may be
able to obtain any such financing, which could unfavorably
affect our net revenue and profitability. See
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity, Capital
Commitments, and Contractual Cash Obligations
Liquidity.
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We face risks relating to our internal
controls. If management is not successful in
maintaining a strong internal control environment, material
weaknesses could reoccur, causing investors to lose confidence
in our reported financial information. This could lead to a
decline in our stock price, limit our ability to access the
capital markets in the future, and require us to incur
additional costs to improve our internal control systems and
procedures.
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Unfavorable results of legal proceedings could harm our
business and result in substantial costs We are
involved in various claims, suits, investigations, and legal
proceedings that arise from time to time in the ordinary course
of our business and that are not yet resolved, including those
that are set forth under Note 10 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial Statements and Supplementary
Data, and additional claims may arise in the future.
Litigation is inherently unpredictable. Regardless of the merit
of the claims, litigation may be both time-consuming and
disruptive to our business. Therefore, we could incur judgments
or enter into settlements of claims that could adversely affect
our operating results or cash flows in a particular period. For
example, we could be exposed to enforcement or other actions
with respect to the continuing investigation into certain
accounting and financial reporting matters being conducted by
the SEC. In addition, if any infringement or other intellectual
property claim made against us by any third party is successful,
or if we fail to develop non-infringing technology or license
the proprietary rights on commercially reasonable terms and
conditions, our business, operating results, and financial
condition could be materially and adversely affected.
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The acquisition of other companies may present new
risks. We have begun to acquire companies as a
part of our overall growth strategy. These acquisitions may
involve significant new risks and uncertainties, including
distraction of management attention away from our current
business operations, insufficient new revenue to offset
expenses, inadequate return of capital, integration challenges,
new regulatory requirements, and issues not
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discovered in our due diligence process. No assurance can be
given that such acquisitions will be successful and will not
adversely affect our profitability or operations.
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Failure to properly manage the distribution of our products
and services may result in reduced revenue and
profitability. We use a variety of distribution
methods to sell our products and services, including directly to
customers and through select retailers and third-party
value-added resellers. As we sell through an increasing number
of indirect channels, inventory management becomes more
challenging as successful demand forecasting becomes more
difficult. Our inability to properly manage and balance
inventory levels and potential conflicts among these various
distribution methods could harm our operating results.
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If our cost cutting measures are not successful, we may
become less competitive. A variety of factors
could prevent us from achieving our goal of better aligning our
product and service offerings and cost structure with customer
needs in the current business environment through reducing our
operating expenses; reducing total costs in procurement, product
design, and transformation; simplifying our structure; and
eliminating redundancies. For example, we may experience delays
in the anticipated timing of activities related to our cost
savings plans and higher than expected or unanticipated costs to
implement them. As a result, we may not achieve our expected
costs savings in the time anticipated, or at all. In such case,
our results of operations and profitability may be negatively
impaired, making us less competitive and potentially causing us
to lose market share.
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Failure to effectively hedge our exposure to fluctuations in
foreign currency exchange rates and interest rates could
unfavorably affect our performance. We utilize
derivative instruments to hedge our exposure to fluctuations in
foreign currency exchange rates and interest rates. Some of
these instruments and contracts may involve elements of market
and credit risk in excess of the amounts recognized in our
financial statements.
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Our continued business success may depend on obtaining
licenses to intellectual property developed by others on
commercially reasonable and competitive terms. If
we or our suppliers are unable to obtain desirable technology
licenses, we may be prevented from marketing products; could be
forced to market products without desirable features; or could
incur substantial costs to redesign products, defend legal
actions, or pay damages. While our suppliers may be
contractually obligated to indemnify us against such expenses,
those suppliers could be unable to meet their obligations. In
addition, our operating costs could increase because of
copyright levies or similar fees by rights holders and
collection agencies in European and other countries. For a
description of potential claims related to copyright levies, see
Note 10 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data Copyright Levies.
|
|
|
Our success depends on our ability to attract, retain, and
motivate our key employees. We rely on key
personnel to support anticipated continued rapid international
growth and increasingly complex product and service offerings.
There can be no assurance that we will be able to attract,
retain, and motivate the key professional, technical, marketing,
and staff resources we need.
|
|
|
Loss of government contracts could harm our
business. Government contracts are subject to
future funding that may affect the extension or termination of
programs and are subject to the right of the government to
terminate for convenience or non-appropriation. In addition, if
we violate legal or regulatory requirements, the government
could suspend or disbar us as a contractor, which would
unfavorably affect our net revenue and profitability.
|
|
|
The expiration of tax holidays or favorable tax rate
structures could result in an increase of our effective tax rate
in the future. Portions of our operations are
subject to a reduced tax rate or are free of tax under various
tax holidays that expire in whole or in part during Fiscal 2010
through Fiscal 2021. Many of these holidays may be extended when
certain conditions are met. If they are not extended, then our
effective tax rate would increase in the future. See Note 3
of Notes to Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data.
|
|
|
Current environmental laws, or laws enacted in the future,
may harm our business. Our operations are subject
to environmental regulation in all of the areas in which we
conduct business. Our product design and procurement operations
must comply with new and future requirements relating to the
materials composition, energy efficiency and collection,
recycling, treatment, and disposal of our electronics products,
including restrictions on lead, cadmium, and other substances.
If we fail to comply with the rules and regulations regarding
|
14
|
|
|
the use and sale of such regulated substances, we could be
subject to liability. While we do not expect that the impact of
these environmental laws and other similar legislation adopted
in the U.S. and other countries will have a substantial
unfavorable impact on our business, the costs and timing of
costs under environmental laws are difficult to predict.
|
|
|
|
Armed hostilities, terrorism, natural disasters, or public
health issues could harm our business. Armed
hostilities, terrorism, natural disasters, or public health
issues, whether in the U.S. or abroad, could cause damage
or disruption to us, our suppliers or customers, or could create
political or economic instability, any of which could harm our
business. These events could cause a decrease in demand for our
products, could make it difficult or impossible for us to
deliver products or for our suppliers to deliver components, and
could create delays and inefficiencies in our supply chain.
|
|
|
ITEM 1B
|
UNRESOLVED
STAFF COMMENTS
|
Not Applicable.
At February 1, 2008, we owned or leased a total of
approximately 17.9 million square feet of office,
manufacturing, and warehouse space worldwide, approximately
8.2 million square feet of which is located in the
U.S. and the remainder of which is located in other
countries. We believe our existing properties are suitable and
adequate for our current needs and that we can readily meet our
requirements for additional space at competitive rates by
extending expiring leases or by finding alternative space.
Our principal executive offices, including global headquarters,
are located at One Dell Way, Round Rock, Texas, United States of
America. The locations of our headquarters of geographic
operations at February 1, 2008 were as follows:
|
|
|
|
|
|
|
|
|
Americas
|
|
|
Europe, Middle East, Africa
|
|
|
|
Asia Pacific, including Japan
|
|
Round Rock, Texas
|
|
|
Bracknell, England
|
|
|
|
Singapore
|
|
Americas
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Leased
|
Description
|
|
|
Principal Locations
|
|
|
(square feet)
|
|
|
(square feet)
|
Headquarters
|
|
|
Round Rock, Texas
|
|
|
2.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Centers(a)
|
|
|
Canada Edmonton and
Ottawa
El Salvador
San Salvador
Oklahoma Oklahoma City
Panama Panama City
Tennessee Nashville
Texas Austin and Round Rock
|
|
|
1.1 million
|
|
|
1.9 million
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
and Distribution
|
|
|
Brazil Hortolândia
Florida Miami (Alienware)
North Carolina
Winston-Salem
Ohio West Chester
Tennessee Lebanon and
Nashville
Texas Austin
|
|
|
2.9 million
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
Design Centers
|
|
|
Texas Austin and Round Rock
|
|
|
700,000
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
15
EMEA
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Leased
|
Description
|
|
|
Principal Locations
|
|
|
(square feet)
|
|
|
(square feet)
|
Headquarters
|
|
|
Bracknell, England
|
|
|
100,000
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Business
Centers(a)
|
|
|
Germany Halle
France Montpellier
Ireland Dublin and
Limerick
Morocco Casablanca
Slovakia Bratislava
|
|
|
400,000
|
|
|
1.5 million
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
and Distribution
|
|
|
Ireland Limerick and
Athlone (Alienware)
Poland Lodz
|
|
|
1.0 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APJ
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
Leased
|
Description
|
|
|
Principal Locations
|
|
|
(square feet)
|
|
|
(square feet)
|
Headquarters
|
|
|
Singapore
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Business
Centers(a)
|
|
|
China Dalian and Xiamen
India Bangalore, Gurgaon,
Hyderabad, and Mohali
Japan Kawasaki
Malaysia Penang and
Kuala Lumpur
Philippines Metro Manila
|
|
|
300,000
|
|
|
3.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
and Distribution
|
|
|
China Xiamen
Malaysia Penang
India Chennai
|
|
|
1.1 million
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Design Centers
|
|
|
China Shanghai
India Bangalore
Singapore
Taiwan Taipei
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Business center locations include
facilities with capacity greater than 1,000 people.
Operations within these centers include sales, technical
support, administrative, and support functions. Locations of
smaller business centers are not listed; however, the smaller
centers are included in the square footage.
|
In general, our Americas, EMEA, and APJ regions use properties
within their geographies. However, business centers in the
Philippines and India, which house sales, customer care,
technical support, and administrative support functions, are
used by each of our geographic regions. During Fiscal 2008, Dell
opened manufacturing plants in Hortolândia, Brazil;
Chennai, India; and Lodz, Poland. In addition, business centers
were opened in Quezon City, Philippines and Kuala Lumpur,
Malaysia. Manufacturing operations in El Dorado Do Sul, Brazil
were relocated to the new plant in Hortolândia; however,
the site continues in use as a business center. Business centers
in McGregor, Texas and Roseburg, Oregon were closed during
Fiscal 2008. Plans to open a second business center in Ottawa,
Canada have been abandoned and our business center in Edmonton,
Canada will be closed in early Fiscal 2009. At the end of Fiscal
2008 there were no major construction projects underway.
16
|
|
ITEM 3
|
LEGAL
PROCEEDINGS
|
The information required by this item is set forth under
Note 10 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data, and is incorporated herein by reference.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information regarding our annual meeting of stockholders held on
December 4, 2007, was set forth under Item 4 in
our Quarterly Report on
Form 10-Q
for the fiscal period ended November 2, 2007, and is
incorporated herein by reference.
PART II
ITEM 5
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our common stock is listed on The NASDAQ Stock Market under the
symbol DELL. Information regarding the market prices of our
common stock may be found in Note 13 of Notes to
Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data.
Holders
At March 14, 2008, there were 30,117 holders of record of
Dell common stock.
Dividends
We have never declared or paid any cash dividends on shares of
our common stock and currently do not anticipate paying any cash
dividends in the immediate future. Any future determination to
pay cash dividends will be at the discretion of our Board of
Directors.
Issuance
of Unregistered Securities
As a result of our inability to timely file our Annual Report on
Form 10-K
for Fiscal 2007, we suspended our sale of Dell securities under
our various employee benefit plans. In preparing for that
suspension, we discovered that we had inadvertently failed to
file with the SEC certain registration statements relating to
securities under certain of those plans, as described below.
|
|
|
Employee Stock Purchase Plan Until February
2008, we maintained an Employee Stock Purchase Plan (the
ESPP) that was available to substantially all of our
employees worldwide. In 1994, stockholders approved additional
shares for issuance under the ESPP, and we discovered that the
issuance of these additional shares was never registered.
Consequently, we have inadvertently issued approximately
54 million unregistered shares under this plan since 1996.
|
|
|
Retirement Plans We maintain a 401(k)
retirement savings plan that is available to substantially all
of our U.S. employees and a separate retirement plan that
is available to our employees in Canada. Both of those plans
contain a Dell Stock Fund, and both plans allow
participants to allocate some or all of their account balances
to interests in the Dell Stock Fund. The Dell common stock held
in the Dell Stock Funds is not purchased from Dell; rather, the
plan trustees accumulate the plan contributions that are
directed to the Dell Stock Funds and purchase for the Dell Stock
Funds shares of Dell common stock in open market transactions.
Nevertheless, because we sponsor the plans, we may have been
required to register certain transactions in the plans related
to shares of Dell common stock. We discovered that we may be
deemed to have been required to file a
Form S-8
in July 2003 to register additional share transactions in the
401(k) plan and a
Form S-8
to register share transactions in the Canada retirement plan in
1999. Consequently, we may have inadvertently failed to register
transactions in the two plans relating to up to approximately
37 million shares.
|
17
In December 2007, we filed a registration statement on
Form S-8
to register future transactions in the U.S. 401(k) plan and
began allowing participants in that plan to allocate some or all
of their account balances to interests in the related Dell Stock
Fund. The Dell Stock Fund within the Canada retirement plan
remains suspended, and we are currently evaluating whether to
continue to offer the Dell Stock Fund in that plan. If we do, we
will file a registration statement on
Form S-8
to register future transactions in that plan as soon as
practicable. We have implemented monitoring and reporting
procedures to ensure that in the future we timely meet our
registration obligations with respect to these and other
employee benefit plans.
The failure to file the registration statements noted above was
inadvertent, and we have always treated the shares issued under
the ESPP or held in the Dell Stock Funds under the retirement
plans as outstanding for financial reporting purposes.
Consequently, these unregistered transactions do not represent
any additional dilution. We believe that we have always provided
the employee-participants in these plans with the same
information they would have received had the registration
statements been filed. Nonetheless, we may be subject to civil
and other penalties by regulatory authorities as a result of the
failure to register.
Certain purchasers of shares in the unregistered transactions
may have the right to rescind their purchases for an amount
equal to the purchase price for the shares (or if the shares
have been disposed of, to receive damages with respect to any
loss on such disposition) plus interest from the date of
purchase. The outstanding shares subject to potential rescission
rights (representing 4 million shares outstanding as of
February 1, 2008) are reflected as redeemable common
stock on our Consolidated Statements of Financial Position. See
Note 4 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data for additional information.
Purchases
of Common Stock
Share
Repurchase Program
We have a share repurchase program that authorizes us to
purchase shares of common stock in order to increase shareholder
value and manage dilution resulting from shares issued under our
equity compensation plans. However, we do not currently have a
policy that requires the repurchase of common stock in
conjunction with share-based payment arrangements. On
December 3, 2007, our Board of Directors approved a new
authorization for an additional $10.0 billion for share
repurchases. The following table sets forth information
regarding our repurchases or acquisitions of common stock during
the fourth quarter of Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Approximate
|
|
|
|
|
|
|
Number of
|
|
Dollar Value
|
|
|
|
|
|
|
Shares
|
|
of Shares that
|
|
|
|
|
|
|
Repurchased
|
|
May Yet Be
|
|
|
|
|
|
|
as Part of
|
|
Repurchased
|
|
|
Total Number
|
|
Average
|
|
Publicly
|
|
Under the
|
|
|
of Shares
|
|
Price Paid
|
|
Announced
|
|
Announced
|
Period
|
|
Repurchased
|
|
per Share
|
|
Plans
|
|
Plans(a)
|
|
|
(in thousands, except average price paid per share)
|
|
Repurchases from November 3, 2007 through November 30,
2007
|
|
|
33
|
|
$
|
26.85
|
|
|
|
|
$
|
1,415,438
|
Repurchases from December 1, 2007 through December 28,
2007
|
|
|
60,390
|
|
$
|
24.40
|
|
|
60,352
|
|
$
|
9,942,709
|
Repurchases from December 29, 2007 through February 1,
2008
|
|
|
118,224
|
|
$
|
21.39
|
|
|
118,166
|
|
$
|
7,415,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
178,647
|
|
$
|
22.41
|
|
|
178,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
On December 3, 2007, our Board
of Directors approved a new authorization for an additional
$10.0 billion for share repurchases.
|
18
Stock
Performance Graph
The following graph compares the cumulative total return on
Dells common stock during the last five fiscal years with
the S&P 500 Index and the Dow Jones Computer Index during
the same period. The graph shows the value, at the end of each
of the last five fiscal years, of $100 invested in Dell common
stock or the indices on February 1, 2003, and assumes the
reinvestment of all dividends. The graph depicts the change in
the value of common stock relative to the indices at the end of
each fiscal year and not for any interim period. Historical
stock price performance is not necessarily indicative of future
stock price performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Fiscal Year
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
Dell Inc.
|
|
$
|
100
|
|
$
|
140
|
|
$
|
172
|
|
$
|
123
|
|
$
|
99
|
|
$
|
85
|
S&P 500 Index
|
|
|
100
|
|
|
135
|
|
|
143
|
|
|
158
|
|
|
181
|
|
|
177
|
Dow Jones US Computer Hardware Index
|
|
|
100
|
|
|
139
|
|
|
150
|
|
|
171
|
|
|
196
|
|
|
204
|
ITEM 6
SELECTED FINANCIAL DATA
The following selected financial data should be read in
conjunction with Part II
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Part II Item 8
Financial Statements and Supplementary Data.
The Audit Committee of our Board of Directors completed an
independent investigation into certain accounting and financial
reporting matters during Fiscal 2008. As a result of issues
identified during the investigation, and during additional
reviews and procedures conducted by management, the Audit
Committee, in consultation with management and
PricewaterhouseCoopers LLP, our independent registered public
accounting firm, concluded on August 13, 2007 that our
previously issued financial statements for Fiscal 2003, 2004,
2005, and 2006 (including the interim periods within those
years), and the first quarter of Fiscal 2007, should no longer
be relied upon because of certain accounting errors and
irregularities in those financial statements. Accordingly, we
restated our previously issued financial statements for those
periods. Restated financial information is presented in our
Annual Report on
Form 10-K
for Fiscal 2007 and is reflected in this report. That document
also contains a discussion of the investigation, the accounting
errors and irregularities identified, and the adjustments made
as a result of the restatement.
The following balance sheet data as of February 1, 2008,
February 2, 2007, and February 3, 2006, and results of
operations for Fiscal 2008, 2007, 2006, and 2005 are derived
from our audited financial statements included in
19
Part II Item 8 Financial
Statements and Supplementary Data and from our previously
filed Annual Report on
Form 10-K
for Fiscal 2007. The data for the remaining periods are derived
from our unaudited financial statements for the respective
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
February 2,
|
|
February 3,
|
|
January 28,
|
|
January 30,
|
|
|
February 1,
2008(c)
|
|
2007(c)
|
|
2006(a)
|
|
2005(b)
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
unaudited
|
|
|
(in millions, except per share data)
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
61,133
|
|
$
|
57,420
|
|
$
|
55,788
|
|
$
|
49,121
|
|
$
|
41,327
|
Gross margin
|
|
$
|
11,671
|
|
$
|
9,516
|
|
$
|
9,891
|
|
$
|
9,018
|
|
$
|
7,563
|
Operating income
|
|
$
|
3,440
|
|
$
|
3,070
|
|
$
|
4,382
|
|
$
|
4,206
|
|
$
|
3,525
|
Income before income taxes
|
|
$
|
3,827
|
|
$
|
3,345
|
|
$
|
4,608
|
|
$
|
4,403
|
|
$
|
3,711
|
Net income
|
|
$
|
2,947
|
|
$
|
2,583
|
|
$
|
3,602
|
|
$
|
3,018
|
|
$
|
2,625
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
$
|
1.15
|
|
$
|
1.50
|
|
$
|
1.20
|
|
$
|
1.02
|
Diluted
|
|
$
|
1.31
|
|
$
|
1.14
|
|
$
|
1.47
|
|
$
|
1.18
|
|
$
|
1.00
|
Number of weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,223
|
|
|
2,255
|
|
|
2,403
|
|
|
2,509
|
|
|
2,565
|
Diluted
|
|
|
2,247
|
|
|
2,271
|
|
|
2,449
|
|
|
2,568
|
|
|
2,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow & Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
3,949
|
|
$
|
3,969
|
|
$
|
4,751
|
|
$
|
5,821
|
|
$
|
4,064
|
Cash, cash equivalents and investments
|
|
$
|
9,532
|
|
$
|
12,445
|
|
$
|
11,756
|
|
$
|
14,101
|
|
$
|
11,921
|
Total assets
|
|
$
|
27,561
|
|
$
|
25,635
|
|
$
|
23,252
|
|
$
|
23,318
|
|
$
|
19,340
|
Short-term borrowings
|
|
$
|
225
|
|
$
|
188
|
|
$
|
65
|
|
$
|
74
|
|
$
|
157
|
Long-term debt
|
|
$
|
362
|
|
$
|
569
|
|
$
|
625
|
|
$
|
662
|
|
$
|
645
|
Total stockholders equity
|
|
$
|
3,735
|
|
$
|
4,328
|
|
$
|
4,047
|
|
$
|
6,412
|
|
$
|
6,238
|
|
|
|
(a)
|
|
Results for Fiscal 2006 include
charges aggregating $421 million ($338 million of
other product charges and $83 million in selling, general
and administrative expenses) related to the cost of servicing or
replacing certain
OptiPlextm
systems that included a vendor part that failed to perform to
our specifications, workforce realignment, product
rationalizations, excess facilities, and a write-off of goodwill
recognized in the third quarter. The related tax effect of these
items was $96 million. Fiscal 2006 also includes an
$85 million income tax benefit related to a revised
estimate of taxes on the repatriation of earnings under the
American Jobs Creation Act of 2004 recognized in the second
quarter.
|
|
(b)
|
|
Results for Fiscal 2005 include an
income tax charge of $280 million related to the
repatriation of earnings under the American Jobs Creation Act of
2004 recorded in the fourth quarter.
|
|
(c)
|
|
Results for Fiscal 2008 and Fiscal
2007 include stock-based compensation expense pursuant to
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment
(SFAS 123(R)). See Note 5 of Notes to
Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data.
|
20
ITEM 7
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SPECIAL NOTE: This section,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, contains
forward-looking statements that are based on our current
expectations. Actual results in future periods may differ
materially from those expressed or implied by those
forward-looking statements because of a number of risks and
uncertainties. For a discussion of risk factors affecting our
business and prospects, see Part I
Item 1A Risk
Factors. This section should be read in conjunction with
Part II Item 8 Financial
Statements and Supplementary Data.
Overview
Our
Company
As a leading technology company, we offer a broad range of
product categories, including desktop PCs, servers and
networking products, storage, mobility products, software and
peripherals, and services. We are the number one supplier of
personal computer systems in the United States, and the number
two supplier worldwide.
We manufacture many of the products we sell and have
manufacturing locations worldwide to service our global customer
base. We believe that our manufacturing processes and
supply-chain management techniques provide us a competitive
advantage. We have relationships with third-party original
equipment manufacturers that build some of our products to our
specifications. In addition, we are continuing to expand our use
of original design manufacturing relationships and manufacturing
outsourcing relationships in order to generate cost
efficiencies, deliver products faster and better serve our
customers in certain segments and geographies.
Our core business strategy is built around our direct customer
model, relevant technologies and solutions, and highly efficient
manufacturing and logistics; and we are expanding that core
strategy by adding new distribution channels to reach even more
commercial customers and individual consumers around the world.
Using this strategy, we strive to provide the best possible
customer experience by offering superior value; high-quality,
relevant technology; customized systems and services; superior
service and support; and differentiated products and services
that are easy to buy and use. Historically, our growth has been
driven organically from our core businesses. Recently, we have
begun to pursue a targeted acquisition strategy designed to
augment select areas of our business with more products,
services, and technology that our customers value.
We also offer various financing alternatives, asset management
services, and other customer financial services for business and
consumer customers. To reach even more customers globally we
have launched new distribution channels to reach commercial
customers and individual consumers around the world; we sell
products indirectly through third-party solution providers,
systems integrators, and third-party value-added resellers. In
Fiscal 2008, we announced PartnerDirect, a global program that
brings our existing partner initiatives under one umbrella in
the U.S. PartnerDirect includes partner training and
certification, deal registration, dedicated sales and customer
care, and a dedicated web portal. We intend to expand the
program globally.
We sell our products and services directly to customers and
through a variety of indirect sales channels. Continuing our
strategy and efforts of better meeting customers needs and
demands, we began offering select products in retail stores in
several countries in the Americas, EMEA, and APJ during Fiscal
2008. These actions represent the first steps in our retail
strategy, which will allow us to extend our business model to
reach customers that we have not been able to reach directly.
We have always strived to simplify and lower costs for our
customers while expanding our business opportunities. To
continue to meet this goal, sustain our business strategy, and
improve our business, we are focused on improving our current
state and reigniting growth. We believe these actions will help
position us for sustainable long-term profitable growth.
|
|
|
|
|
Improving our current state We are focused on
eliminating bureaucracy and improving competitiveness by
enhancing our productivity and becoming more efficient while
strengthening our operating processes and internal controls. Our
new and experienced executive leadership team is working
together to increase productivity and efficiency across all
functions. We are focused on improving product innovation by
|
21
|
|
|
|
|
shortening our product development cycle time and examining our
supply chain models. Lastly, we are examining our pricing and
margin strategies to improve our profitability.
|
|
|
|
|
|
Reigniting growth We are enabling our growth
strategy by focusing on five key areas:
|
|
|
|
|
|
Global Consumer In Fiscal 2009, our consumer
segment will expand beyond the U.S. to include worldwide
sales to individual consumers and select retailers as a part of
an internal consolidation of our consumer business. The
consolidation will improve our global sales execution and
coverage through better customer alignment, targeted sales force
investments in rapidly growing countries, and improved marketing
tools. We are also designing new, innovative products with
faster development cycles and competitive features. Lastly, we
have rapidly expanded our retail business in order to reach more
consumers.
|
|
|
|
Enterprise We are focused on simplifying IT
for our customers to allow customers to deploy IT faster, run IT
at a total lower cost, and grow IT smarter. As a result of our
simplify IT focus, we have become the industry
leader in server virtualization, power, and cooling performance.
|
|
|
|
Notebooks Our goal is to reclaim notebook
leadership by creating the best products while shortening our
development cycle and being the most innovative developer of
notebooks. To help meet this goal, we have recently separated
our consumer and commercial design functions and launched
several notebook products. We expect to launch more notebook
products in Fiscal 2009.
|
|
|
|
Small and Medium Business We are focused on
providing small and medium businesses the simplest and most
complete IT solution by extending our channel direct program
(PartnerDirect) and expanding our offerings to mid-sized
businesses. We are committed to improving our storage products
and services as evidenced by our new Building IT-as-a-Service
solution, which provides businesses with remote and lifecycle
management,
e-mail
backup, and software license management.
|
|
|
|
Emerging countries As a part of our growth
strategy, we are focusing on and investing resources in emerging
countries with an emphasis on Brazil, Russia, India,
and China. We are also creating custom products and services to
meet the preferences and demands of individual countries and
various regions.
|
We continue to grow our business organically and through
strategic acquisitions. During Fiscal 2008, we acquired five
companies, among which the two largest were EqualLogic, Inc.
(EqualLogic) and ASAP Software Express, Inc.
(ASAP), and we purchased CIT Group Inc.s
(CIT) 30% interest in Dell Financial Services, L.P.
(DFS). We expect to continue to periodically make
strategic acquisitions in the future.
Fiscal
2008 Performance
|
|
|
Share position |
|
We shipped 40 million units for calendar year
2007 according to IDC, resulting in a worldwide PC share
position of 14.9%. After leading the worldwide PC market for
the past six years, we fell to the second position for calendar
year 2007. We lost share, both in the U.S. and internationally,
as our growth did not meet the overall PC growth. Our U.S.
Consumer segment continued to underperform, which slowed our
overall growth in unit shipments, revenue, and profitability.
This was mainly due to intense competitive pressure,
particularly in the lower priced desktops and notebooks where
competitors offered aggressively priced products with better
product recognition and more relevant feature sets. A slight
decline in our worldwide desktop shipments also was a factor in
our losing worldwide PC share position; worldwide desktop
shipments grew 5% during calendar year 2007.
|
|
Net revenue |
|
Fiscal 2008 net revenue increased 6%
year-over-year to $61.1 billion, with unit shipments up 5%
year-over-year, as compared to Fiscal 2007 net revenue
which increased 3% year-over-year to $57.4 billion on unit
growth of 2% over Fiscal 2006 net revenue of
$55.8 billion.
|
22
|
|
|
Operating income |
|
Operating income was $3.4 billion for
Fiscal 2008, or 5.6% of net revenue compared to
$3.1 billion for Fiscal 2007, or 5.4% of net revenue, and
$4.4 billion or 7.9% of net revenue in Fiscal 2006.
|
|
Net income |
|
Net income was $2.9 billion for Fiscal
2008, or 4.8% of net revenue compared to $2.6 billion for
Fiscal 2007, or 4.5% of net revenue, and $3.6 billion or
6.5% of net revenue in Fiscal 2006.
|
|
Earnings per share |
|
Earnings per share increased 15% to $1.31 for
Fiscal 2008, compared to $1.14 for Fiscal 2007 and $1.47 for
Fiscal 2006.
|
Results
of Operations
The following table summarizes our consolidated results of
operations for each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
2008(a)
|
|
February 2,
2007(a)
|
|
February 3,
2006(b)
|
|
|
Dollars
|
|
% of Revenue
|
|
Dollars
|
|
% of Revenue
|
|
Dollars
|
|
% of Revenue
|
|
|
(in millions, except per share amounts and percentages)
|
|
Net revenue
|
|
$
|
61,133
|
|
|
100.0%
|
|
$
|
57,420
|
|
|
100.0%
|
|
$
|
55,788
|
|
|
100.0%
|
Gross margin
|
|
$
|
11,671
|
|
|
19.1%
|
|
$
|
9,516
|
|
|
16.6%
|
|
$
|
9,891
|
|
|
17.7%
|
Operating expenses
|
|
$
|
8,231
|
|
|
13.5%
|
|
$
|
6,446
|
|
|
11.2%
|
|
$
|
5,509
|
|
|
9.8%
|
Operating income
|
|
$
|
3,440
|
|
|
5.6%
|
|
$
|
3,070
|
|
|
5.4%
|
|
$
|
4,382
|
|
|
7.9%
|
Income tax provision
|
|
$
|
880
|
|
|
1.4%
|
|
$
|
762
|
|
|
1.3%
|
|
$
|
1,006
|
|
|
1.8%
|
Net income
|
|
$
|
2,947
|
|
|
4.8%
|
|
$
|
2,583
|
|
|
4.5%
|
|
$
|
3,602
|
|
|
6.5%
|
Earnings per share diluted
|
|
$
|
1.31
|
|
|
N/A
|
|
$
|
1.14
|
|
|
N/A
|
|
$
|
1.47
|
|
|
N/A
|
|
|
|
(a)
|
|
Results for Fiscal 2008 include
stock-based compensation expense of $436 million, or
$309 million ($0.14 per share) net of tax, and results for
Fiscal 2007 include stock-based compensation expense of
$368 million, or $258 million ($0.11 per share) net of
tax, due to the implementation of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)). We implemented
SFAS 123(R) using the modified prospective method effective
February 4, 2006. For additional information, see
Note 5 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data.
|
|
(b)
|
|
Results for Fiscal 2006 include
charges aggregating $421 million ($338 million of
other product charges and $83 million in selling, general,
and administrative expenses) related to the cost of servicing or
replacing certain
OptiPlextm
systems that include a vendor part that failed to perform to our
specifications, workforce realignment, product rationalizations,
excess facilities, and a write-off of goodwill recognized in the
third quarter. The related tax effect of these items was
$96 million. Fiscal 2006 also includes an $85 million
income tax benefit related to a revised estimate of taxes on the
repatriation of earnings under the American Jobs Creation Act of
2004 recognized in the second quarter.
|
Consolidated
Operations
Fiscal 2008 revenue increased 6% year-over-year to
$61.1 billion, with unit shipments up 5% year-over-year.
Revenue grew across all regions: Asia Pacific-Japan
(APJ) grew 15%; Europe, Middle East, and Africa
(EMEA) increased 12%; and the Americas grew 3%.
Revenue outside the U.S. represented approximately 47% of
Fiscal 2008 net revenue, compared to approximately 44% in the
prior year. Outside the U.S., we produced 14% year-over-year
revenue growth for Fiscal 2008; however, our unit growth was
below the overall unit growth rate of the international PC
market. During Fiscal 2008, the U.S. dollar weakened
relative to the other principal currencies in which we transact
business; however, as a result of our hedging activities,
foreign currency fluctuations did not have a significant impact
on our consolidated results of operations. Combined Brazil,
Russia, India, and China (BRIC) revenue growth
during Fiscal 2008 was 27%. To continue to capitalize on and
increase international growth, we are tailoring solutions to
meet specific regional needs, enhancing relationships to provide
customer choice and flexibility, and expanding into these and
other emerging countries that represent 85% of the worlds
population. Within the Americas, Americas Business revenue grew
by 6% and U.S. Consumer revenue declined by 12% during
Fiscal 2008. Worldwide, all product categories grew revenue over
the prior year other than desktop PCs, which declined 1% as
consumers continue to migrate to mobility products. Desktop PC
revenue in the Americas and EMEA regions declined 4% and 3%
year-over-year, respectively, as opposed to desktop PC revenue
in APJ, which increased 12%.
23
Fiscal 2007 revenue increased 3% year-over-year to
$57.4 billion, with unit shipments up 2% year-over-year.
Revenue grew across the EMEA and APJ regions by 6% and 12%,
respectively, while the Americas region revenue remained flat
year-over-year. Revenue outside the U.S. represented
approximately 44% of Fiscal 2007 net revenue, compared to
approximately 41% in the prior year. Outside the U.S., we
produced 10% year-over-year revenue growth for Fiscal 2007.
During Fiscal 2007, Americas Business revenue grew by 3% and
U.S. Consumer revenue declined by 11%. All product
categories grew revenue over the prior year periods, other than
desktop PCs. Desktop PC revenue in the Americas and EMEA regions
declined 12% and 6% year-over-year, respectively. We believe
that this decline in desktop PC revenue reflected an
industry-wide shift to mobility products. Our growth
underperformed the industrys growth in Fiscal 2007,
particularly in our U.S. Consumer segment, as we were out
of product feature set and price position.
Operating income and net income increased 12% and 14%
year-over-year to $3.4 billion and $2.9 billion,
respectively, for Fiscal 2008. The increased profitability was
mainly a result of strength in mobility, solid demand for
enterprise products, and a favorable component-cost environment.
In Fiscal 2007 and Fiscal 2006, operating and net income were
$3.1 billion and $2.6 billion, and $4.4 billion
and $3.6 billion, respectively. Net income for Fiscal 2006
includes an income tax repatriation benefit of $85 million
pursuant to a favorable tax incentive provided by the American
Jobs Creation Act of 2004. This tax benefit is related to the
Fiscal 2006 repatriation of $4.1 billion in foreign
earnings.
Our average selling price (total revenue per unit sold) in
Fiscal 2008 increased 2% year-over-year, which primarily
resulted from our pricing strategy, compared to a 1%
year-over-year increase for Fiscal 2007. Our recent pricing
strategy has been to concentrate on solutions sales, realign
pricing, and drive a better mix of products and services, while
aggressively pricing our products to remain competitive in the
marketplace. In Fiscal 2008, we continued to see intense
competitive pressure, particularly for lower priced desktops and
notebooks, as competitors offered aggressively priced products
with better product recognition and more relevant feature sets.
As a result, particularly in the U.S., we lost share in the
U.S. consumer segment in notebooks and desktops, which
slowed our overall growth in unit shipments, revenue, and
profitability. We expect that this competitive pricing
environment will continue for the foreseeable future.
Revenues
by Segment
We conduct operations worldwide and manage our business in three
geographic regions: the Americas, EMEA, and APJ. The Americas
region covers the U.S., Canada, and Latin America. Within the
Americas, we are further segmented into Business and
U.S. Consumer. The Americas Business (Business)
segment includes sales to corporate, government, healthcare,
small and medium business, and education customers, while the
U.S. Consumer segment includes sales primarily to
individual consumers and selected retailers within the
U.S. We have developed and started implementing a plan to
combine the consumer business of both EMEA and APJ with the
U.S. Consumer business and re-align our management and
financial reporting structure. We will begin reporting worldwide
Consumer once we complete the global consolidation of this
business, which we expect to be the first quarter of Fiscal
2009. The changes have had no impact on our operating segment
structure to date. The EMEA region covers Europe, the Middle
East, and Africa. The APJ region covers the Asian countries of
the Pacific Rim as well as Australia, New Zealand, and India.
During the second half of Fiscal 2008, we began selling desktop
and notebook computers, printers, ink, and toner through retail
channels in the Americas, EMEA, and APJ in order to expand our
customer base. Our goal is to have strategic relationships with
a number of major retailers in our larger geographic regions. In
the U.S., we currently have relationships with retailers such as
Staples, Wal-Mart, and Best Buy; and in Latin America, we have
relationships with retailers, including Wal-Mart and Pontofrio.
Additionally, some of our relationships include Carphone
Warehouse, Carrefour, Tesco, and DSGi in EMEA; and in APJ, we
are working with retailers such as Gome, HiMart, Courts, and Bic
Camera.
24
The following table summarizes our net revenue by reportable
segment for each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1, 2008
|
|
February 2, 2007
|
|
February 3, 2006
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Dollars
|
|
Revenue
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
$
|
31,144
|
|
|
50.9%
|
|
$
|
29,311
|
|
|
51.1%
|
|
$
|
28,365
|
|
|
50.8%
|
U.S. Consumer
|
|
|
6,224
|
|
|
10.2%
|
|
|
7,069
|
|
|
12.3%
|
|
|
7,960
|
|
|
14.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
37,368
|
|
|
61.1%
|
|
|
36,380
|
|
|
63.4%
|
|
|
36,325
|
|
|
65.1%
|
EMEA
|
|
|
15,267
|
|
|
25.0%
|
|
|
13,682
|
|
|
23.8%
|
|
|
12,887
|
|
|
23.1%
|
APJ
|
|
|
8,498
|
|
|
13.9%
|
|
|
7,358
|
|
|
12.8%
|
|
|
6,576
|
|
|
11.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
61,133
|
|
|
100.0%
|
|
$
|
57,420
|
|
|
100.0%
|
|
$
|
55,788
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Americas Business represented
the majority of our absolute dollar revenue growth in both
Fiscal 2008 and Fiscal 2007. During Fiscal 2008, Americas
revenues increased 3% year-over-year representing 61.1% of our
total net sales as compared to 63.4% in Fiscal 2007. Revenue
from sales of software and peripherals and mobility products led
the regions growth during Fiscal 2008. The overall
increase in net sales was partially offset by a decline in net
sales of desktops. Revenue from the sale of mobility products
led the regions growth and grew by single digits in both
Americas Business and U.S. Consumer in Fiscal 2007.
However, this growth was also offset by the continuing trend of
declines in desktop PC sales as wireless capabilities, falling
prices, and a growing need for mobility have increased the
preference and demand for notebooks.
|
|
|
|
|
|
Business Americas Business grew
revenue as well as units by 6% in Fiscal 2008, compared to 3%
revenue growth on flat unit growth in Fiscal 2007. The increase
in revenue in Fiscal 2008 resulted primarily from the sale of
mobility products, which grew 11% in Fiscal 2008 compared to
Fiscal 2007. The unit volume increases resulted from strong
growth in laptops. Americas International, which includes
countries in North America and Latin America other than the
U.S., drove the majority of the increase in revenue in the
Americas in both years. Americas International produced revenue
growth of 17% year-over-year for Fiscal 2008 as compared to 19%
revenue growth year-over-year in Fiscal 2007. In Fiscal 2007,
the slow down of net revenue growth was due to desktop weakness,
lower demand, and a significant decline in our Public business.
|
|
|
|
|
|
U.S. Consumer U.S. Consumer
revenue and unit volume decreased 12% and 20%, respectively, in
Fiscal 2008, compared to revenue and unit decreases of 11% and
14%, respectively, in Fiscal 2007. U.S. Consumer revenue
declined as compared to Fiscal 2007 primarily due to a 19% and
29% decline in desktop revenue and unit volume, respectively. In
Fiscal 2008, this segments average selling price increased
10% year-over-year compared to a 3% year-over-year increase from
a year ago, mainly due to realigning prices and selling a more
profitable product mix. We continue to see a shift to mobility
products in U.S. Consumer and our other segments as
notebooks become more affordable. In response to this
environment, we have updated our business model for
U.S. Consumer and have entered into a limited number of
retail distribution arrangements to complement and extend the
existing direct business. In the fourth quarter of Fiscal 2008,
the U.S. Consumer business began to improve and posted
revenue growth of 12% over the fourth quarter of Fiscal 2007,
which reflects changes we have made to the business to reignite
growth, including introducing four notebook families for
consumers in six months. In Fiscal 2009, we expect to continue
to expand our product offerings by launching 50% more new
notebooks than in Fiscal 2008. U.S. Consumer revenue and
unit volume decreased 11% and 14%, respectively, in Fiscal 2007
compared to revenue growth of 5% on unit growth of 9% in Fiscal
2006. U.S. Consumer revenue growth slowed as compared to
Fiscal 2006 primarily due to a 25% decline in both desktop
revenue and unit volume.
|
|
|
|
EMEA During Fiscal 2008, EMEA
represented 25% of our total consolidated net revenue as
compared to 24% in Fiscal 2007. EMEA had 12% year-over-year net
revenue growth as a result of unit shipment growth of
|
25
|
|
|
7%. Average price per unit increased 4%, which reflects the mix
of products sold and a benefit from the strengthening of the
Euro and British Pound against the U.S. dollar during
Fiscal 2008, offset by our pricing strategy. The revenue growth
was primarily a result of higher demand for mobility products,
represented by a 20% increase in revenue on a unit shipment
increase of 24%. Growth in services revenue also contributed to
EMEAs strong Fiscal 2008 performance as EMEAs
services revenue grew 30% year-over-year. These increases were
partially offset by a 3% decrease in desktop sales. At a country
level, Poland, Austria, Greece, France, and Germany experienced
strong growth in Fiscal 2008. We recently reorganized our EMEA
operations to focus our sales teams on specific customer types,
as opposed to our previous country focus, to reignite growth and
provide more consistent offerings to our customers.
|
In Fiscal 2007, the segments performance was largely
attributed to growth in mobility products, where year-over-year
unit volumes and revenue grew 29% and 15%, respectively,
compared to 49% and 23%, respectively, in Fiscal 2006. This
growth occurred primarily in France and Germany in Fiscal 2007,
with Germany leading the regions progress. The United
Kingdom experienced weak demand in its consumer business,
resulting in a 2% year-over-year decline in revenue for Fiscal
2007. With the exception of desktop PCs, all product categories
in this region experienced growth for Fiscal 2007 compared to
Fiscal 2006, with mobility, storage, and services revenues
posting strong gains.
|
|
|
Asia Pacific-Japan During Fiscal
2008, APJs revenue continued to improve, with 15% revenue
growth year-over-year. Consistent with the EMEA segment, these
increases were mainly a result of strong growth in mobility.
Sales of mobility products increased 33% year-over-year and unit
volume increased 32% in Fiscal 2008. Sales of mobility products
grew due to a shift in customer preference from desktops to
notebooks as well as the strong reception of our
Inspirontm
and
Vostrotm
notebooks. APJ also reported 20% growth in servers and
networking revenue on unit growth of 5% primarily due to our
focus on delivering greater value within customer data centers
with our rack optimized server platforms, whose average selling
prices are higher than our tower servers. These increases were
partially offset by a 10% decrease in services revenue. From a
country perspective, India, Thailand, Taiwan, Malaysia, and
China experienced significant revenue growth during Fiscal 2008.
Significant growth in India and China during Fiscal 2008
contributed to a revenue growth rate of approximately 27% for
our targeted BRIC countries.
|
In Fiscal 2007, APJ reported 12% revenue growth on 20% unit
growth. The region was led by 26% year-over-year revenue growth
in China during Fiscal 2007. Fiscal 2007s improved
performance was partially offset by Japans results, which
saw revenue decline of 5% year-over-year. In Fiscal 2007, India,
South Korea, Singapore, and Malaysia produced significant
year-over-year revenue growth at a higher rate than the overall
region. All product categories in this region experienced
revenue growth during Fiscal 2007 with mobility leading the
growth with a revenue increase of 12% on unit growth of 31%
during Fiscal 2007. Also driving this growth were increases in
services, software and peripherals, and storage.
For additional information regarding our reportable segments,
see Note 11 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data.
26
Revenue
by Product and Services Categories
The following table summarizes our net revenue by product
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1, 2008
|
|
February 2, 2007
|
|
February 3, 2006
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Dollars
|
|
Revenue
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentage)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs
|
|
$
|
19,573
|
|
|
32%
|
|
$
|
19,815
|
|
|
34%
|
|
$
|
21,568
|
|
|
39%
|
Mobility
|
|
|
17,423
|
|
|
28%
|
|
|
15,480
|
|
|
27%
|
|
|
14,372
|
|
|
25%
|
Software and peripherals
|
|
|
9,908
|
|
|
16%
|
|
|
9,001
|
|
|
16%
|
|
|
8,329
|
|
|
15%
|
Servers and networking
|
|
|
6,474
|
|
|
11%
|
|
|
5,805
|
|
|
10%
|
|
|
5,449
|
|
|
10%
|
Services
|
|
|
5,320
|
|
|
9%
|
|
|
5,063
|
|
|
9%
|
|
|
4,207
|
|
|
8%
|
Storage
|
|
|
2,435
|
|
|
4%
|
|
|
2,256
|
|
|
4%
|
|
|
1,863
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
61,133
|
|
|
100%
|
|
$
|
57,420
|
|
|
100%
|
|
$
|
55,788
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Desktop PCs During Fiscal 2008,
revenue from desktop PCs (which includes desktop computer
systems and workstations) decreased slightly from Fiscal 2007
revenue on a unit decline of 2% even though worldwide industry
unit sales grew 5% during calendar 2007. The decline was
primarily due to us being out of product feature and price
position and consumers migration to mobility products. Our
U.S. Consumer segment continued to perform below
expectation in Fiscal 2008 with a 19% decrease in desktop
revenue year-over-year; however, in the fourth quarter of Fiscal
2008, desktop revenues for U.S. Consumers grew 5% over the
fourth quarter of Fiscal 2007. U.S. Consumer was the
primary contributor to our worldwide full year decline in
desktop revenue with EMEA also contributing to the decline with
a 3% decrease in revenue during Fiscal 2008 as compared to
Fiscal 2007. The decline in revenue in our U.S. Consumer and
EMEA segments was offset by a strong performance in APJ, where
desktop sales increased 12% during Fiscal 2008 over prior year,
while desktop sales in our Americas Business segment remained
relatively flat during the same time period. We will likely see
rising user demand for mobility products in the foreseeable
future that will contribute to a slowing demand for desktop PCs
as mobility growth is expected to outpace desktop growth at a
rate of approximately six-to-one. In Fiscal 2008, we introduced
Vostrotm
desktops specifically designed to meet the needs of small
business customers.
|
In Fiscal 2007, revenue from desktop PCs decreased 8%
year-over-year on unit decline of 5%. Desktop PCs in the
Americas declined year-over-year during Fiscal 2007, but was
offset by single-digit growth in the APJ region during the same
period. Desktop PCs, as compared to mobility products, led
Fiscal 2007 in volume; however, our desktop PC average selling
price decreased 3% from Fiscal 2006 to Fiscal 2007, which
contributed to the overall revenue decline.
|
|
|
Mobility In Fiscal 2008, revenue from
mobility products (which includes notebook computers and mobile
workstations) grew 13% year-over-year on unit growth of 16%. All
segments experienced strong growth except U.S. Consumer,
whose revenue and units declined 10% during Fiscal 2008 as
compared to Fiscal 2007. During the same period mobility revenue
in APJ grew 33% on unit growth of 32%; EMEA revenue grew 20% on
unit growth of 24%; and Americas Business revenue grew 11% on
17% unit growth. Even though we posted double-digit mobility
growth during Fiscal 2008, according to IDC, industry mobility
shipments grew 34% during calendar 2007. To capitalize on the
industry growth in mobility, we have separated our consumer and
commercial design functions focusing our consumer
team on innovation and shorter design cycles. As a result, we
have launched four consumer notebook families in the past six
months, including
Inspirontm
color laptops and
XPStm
laptops, for which the demand has been better than expected. As
a result, the fourth quarter of Fiscal 2008 mobility revenues
for U.S. Consumer grew 25% over the fourth quarter of
Fiscal 2007. We also introduced
Vostrotm
laptops, specifically designed to meet the needs of small
business customers. During the fourth quarter of Fiscal 2008, we
launched our first tablet the
Latitudetm
XT, the industrys only sub-four pound convertible tablet
with pen and touch capability. As notebooks become more
affordable and wireless
|
27
|
|
|
products become standardized, demand for our mobility products
continues to be strong, producing robust year-over-year revenue
and unit growth. We are likely to see sustained growth in our
mobility products in the foreseeable future due to the continued
industry-wide migration from desktop PCs to mobility products.
|
In Fiscal 2007, revenue from mobility products grew by 8%
year-over-year as compared to 20% in the previous year. The
impact of the diminished growth was particularly acute in the
U.S. and led to a loss of share as compared to Fiscal 2006.
The slow growth resulted from both our product feature set and
related value offering, particularly in the consumer business,
as well as our inability to reach certain customer sets. Our
EMEA region led the growth in our mobility product category with
a 15% increase in Fiscal 2007.
|
|
|
Software and Peripherals In Fiscal
2008, revenue from software and peripherals
(S&P) (which includes Dell-branded printers,
monitors not sold with systems, plasma and LCD televisions,
projectors, and a multitude of competitively priced third-party
printers, televisions, software, digital cameras, and other
products) increased 10% year-over-year. EMEA lead S&P
revenue growth with a year-over-year increase of 14%, and
Americas Business and APJ revenue growth was 11% and 10%,
respectively, during Fiscal 2008 as compared to Fiscal 2007. The
increase in S&P revenue is primarily attributable to
strength in imaging and printing, digital displays, and software
licensing. With the acquisition of ASAP, a leading software
solutions and licensing services provider, in the fourth quarter
of Fiscal 2008, we now offer products from over 2,000 software
publishers.
|
In Fiscal 2007, revenue from software and peripherals increased
8% year-over-year. The overall increase in Fiscal 2007 S&P
revenue was led by the APJ region with growth of 38%, while
U.S. consumer sales declined 8%. This increase was
primarily attributable to a 12% year-over-year increase in
software revenue that was offset by declines in our imaging
product revenue.
|
|
|
Servers and Networking In Fiscal 2008,
servers and networking revenue grew 12% on unit growth of 6%
year-over-year as compared to industry unit growth of 8%. Our
unit growth was slightly behind the growth in the overall
industry, while we improved our product feature sets by
transitioning to new platforms, and as we managed through the
realignment of certain portions of our sales force to address
sales execution deficiencies. A significant portion of the
revenue growth is due to higher average selling prices, which
increased 5% during Fiscal 2008 as compared to the prior year.
Fourth quarter year-over-year revenue growth of 2% was below
industry growth and our expectations as conservatism in the
U.S. commercial sectors affected sales of our server
products. All regions experienced strong year-over-year revenue
growth with APJ leading the way with 20% growth on unit growth
of 5%; additionally, server and networking revenue increased 16%
and 8% in EMEA and the Americas, respectively. For Fiscal 2008,
we were again ranked number one in the United States with a 34%
share in server units shipped; worldwide we were second with a
25% share. Servers and networking remains a strategic focus
area. Late in the fourth quarter, we launched our 10G blade
servers the most energy efficient blade server
solution on the market. Our PowerEdge servers are ranked number
one in server benchmark testing for overall performance, energy
efficiency, and price.
|
In Fiscal 2007, servers and networking revenue grew 7% on unit
growth of 6% year-over-year. During Fiscal 2007 we introduced
our new ninth generation (9G) PowerEdge servers with
Intels Xeon 5100 series processors, and we began shipping
two new PowerEdge servers featuring AMD
Opterontm
processors, providing our customers with an additional choice
for high-performance two-socket and four-socket systems. We also
launched the industrys first standards-based Quad-Core
processors for two-socket blade, rack, and tower servers. These
additions contributed to the 6% year-over-year revenue increase
in Fiscal 2007 in the Americas Business segment.
|
|
|
Services In Fiscal 2008, revenue from
services (which includes the sale and servicing of our extended
product warranties) increased 5% year-over-year compared to a
20% increase in Fiscal 2007. EMEA drove services revenue growth
with a 30% increase in Fiscal 2008 as compared to Fiscal 2007,
and Americas Business contributed with 3% revenue growth. This
growth was offset by revenue declines in U.S. Consumer and
APJ of 16% and 10%, respectively. Strong Fiscal 2008 services
sales increased our deferred service revenue balance by
approximately $1.0 billion in Fiscal 2008, a 25% increase
to approximately $5.3 billion. In Fiscal 2007, our deferred
service revenue increased $514 million or 14% to
approximately $4.2 billion. During Fiscal 2008, we acquired
a number of service technologies and capabilities through
strategic acquisitions of certain companies. These capabilities
are being used to build-out our mix of service offerings. In the
first quarter of Fiscal 2009, we
|
28
introduced ProSupport, which distilled ten service offerings
down to two customizable packages spanning our commercial
product and solutions portfolios with flexible options for
service level and proactive management.
In Fiscal 2007, revenue from services increased 20%
year-over-year including a 26% year-over-year growth in revenues
outside the Americas. We introduced our new Platinum Plus
offering during Fiscal 2007, which contributed to an increase in
our premium service contracts.
|
|
|
Storage In Fiscal 2008, storage
revenue increased 8% as compared to a 21% increase in Fiscal
2007. All regions contributed to the revenue growth, led by
EMEA, which experienced strong growth of 18%; additionally, APJ
and the Americas increased 10% and 5%, respectively. In Fiscal
2008, we expanded both our PowerVault and Dell EMC
solutions that drove both additional increases in performance
and customer value. During the fourth quarter of Fiscal 2008, we
completed the acquisition of EqualLogic, Inc., an industry
leader in iSCSI SANs. With this acquisition, we now provide much
broader product offerings for small and medium business
consumers. Industry analysts believe that the iSCSI SAN space is
expected to grow over 125% annually over the next five years.
|
In Fiscal 2007, storage revenue sustained double-digit growth
with a 21% year-over-year increase. The Americas led the revenue
growth in Fiscal 2007 with a year-over-year increase of 21%. In
Fiscal 2007, we also announced a five-year extension to our
partnership with EMC. These portfolio enhancements continue to
deliver lower cost solutions for our customers.
Gross
Margin
The following table presents information regarding our gross
margin during each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1, 2008
|
|
February 2, 2007
|
|
February 3, 2006
|
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
% of
|
|
|
Dollars
|
|
Revenue
|
|
Dollars
|
|
Revenue
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Net revenue
|
|
$
|
61,133
|
|
|
100.0%
|
|
$
|
57,420
|
|
|
100.0%
|
|
$
|
55,788
|
|
|
100.0%
|
Gross margin
|
|
$
|
11,671
|
|
|
19.1%
|
|
$
|
9,516
|
|
|
16.6%
|
|
$
|
9,891
|
|
|
17.7%
|
During Fiscal 2008, our gross margin increased in absolute
dollars and as a percentage of revenue from Fiscal 2007, driven
by greater cost declines. The cost environment was more
favorable in the first half of Fiscal 2008 than the second half.
Our gross margin percentage was 18.8% in the fourth quarter of
Fiscal 2008 as compared to 19.3% in the first quarter of Fiscal
2008. The fourth quarter was positively impacted by a
$58 million reduction in accrued liabilities for a one-time
adjustment related to a favorable ruling by the German Federal
Supreme Court on a copyright levy case. We continue to evolve
our inventory and manufacturing business model to capitalize on
component cost declines, and we continuously negotiate with our
suppliers in a variety of areas including availability of
supply, quality, and cost. We continue to expand our utilization
of original design manufacturers, manufacturing outsourcing
relationships, and new distribution strategies to better meet
customer needs and reduce product cycle times. Our goal is to
introduce the latest relevant technology more quickly and to
rapidly pass on component cost savings to a broader set of our
customers worldwide. As we continue to evolve our inventory and
manufacturing business model to capitalize on component cost
declines, we continuously negotiate with our suppliers in a
variety of areas including availability of supply, quality, and
cost. These real-time continuous supplier negotiations support
our business model, which is able to respond quickly to changing
market conditions due to our direct customer model and real-time
manufacturing. Because of the fluid nature of these ongoing
negotiations, the timing and amount of supplier discounts and
rebates vary from time to time. In addition, a focus on more
richly configured customer solutions and a better mix of
products and services yielded a better balance of profitability
and revenue growth. In general, gross margin and margins on
individual products will remain under downward pressure due to a
variety of factors, including continued industry wide global
pricing pressures, increased competition, compressed product
life cycles, potential increases in the cost and availability of
raw materials, and outside manufacturing services. In response
to these competitive pricing pressures, we expect to continue to
take pricing actions with respect to our products. We are
continuing to identify opportunities to improve our
competitiveness, including lowering costs and improving
productivity. One example of these opportunities is our
announcement on March 31, 2008, that we will close our
desktop manufacturing facility in Austin, Texas. In addition, we
will take
29
further actions to reduce total costs in design, materials, and
operating expenses. Initial benefits of these opportunities are
expected in the second half of Fiscal 2009.
In Fiscal 2007, our gross margin declined as compared to Fiscal
2006, while revenue increased year-over-year. Throughout Fiscal
2007, industry-wide competition put pressure on average selling
prices while our pricing and product strategy evolved. In Fiscal
2007, we added a second source of micro processors (chip
sets) ending a long-standing practice of sourcing from
only one manufacturer. We believe that moving to more than one
supplier of chip sets is beneficial for customers long-term, as
it adds choice and ensures access to the most current
technologies. During the transition from sole to dual sourcing
of chip sets, gross margin was negatively impacted as we
re-balanced our product and category mix. In addition, commodity
price declines stalled during Fiscal 2007.
Operating
Expenses
The following table presents information regarding our operating
expenses during each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
|
February 3, 2006
|
|
|
February 1, 2008
|
|
February 2, 2007
|
|
|
|
% of
|
|
|
Dollars
|
|
% of Revenue
|
|
Dollars
|
|
% of Revenue
|
|
Dollars
|
|
Revenue
|
|
|
(in millions, except percentages)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
7,538
|
|
|
12.4%
|
|
$
|
5,948
|
|
|
10.3%
|
|
$
|
5,051
|
|
|
9.0%
|
Research, development, and engineering
|
|
|
610
|
|
|
1.0%
|
|
|
498
|
|
|
0.9%
|
|
|
458
|
|
|
0.8%
|
In-process research and development
|
|
|
83
|
|
|
0.1%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
8,231
|
|
|
13.5%
|
|
$
|
6,446
|
|
|
11.2%
|
|
$
|
5,509
|
|
|
9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and
Administrative During Fiscal 2008,
selling, general, and administrative expenses increased 27% to
$7.5 billion. The increase was primarily due to
investigation costs, higher compensation and benefits expense,
and increased outside consulting fees. Expenses related to the
United States Securities and Exchange Commission
(SEC) and Audit Committee investigations were
$160 million and $100 million for Fiscal 2008 and
Fiscal 2007, respectively. Fiscal 2008 results also include
$76 million (of the total of $107 million) of
additional expense for cash payments for expiring stock options,
and selling, general, and administrative expenses related to
headcount and infrastructure reductions were $92 million.
In addition, compensation related expenses, which includes the
aforementioned expiring stock options expense and headcount
reductions, increased in Fiscal 2008 compared to Fiscal 2007.
Employee bonus expense also increased substantially in Fiscal
2008 compared to Fiscal 2007 when bonuses were paid at a reduced
amount.
|
During Fiscal 2007, selling, general, and administrative
expenses increased 18% to $5.9 billion, compared to
$5.1 billion for Fiscal 2006. The increase in Fiscal 2007
as compared to Fiscal 2006 was primarily attributed to increased
compensation costs and outside consulting services. The
compensation increase was largely due to increased stock-based
compensation expense due to the adoption of SFAS 123(R)
($272 million), and the higher outside consulting services
costs were mainly due to the SEC and Audit Committee
investigations ($100 million). In addition, during Fiscal
2007, we made incremental customer experience investments of
$150 million to improve customer satisfaction, repurchase
preferences, as well as technical support. As a result, we
increased our headcount through direct hiring and replacing of
temporary staff with regular employees.
|
|
|
Research, Development, and
Engineering Research, development, and
engineering expenses increased 22% to $610 million compared
to $498 million in Fiscal 2007. The increase in research,
development, and engineering was primarily driven by
significantly higher compensation costs. The higher compensation
costs are partially attributed to increased focused investments
in research and development (R&D), which are
critical to our future growth and competitive position in the
marketplace. During Fiscal 2008, we implemented our
Simplify IT initiative for our customers. R&D
is the foundation for this initiative, which is aimed at
allowing customers to deploy IT faster, run IT at a lower total
cost, and grow IT smarter. In Fiscal 2007, research,
development, and engineering expense increased in absolute
dollars compared to Fiscal 2006 due to increased staffing
levels, product development costs, and stock-based compensation
expense resulting from the adoption of SFAS 123(R).
|
30
We manage our research, development, and engineering spending by
targeting those innovations and products most valuable to our
customers, and by relying upon the capabilities of our strategic
partners. We will continue to invest in research, development,
and engineering activities to support our growth and to provide
for new, competitive products. We obtained 1,954 worldwide
patents and have applied for 2,196 additional worldwide patents
at February 1, 2008.
|
|
|
In-Process Research and
Development We recognized in-process
research and development (IPR&D) charges in
connection with acquisitions accounted for as business
combinations, as more fully described in Note 7 of Notes to
Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data. During Fiscal 2008, we
recorded IPR&D charges of $83 million. Prior to Fiscal
2008, there were no IPR&D charges related to acquisitions.
|
On May 31, 2007, we announced that we had initiated a
comprehensive review of costs across all processes and
organizations with the goal to simplify structure, eliminate
redundancies, and better align operating expenses with the
current business environment and strategic growth opportunities.
These efforts are continuing. Since this announcement and
through the end of Fiscal 2008, we have reduced headcount by
3,200, excluding acquisitions, and strategically closed some of
our facilities. As noted above, we expect to take further action
to continue to reduce our cost structure in Fiscal 2009 to
improve our competitiveness and increase productivity.
Stock-Based
Compensation
We use the 2002 Long-Term Incentive Plan, amended in December
2007, for stock-based incentive awards. These awards can be in
the form of stock options, stock appreciation rights, stock
bonuses, restricted stock, restricted stock units, performance
units, or performance shares.
Stock-based compensation expense totaled $436 million for
Fiscal 2008, compared to $368 million and $17 million
for Fiscal 2007 and Fiscal 2006, respectively. The increase in
Fiscal 2008 and Fiscal 2007 as compared to Fiscal 2006 is due to
the implementation of SFAS 123(R) and cash payments of
$107 million made for expired in-the-money stock options
discussed below. We adopted SFAS 123(R) using the modified
prospective transition method under SFAS 123(R) effective
the first quarter of Fiscal 2007. Included in stock-based
compensation for Fiscal 2008 and Fiscal 2007 is the fair value
of stock-based awards earned during the year, including
restricted stock, restricted stock units, and stock options, as
well as the discount associated with stock purchased under our
employee stock purchase plan (ESPP). The ESPP was
discontinued effective February 2008 as part of an overall
assessment of our benefits strategy. Prior to the adoption of
SFAS 123(R), we accounted for our equity incentive plans
under the intrinsic value recognition and measurement principles
of Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, (APB
25) and its related interpretations. Accordingly,
stock-based compensation for the fair value of employee stock
options with no intrinsic value at the grant date and the
discount associated with the stock purchase under our ESPP was
not recognized in net income prior to Fiscal 2007. For further
discussion on stock-based compensation, see Note 5 of Notes
to Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data.
At February 1, 2008 there was $93 million and
$600 million of total unrecognized stock-based compensation
expense related to stock options and non-vested restricted
stock, respectively, with the unrecognized stock-based
compensation expense expected to be recognized over a
weighted-average period of 2.0 years and 1.9 years,
respectively. At February 2, 2007 there was
$139 million and $356 million of total unrecognized
stock-based compensation expense related to stock options and
non-vested restricted stock, respectively, with the unrecognized
stock-based compensation expense expected to be recognized over
a weighted-average period of 1.7 years and 2.4 years,
respectively.
Due to our inability to timely file our Annual Report on
Form 10-K
for Fiscal 2007, we suspended the exercise of employee stock
options, the vesting of restricted stock units, and the purchase
of shares under the ESPP on April 4, 2007. As a result, we
agreed to pay cash to current and former employees who held
in-the-money stock options (options that had an exercise price
less than the then current market price of the stock) that
expired during the period of unexercisability. We made payments
of approximately $107 million in Fiscal 2008 relating to
expired in-the-money stock options. We are now current in our
periodic reporting obligations and, accordingly, are permitting
the
31
exercise of employee stock options by employees and the vesting
of restricted stock units. As options have again become
exercisable, we do not expect to pay cash for expired
in-the-money stock options in the future.
Investment
and Other Income, net
The table below provides a detailed presentation of investment
and other income, net for Fiscal 2008, 2007, and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Investment and other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
|
$
|
496
|
|
|
$
|
368
|
|
|
$
|
308
|
|
Gains (losses) on investments, net
|
|
|
14
|
|
|
|
(5
|
)
|
|
|
(2
|
)
|
Interest expense
|
|
|
(45
|
)
|
|
|
(45
|
)
|
|
|
(29
|
)
|
CIT minority interest
|
|
|
(29
|
)
|
|
|
(23
|
)
|
|
|
(27
|
)
|
Foreign exchange
|
|
|
(30
|
)
|
|
|
(37
|
)
|
|
|
3
|
|
Gain on sale of building
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
Other
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income, net
|
|
$
|
387
|
|
|
$
|
275
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in investment income from Fiscal 2007 to Fiscal
2008 is primarily due to earnings on higher average balances of
cash equivalents and investments, partially offset by lower
interest rates. In Fiscal 2007, investment income increased from
the prior year primarily due to rising interest rates, partially
offset by a decrease in interest income earned on lower average
balances of cash equivalents and investments. The gains in
Fiscal 2008 as compared to losses in Fiscal 2007 and Fiscal 2006
are mainly the result of sales of securities. The increase from
Fiscal 2006 to Fiscal 2007 in interest expense is due to an
increase in the effective rate on the debt swap agreements and
the start of the commercial paper program in Fiscal 2007. The
increase in foreign exchange loss in Fiscal 2008 and Fiscal 2007
relative to Fiscal 2006 is mainly due to higher net losses on
derivative instruments. The gain on sale of building relates to
the sale of a building in EMEA.
Income
Taxes
Our effective tax rate was 23.0%, 22.8%, and 21.8% for Fiscal
2008, 2007, and 2006, respectively. The differences between our
effective tax rate and the U.S. federal statutory rate of
35% principally result from our geographical distribution of
taxable income and permanent differences between the book and
tax treatment of certain items. We reported an effective tax
rate of approximately 23.0% for Fiscal 2008, as compared to
22.8% for Fiscal 2007. In the fourth quarter of Fiscal 2008, we
were able to access $5.3 billion in cash from a subsidiary
outside of the U.S. to fund share repurchases,
acquisitions, and the continued growth of DFS. Accessing the
cash slightly increased our effective tax rate. The taxes
related to accessing the foreign cash and nondeductibility of
the in-process research and development acquisition charges were
offset primarily by the increase of our consolidated
profitability in lower tax rate jurisdictions during Fiscal
2008. For Fiscal 2007, we reported an effective tax rate of
approximately 22.8%, as compared to 21.8% for Fiscal 2006. The
increase in our Fiscal 2007 effective tax rate compared to
Fiscal 2006 is due to the $85 million tax reduction in the
second quarter of Fiscal 2006 discussed below, offset by a
higher proportion of our operating profits being generated in
lower foreign tax jurisdictions during Fiscal 2007. Our foreign
earnings are generally taxed at lower rates than in the United
States. As a result, sales growth and related profit earned
outside of the U.S. in lower tax jurisdictions is expected
to lower our operational effective tax rate in future periods.
We adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109 (FIN 48) effective
February 3, 2007. FIN 48 clarifies the accounting and
reporting for uncertainties in income taxes recognized in our
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS 109).
FIN 48 prescribes a comprehensive model for the financial
statement recognition, measurement, presentation, and disclosure
of uncertain tax positions
32
taken or expected to be taken in income tax returns. The
adoption of FIN 48 resulted in a decrease to
stockholders equity of approximately $62 million in
the first quarter of Fiscal 2008. For a further discussion of
the impact of FIN 48, see Note 3 of Notes to
Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data.
On October 22, 2004, the American Jobs Creation Act of 2004
was signed into law. Among other items, that act created a
temporary incentive for U.S. multinationals to repatriate
accumulated income earned outside the U.S. at an effective
tax rate of 5.25%, versus the U.S. federal statutory rate
of 35%. In the fourth quarter of Fiscal 2005, we recorded an
initial estimated income tax charge of $280 million based
on the decision to repatriate $4.1 billion of foreign
earnings. This tax charge included an amount relating to a
drafting oversight that Congressional leaders expected to
correct in calendar year 2005. On May 10, 2005, the
Department of Treasury issued further guidance that addressed
the drafting oversight. In the second quarter of Fiscal 2006, we
reduced our original estimate of the tax charge by
$85 million as a result of the guidance issued by the
Treasury Department. At February 3, 2006, we had completed
the repatriation of the $4.1 billion in foreign earnings
Financing
Receivables and Off-Balance Sheet Arrangements
Financing Receivables At February 1,
2008, our financing receivables balance was $2.1 billion of
which $1.6 billion represents customer receivables.
Customer receivables increased 16% from our balance at
February 2, 2007. This increase primarily reflects our
contractual right to fund a greater percentage of customer
receivables as CITs funding rights decrease. As our
funding rights increase, we expect continued growth in customer
financing receivables, subject to the outcome of the strategic
review noted below. To manage this growth, we will continue to
balance the use of our own working capital and other sources of
liquidity. The key decision factors in the analysis are the cost
of funds, required credit enhancements, and the ability to
access the capital markets. Of the customer receivables balance,
$444 million represented balances which were due from CIT in
connection with specified promotional programs. Given the recent
volatility in the credit markets, we are closely monitoring all
of our financing receivables and are actively pursuing
alternative strategies to mitigate any potential balance sheet
risk. Based on our assessment of these customer financing
receivables and the associated risks, we believe that we are
adequately reserved. See Note 6 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial
Statements and Supplementary Data for additional
information about our financing receivables and our promotional
programs.
We closely monitor credit risk of our entire portfolio. Our
investment in credit risk management resources and tools allow
us to constantly evaluate our portfolio credit risk. During
Fiscal 2008, we took underwriting actions, including reducing
our credit approval rate of subprime customers, in order to
protect our portfolio from the deteriorating credit environment.
We will continue to assess our portfolio risk and take
additional underwriting actions, as we deem necessary. Subprime
consumer receivables comprise less than 20% of the net customer
financing receivables balance at February 1, 2008.
We maintain an allowance for losses to cover probable financing
receivable credit losses. The allowance for losses is determined
based on various factors, including historical experience, past
due receivables, receivable type, and customer risk profile.
Substantial changes in the economic environment or any of the
factors mentioned above could change the expectation of
anticipated credit losses. As of February 1, 2008 and
February 2, 2007, the allowance for financing receivable
losses was $96 million and $39 million, respectively.
A 10% change in this allowance would not be material to our
consolidated results. See Note 6 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial Statements and Supplementary
Data for additional information.
We announced on March 31, 2008, that we are undertaking a
strategic assessment of ownership alternatives for DFS financing
activities. The assessment will primarily focus on the consumer
and
small-and-medium
business revolving credit financing receivables and operations
in the U.S., but may also include commercial leasing. The
outcome of the assessment will depend on the customer, capital,
and economic impact of alternative ownership structures. It is
possible the assessment will result in no change to the
ownership
and/or
operating structure. We expect to complete our assessment in the
third quarter of Fiscal 2009.
Asset Securitization During Fiscal 2008, we
continued to sell customer financing receivables to
unconsolidated qualifying special purpose entities. The
qualifying special purpose entities are bankruptcy remote legal
entities with
33
assets and liabilities separate from ours. The sole purpose of
the qualifying special purpose entities is to facilitate the
funding of customer receivables in the capital markets. Once
sold, these receivables are off-balance sheet. We determined the
amount of receivables to securitize based on our funding
requirements in conjunction with specific selection criteria
designed for the transaction.
Off-balance sheet securitizations involve the transfer of
customer financing receivables to unconsolidated qualifying
special purpose entities that are accounted for as a sale in
accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities, (SFAS 140). Upon the sale
of the customer receivables, we recognize a gain on the sale and
retain an interest in the assets sold. The gain on sale ranges
from 1% to 3% of the customer receivables sold. The
unconsolidated qualifying special purpose entities have entered
into financing arrangements with various multi-seller conduits
that, in turn, issue asset-backed debt securities in the capital
markets. During Fiscal 2008 and Fiscal 2007, we sold
$1.2 billion and $1.1 billion, respectively, of
customer receivables to unconsolidated qualifying special
purpose entities. The principal balance of the securitized
receivables at the end of Fiscal 2008 and Fiscal 2007 was
$1.2 billion and $1.0 billion, respectively.
We provide credit enhancement to the securitization in the form
of over-collateralization. Receivables transferred to the
qualified special purpose entities exceed the level of debt
issued. We retain the right to receive collections for assets
securitized exceeding the amount required to pay interest,
principal, and other fees and expenses (referred to as retained
interest). Our retained interest in the securitizations is
determined by calculating the present value of these excess cash
flows over the expected duration of the transactions. Our risk
of loss related to securitized receivables is limited to the
amount of our retained interest. We service securitized
contracts and earn a servicing fee. Our securitization
transactions generally do not result in servicing assets and
liabilities, as the contractual fees are adequate compensation
in relation to the associated servicing cost.
In estimating the value of the retained interest, we make a
variety of financial assumptions, including pool credit losses,
payment rates, and discount rates. These assumptions are
supported by both our historical experience and anticipated
trends relative to the particular receivable pool. We review our
investments in retained interests periodically for impairment,
based on their estimated fair value. All gains and losses are
recognized in income immediately. Retained interest balances and
assumptions are disclosed in Note 6 of Notes to
Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data.
Our securitization programs contain standard structural features
related to the performance of the securitized receivables. These
structural features include defined credit losses,
delinquencies, average credit scores, and excess collections
above or below specified levels. In the event one or more of
these features are met and we are unable to restructure the
program, no further funding of receivables will be permitted and
the timing of expected retained interest cash flows will be
delayed which would impact the valuation of our retained
interest. Should these events occur, we do not expect a material
adverse affect on the valuation of the retained interest or on
our ability to securitize financing receivables.
Current capital markets are experiencing an unusual period of
volatility and reduced liquidity that we expect will result in
higher costs and increasing credit enhancements for funding of
financial assets. Our exposure to the capital markets will
increase as we continue to fund additional financing
receivables. We do not expect current capital market conditions
to limit our ability to access liquidity for funding financing
receivables in the future, as we continue to find funding
sources in the capital markets.
Liquidity,
Capital Commitments, and Contractual Cash Obligations
Liquidity
Our cash balances are held in numerous locations throughout the
world, including substantial amounts held outside of the U.S.;
however, the majority of our cash and investments that are
located outside of the U.S. are denominated in the
U.S. dollar. Most of the amounts held outside of the
U.S. could be repatriated to the U.S., but, under current
law, would be subject to U.S. federal income taxes, less
applicable foreign tax credits. Repatriation of some foreign
balances is restricted by local laws. We have provided for the
U.S. federal tax liability on these amounts for financial
statement purposes except for foreign earnings that are
considered indefinitely reinvested outside of the
U.S. Repatriation could result in additional
U.S. federal income tax payments in future years. We
utilize a variety of tax
34
planning and financing strategies with the objective of having
our worldwide cash available in the locations in which it is
needed. In the fourth quarter of Fiscal 2008, we were able to
access $5.3 billion in cash from a subsidiary outside of
the U.S. The cash was used to fund shares repurchases,
acquisitions, and the growth of DFS.
We use cash generated by operations as our primary source of
liquidity and believe that internally generated cash flows are
sufficient to support business operations. However, to further
supplement domestic liquidity, we anticipate that we will access
the capital markets in the first half of Fiscal 2009. This
action is contingent upon appropriate market conditions. We
intend to establish the appropriate debt levels based upon cash
flow expectations, cash requirements for operations,
discretionary spendingincluding items such as share
repurchases and acquisitionsand the overall cost of
capital. We do not believe that the overall credit concerns in
the markets would impede our ability to access the capital
markets because of the overall strength of our financial
position.
We ended Fiscal 2008 with $9.5 billion in cash and
investments compared to $12.4 billion at the end of Fiscal
2007. The decrease in cash and investments from Fiscal 2007 was
a result of spending $4.0 billion on share repurchases and
a net $2.2 billion on acquisitions, partially offset by
internally generated cash flows. See Market Risk for
discussion related to exposure to changes in the market value of
our investment portfolio. In Fiscal 2008, we continued to
maintain strong liquidity with cash flows from operations of
$3.9 billion, compared to $4.0 billion in Fiscal 2007.
The following table summarizes our ending cash, cash
equivalents, and investments balances and contains a summary of
our Consolidated Statements of Cash Flows for the past three
fiscal years:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
|
2008
|
|
2007
|
|
|
(in millions)
|
|
Cash, cash equivalents, and investments:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,764
|
|
$
|
9,546
|
Debt securities
|
|
|
1,657
|
|
|
2,784
|
Equity and other securities
|
|
|
111
|
|
|
115
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments
|
|
$
|
9,532
|
|
$
|
12,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
3,949
|
|
|
$
|
3,969
|
|
|
$
|
4,751
|
|
Investing activities
|
|
|
(1,763
|
)
|
|
|
1,003
|
|
|
|
4,149
|
|
Financing activities
|
|
|
(4,120
|
)
|
|
|
(2,551
|
)
|
|
|
(6,252
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
152
|
|
|
|
71
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(1,782
|
)
|
|
$
|
2,492
|
|
|
$
|
2,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities Cash flows from
operating activities during Fiscal 2008, 2007, and 2006 resulted
primarily from net income, which represents our principal source
of cash. In Fiscal 2008, the slight decrease in operating cash
flows was primarily due to changes in working capital slightly
offset by the increase in net income. In Fiscal 2007, the
decrease in operating cash flows was primarily led by a decrease
in net income, slightly offset by changes in working capital.
See discussion of our cash conversion cycle in Key
Performance Metrics below.
|
Upon adopting SFAS 123(R) in the first quarter of Fiscal
2007, the excess tax benefits associated with employee stock
compensation are classified as a financing activity; however,
the offset reduces cash flows from operations. In Fiscal 2008
and 2007, the excess tax benefit was $12 million and
$80 million, respectively. Prior to adopting
SFAS 123(R), operating cash flows were impacted by income
tax benefits that resulted from the exercise of employee stock
options. These tax benefits totaled $224 million in Fiscal
2006. These benefits
35
are the tax effects of corporate income tax deductions (that are
considered taxable income to the employee) that represent the
amount by which the fair value of our stock exceeds the option
strike price on the day the employee exercises a stock option.
The decline in tax benefits in Fiscal 2008 and Fiscal 2007 from
Fiscal 2006 is due to fewer stock option exercises.
Key Performance Metrics Our direct business
model allows us to maintain an efficient asset management system
in comparison to our major competitors. We are capable of
minimizing inventory risk while collecting amounts due from
customers before paying vendors, thus allowing us to generate
annual cash flows from operating activities that typically
exceed net income. The following table presents the components
of our cash conversion cycle for the fourth quarter of each of
the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Days of sales
outstanding(a)
|
|
|
36
|
|
|
|
31
|
|
|
|
29
|
|
Days of supply in
inventory(b)
|
|
|
8
|
|
|
|
5
|
|
|
|
5
|
|
Days in accounts
payable(c)
|
|
|
(80
|
)
|
|
|
(78
|
)
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash conversion cycle
|
|
|
(36
|
)
|
|
|
(42
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Days of sales outstanding
(DSO) calculates the average collection period of
our receivables. DSO is based on the ending net trade
receivables and the most recent quarterly revenue for each
period. DSO also includes the effect of product costs related to
customer shipments not yet recognized as revenue that are
classified in other current assets. DSO is calculated by adding
accounts receivable, net of allowance for doubtful accounts, and
customer shipments in transit and dividing that sum by average
net revenue per day for the current quarter (90 days). At
February 1, 2008, February 2, 2007, and
February 3, 2006, DSO and days of customer shipments not
yet recognized were 33 and 3 days, 28 and 3 days, and
26 and 3 days, respectively.
|
|
(b)
|
|
Days of supply in inventory
(DSI) measures the average number of days from
procurement to sale of our product. DSI is based on ending
inventory and most recent quarterly cost of sales for each
period. DSI is calculated by dividing inventory by average cost
of goods sold per day for the current quarter (90 days).
|
|
(c)
|
|
Days in accounts payable
(DPO) calculates the average number of days our
payables remain outstanding before payment. DPO is based on
ending accounts payable and most recent quarterly cost of sales
for each period. DPO is calculated by dividing accounts payable
by average cost of goods sold per day for the current quarter
(90 days).
|
Our cash conversion cycle worsened by six days at
February 1, 2008 as compared to February 2, 2007. This
deterioration was driven by a five day increase in DSO largely
attributed to timing of payments from customers, a continued
shift in sales mix from domestic to international, and an
increased presence in the retail channel. In addition, DSI
increased by three days, which was primarily due to strategic
materials purchases. The DSO and DSI declines were offset by a
two-day
increase in DPO largely attributed to an increase in the amount
of strategic material purchases in inventory at the end of
Fiscal 2008 and the number of suppliers with extended payment
terms as compared to Fiscal 2007.
Our cash conversion cycle deteriorated one day at
February 2, 2007 from February 3, 2006. This decline
was driven by a
two-day
increase in DSO largely attributed to higher percentage of our
revenue coming from outside the U.S., where payment terms are
customarily longer and a higher percentage of revenue occurring
at the end of the period. This decline was offset by a
one-day
increase in DPO largely attributed to an increase in the number
of suppliers with extended payment terms as compared to Fiscal
2006.
We defer the cost of revenue associated with customer shipments
not yet recognized as revenue until they are delivered. These
deferred costs are included in our reported DSO because we
believe it presents a more accurate presentation of our DSO and
cash conversion cycle. These deferred costs are recorded in
other current assets in our Consolidated Statements of Financial
Position and totaled $519 million, $424 million, and
$417 million at February 1, 2008, February 2,
2007, and February 3, 2006, respectively.
|
|
|
Investing Activities Cash used in investing
activities during Fiscal 2008 was $1.8 billion, as compared
to $1.0 billion cash provided by investing activities
during Fiscal 2007 and $4.1 billion provided in Fiscal
2006. Cash generated or used in investing activities principally
consists of net maturities and sales or purchases of
investments; net capital expenditures for property, plant, and
equipment; and cash used to fund strategic acquisitions, which
was approximately $2.2 billion during Fiscal 2008. In
Fiscal 2008 as compared to Fiscal 2007, we re-invested a lower
amount of our proceeds from the maturity or sales of investments
to build liquidity
|
36
for share repurchases and for cash payments made in connection
with acquisitions. In Fiscal 2007 compared to Fiscal 2006, we
had a lower amount of proceeds from maturities and sales of
investments, and this was partially offset by an increase in
capital expenditures as we continued to focus on investing in
our global infrastructure in order to support our rapid global
growth.
|
|
|
Financing Activities Cash used in financing
activities during Fiscal 2008 was $4.1 billion, as compared
to $2.6 billion in Fiscal 2007 and $6.3 billion in
Fiscal 2006. Financing activities primarily consist of the
repurchase of our common stock, partially offset by proceeds
from the issuance of common stock under employee stock plans and
other items. In Fiscal 2008, the year-over-year increase in cash
used in financing activities was due primarily to the repurchase
of our common stock as the temporary suspension of our share
repurchase program ended in the fourth quarter of Fiscal 2008.
In Fiscal 2008, we repurchased approximately 179 million
shares at an aggregate cost of $4.0 billion. In Fiscal
2007, the year-over-year decrease in cash used in financing
activities was due primarily to the suspension of our share
repurchase program in September 2006. During Fiscal 2007, we
repurchased approximately 118 million shares at an
aggregate cost of $3.0 billion compared to 204 million
shares at an aggregate cost of $7.2 billion in Fiscal 2006.
|
We believe our ability to generate cash flows from operations on
an annual basis will continue to be strong, driven mainly by our
profitability, efficient cash conversion cycle, and the growth
in our deferred service offerings. In order to augment our
liquidity and provide us with additional flexibility, we
implemented a commercial paper program with a supporting credit
facility on June 1, 2006. Under the commercial paper
program, we issue, from time-to-time, short-term unsecured notes
in an aggregate amount not to exceed $1.0 billion. We use
the proceeds for general corporate purposes. At February 1,
2008, there were no outstanding amounts or advances under the
commercial paper program or supporting credit facility.
We are increasingly relying upon access to the capital markets
to fund financing for our customers and to provide sources of
liquidity in the U.S. for general corporate purposes,
including share repurchases. We believe we will be able to
access the capital markets to increase the size of our existing
commercial paper program and to meet our liquidity needs.
Although we believe that we will be able to maintain sufficient
access to the capital markets, even in light of the current
market conditions, changes in our credit ratings, deterioration
in our business performance, or adverse changes in the economy
could limit our access to these markets. We intend to establish
the appropriate debt levels based upon cash flow expectations,
cash requirements for operations, discretionary spending,
including items such as share repurchases and acquisitions, and
the overall cost of capital. We do not believe that the overall
credit concerns in the markets would impede our ability to
access the capital markets because of the overall strength of
our financial position. See Note 2 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial Statements and Supplementary
Data for further discussion of our commercial paper
program.
Capital
Commitments
Redeemable Common Stock In prior years, we
inadvertently failed to register with the SEC the issuance of
some shares under certain employee benefit plans. As a result,
certain purchasers of common stock pursuant to those plans may
have the right to rescind their purchases for an amount equal to
the purchase price paid for the shares, plus interest from the
date of purchase. At February 1, 2008 and February 2,
2007, we have classified approximately 4 million shares
($94 million) and 5 million shares
($111 million), respectively, that are subject to potential
rescission rights outside of stockholders equity because
the redemption features are not within our control. We may also
be subject to civil and other penalties by regulatory
authorities as a result of the failure to register. These shares
have always been treated as outstanding for financial reporting
purposes. See Item 5 Market for
Registrants Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities Issuance
of Unregistered Securities.
Share Repurchase Program We have a share
repurchase program that authorizes us to purchase shares of
common stock in order to increase shareholder value and manage
dilution resulting from shares issued under our equity
compensation plans. However, we do not currently have a policy
that requires the repurchase of common stock in conjunction with
share-based payment arrangements. On December 3, 2007, our
Board of Directors approved a new authorization for an
additional $10.0 billion for share repurchases.
37
We typically repurchase shares of common stock through a
systematic program of open market purchases. During Fiscal 2008,
we repurchased approximately 179 million shares of common
stock for an aggregate cost of $4.0 billion as compared to
118 million shares at an aggregate cost of
$3.0 billion in Fiscal 2007 and 204 million shares at
an aggregate cost of $7.2 billion in Fiscal 2006. This
significant decrease in share repurchases during Fiscal 2008 and
Fiscal 2007 as compared to Fiscal 2006 is due to the temporary
suspension of our share repurchase program in September 2006. We
recommenced our share repurchase program in the fourth quarter
of Fiscal 2008. For more information regarding share
repurchases, see Part II
Item 5 Market for Registrants Common
Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Capital Expenditures During Fiscal 2008 and
Fiscal 2007, we spent $831 million and $896 million,
respectively, on property, plant, and equipment primarily on our
global expansion efforts and infrastructure investments in order
to support future growth. Product demand and mix, as well as
ongoing efficiencies in operating and information technology
infrastructure, influence the level and prioritization of our
capital expenditures. Capital expenditures for Fiscal 2009,
related to our continued expansion worldwide, are currently
expected to reach approximately $850 million. These
expenditures are expected to be funded from our cash flows from
operating activities.
Restricted Cash Pursuant to an agreement
between DFS and CIT, we are required to maintain escrow cash
accounts that are held as recourse reserves for credit losses,
performance fee deposits related to our private label credit
card, and deferred servicing revenue. Restricted cash in the
amount of $294 million and $418 million is included in
other current assets at February 1, 2008 and
February 2, 2007, respectively.
Contractual
Cash Obligations
The following table summarizes our contractual cash obligations
at February 1, 2008.
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Payments Due by Period
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Fiscal
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Fiscal 2010-
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Fiscal 2012-
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Total
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2009
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2011
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2013
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Beyond
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(in millions)
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Contractual cash obligations:
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Debt(a)
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$
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529
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$
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227
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$
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2
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$
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-
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$
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300
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Operating leases
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487
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|
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92
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|
|
138
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|
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92
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165
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Advances under credit facilities
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23
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|
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23
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|
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-
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|
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-
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-
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Purchase obligations
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893
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|
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544
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|
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348
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1
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-
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Interest
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451
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33
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|
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45
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43
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330
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Current portion of uncertain tax
positions(b)
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98
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98
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-
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-
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-
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Contractual cash obligations
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$
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2,481
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$
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1,017
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$
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533
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$
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136
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$
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795
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(a)
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Changes in the fair value of the
debt where the interest rate is hedged with interest rate swap
agreements are not included in the contractual cash obligations
for debt as the debt is expected to be settled at par at its
scheduled maturity date.
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(b)
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The current portion of uncertain
tax positions does not include approximately $1.5 billion
in additional liabilities associated with uncertain tax
positions that are not expected to be liquidated in Fiscal 2009.
We are unable to reliably estimate the expected payment dates
for these additional non-current liabilities.
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Debt At February 1, 2008, we had
outstanding $200 million in Senior Notes with the principal
balance due April 15, 2008, and $300 million in Senior
Debentures with the principal balance due April 15, 2028.
For additional information regarding these issuances, see
Note 2 of Notes to Consolidated Financial Statements
included in Part II
Item 8 Financial Statements and Supplementary
Data, which Note 2 is incorporated herein by
reference.
Concurrent with the issuance of the Senior Notes and Senior
Debentures, we entered into interest rate swap agreements
converting our interest rate exposure from a fixed rate to a
floating rate basis to better align the associated interest rate
characteristics to our cash and investments portfolio. The
interest rate swap agreements have an aggregate notional amount
of $200 million maturing April 15, 2008, and
$300 million maturing April 15, 2028.
38
The floating rates are based on three-month London Interbank
Offered Rates plus 0.41% and 0.79% for the Senior Notes and
Senior Debentures, respectively. As a result of the interest
rate swap agreements, our effective interest rates for the
Senior Notes and Senior Debentures were 5.9% and 6.2%,
respectively, for Fiscal 2008.
Operating Leases We lease property and
equipment, manufacturing facilities, and office space under
non-cancellable leases. Certain of these leases obligate us to
pay taxes, maintenance, and repair costs.
Advances Under Credit Facilities Dell India
Pvt Ltd., our wholly-owned subsidiary, maintains unsecured
short-term credit facilities with Citibank N.A. Bangalore Branch
India (Citibank India) that provide a maximum
capacity of $30 million to fund Dell Indias
working capital and import buyers credit needs. Financing is
available in both Indian Rupees and foreign currencies. The
borrowings are extended on an unsecured basis based on our
guarantee to Citibank U.S. Citibank India can cancel the
facilities in whole or in part without prior notice, at which
time any amounts owed under the facilities will become
immediately due and payable. Interest on the outstanding loans
is charged monthly and is calculated based on Citibank
Indias internal cost of funds plus 0.25%. At
February 1, 2008, outstanding advances from Citibank India
totaled $23 million, which are included in short-term
borrowings on our Consolidated Statement of Financial Position.
Purchase Obligations Purchase obligations are
defined as contractual obligations to purchase goods or services
that are enforceable and legally binding on us. These
obligations specify all significant terms, including fixed or
minimum quantities to be purchased; fixed, minimum, or variable
price provisions; and the approximate timing of the transaction.
Purchase obligations do not include contracts that may be
cancelled without penalty.
We utilize several suppliers to manufacture sub-assemblies for
our products. Our efficient supply chain management allows us to
enter into flexible and mutually beneficial purchase
arrangements with our suppliers in order to minimize inventory
risk. Consistent with industry practice, we acquire raw
materials or other goods and services, including product
components, by issuing to suppliers authorizations to purchase
based on our projected demand and manufacturing needs. These
purchase orders are typically fulfilled within 30 days and
are entered into during the ordinary course of business in order
to establish best pricing and continuity of supply for our
production. Purchase orders are not included in the table above
as they typically represent our authorization to purchase rather
than binding purchase obligations.
Purchase obligations increased to $893 million at
February 1, 2008, from $570 million at
February 2, 2007. The significant increase is mainly due to
the signing of a $450 million marketing services agreement
with a vendor during the fourth quarter of Fiscal 2008,
partially offset by a $99 million decrease in purchase
commitments related to the improvement and construction of
facilities as several projects were finished during Fiscal 2008,
and a net decrease in our other purchase commitments.
Interest See Note 2 of Notes to the
Consolidated Financial Statements included in
Part II Item 8 Financial
Statements and Supplementary Data for further discussion
of our debt and related interest expense.
Market
Risk
We are exposed to a variety of risks, including foreign currency
exchange rate fluctuations and changes in the market value of
our investments. In the normal course of business, we employ
established policies and procedures to manage these risks.
Foreign
Currency Hedging Activities
Our objective in managing our exposures to foreign currency
exchange rate fluctuations is to reduce the impact of adverse
fluctuations on earnings and cash flows associated with foreign
currency exchange rate changes. Accordingly, we utilize foreign
currency option contracts and forward contracts to hedge our
exposure on forecasted transactions and firm commitments in over
20 currencies in which we transact business. The principal
currencies hedged during Fiscal 2008 were the Euro, British
Pound, Japanese Yen, and Canadian Dollar. We monitor our foreign
currency exchange exposures to ensure the overall effectiveness
of our foreign currency hedge positions. However, there can be
no assurance that our foreign currency hedging activities will
substantially offset the impact of fluctuations in currency
exchange rates on our results of operations and financial
position. During Fiscal 2008, the U.S. dollar weakened
relative to the other principal currencies in which we transact
business.
39
However, as a result of our hedging activities, foreign currency
fluctuations did not have a significant impact on our results of
operations and financial position during Fiscal 2008, 2007, and
2006.
Based on our foreign currency cash flow hedge instruments
outstanding at February 1, 2008 and February 2, 2007,
we estimate a maximum potential
one-day loss
in fair value of approximately $57 million and
$41 million, respectively, using a
Value-at-Risk
(VAR) model. The VAR model estimates were made
assuming normal market conditions and a 95% confidence level. We
used a Monte Carlo simulation type model that valued our foreign
currency instruments against a thousand randomly generated
market price paths. Forecasted transactions, firm commitments,
fair value hedge instruments, and accounts receivable and
payable denominated in foreign currencies were excluded from the
model. The VAR model is a risk estimation tool, and as such, is
not intended to represent actual losses in fair value that will
be incurred. Additionally, as we utilize foreign currency
instruments for hedging forecasted and firmly committed
transactions, a loss in fair value for those instruments is
generally offset by increases in the value of the underlying
exposure.
Cash and
Investments
At February 1, 2008, we have $9.5 billion of total
cash, cash equivalents, and investments. Our investment policy
is to manage our total cash and investments balances to preserve
principal and maintain liquidity while maximizing the return on
the investment portfolio through the full investment of
available funds. We diversify our investment portfolio by
investing in multiple types of investment-grade securities and
through the use of third-party investment managers.
Of the $9.5 billion, $7.8 billion is classified as
cash and cash equivalents. Due to the nature of these
investments, we consider it reasonable to expect that their fair
market values will not be significantly impacted by a change in
interest rates, and that these investments can be liquidated for
cash at short notice. As of February 1, 2008, the carrying
value of our cash equivalents approximated fair value.
The remaining $1.7 billion is primarily invested in fixed
income securities including government, agency, asset-backed,
mortgage-backed and corporate debt securities of varying
maturities at the date of acquisition. The fair value of our
portfolio is affected primarily by interest rates more so than
by the credit and liquidity issues currently facing the capital
markets. We attempt to mitigate these risks by investing
primarily in high credit quality securities with AAA and AA
ratings and short-term securities with an
A-1 rating,
limiting the amount that can be invested in any single issuer,
and by investing in short to intermediate term investments whose
market value is less sensitive to interest rate changes. As of
February 1, 2008, we did not hold any auction rate
securities; at February 2, 2007, we held auction rate
securities that had a carrying value of $255 million. The
total carrying value of investments in asset-backed and
mortgage-backed debt securities was approximately
$550 million. Based on our investment portfolio and
interest rates at February 1, 2008, a 100 basis point
increase or decrease in interest rates would result in a
decrease or increase of approximately $33 million in the
fair value of the investment portfolio.
We periodically review our investment portfolio to determine if
any investment is other-than-temporarily impaired due to changes
in credit risk or other potential valuation concerns. At
February 1, 2008, the fair value of securities below their
carrying value was $155 million. The unrealized loss of
$9 million related to these securities has been recorded in
other comprehensive income (loss), as we believe the investments
are not other-than-temporarily impaired. While certain
available-for-sale securities have market values below cost, we
believe it is probable that the principal and interest will be
collected in accordance with the contractual terms, and that the
decline in the market value is exacerbated by the overall credit
concerns in the market. Factors considered in determining
whether a loss is other-than-temporary include the length of
time and extent to which fair value has been less than the cost
basis; the underlying collateral, agency ratings, and future
cash flows; and our intent and ability to hold the investment
for a period of time sufficient to allow for any anticipated
recovery in fair value. Our assessment that an investment is not
other-than-temporarily impaired could change in the future due
to new developments or changes in any particular investment.
The fair value of our portfolio was based on quoted market
prices, which we currently believe are indicative of fair value.
We will continue to evaluate whether the inputs are market
observable as we implement SFAS No. 157, Fair Value
Measurements (SFAS 157).
40
Debt
We have entered into interest rate swap arrangements that
convert our fixed interest rate expense to a floating rate basis
to better align the associated interest rate characteristics to
our cash and investments portfolio. The interest rate swaps
qualify for hedge accounting treatment pursuant to
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. We have designated the
issuance of the Senior Notes and Senior Debentures and the
related interest rate swap agreements as an integrated
transaction. The changes in the fair value of the interest rate
swaps are reflected in the carrying value of the interest rate
swap on the balance sheet. The carrying value of the debt on the
balance sheet is adjusted by an equal and offsetting amount. The
differential to be paid or received on the interest rate swap
agreements is accrued and recognized as an adjustment to
interest expense as interest rates change.
At February 1, 2008, we had a $1.0 billion commercial
paper program with a supporting $1.0 billion senior
unsecured revolving credit facility. This program allows us to
obtain favorable short-term borrowing rates. There were no
outstanding advances under the commercial paper program at
February 1, 2008. At February 2, 2007,
$100 million was outstanding under the program, and the
weighted-average interest rate on those outstanding short-term
borrowings was 5.3%. We use the proceeds of the program and
facility for general corporate purposes. We believe we will be
able to access the capital markets to increase the size of our
existing commercial paper program and meet our liquidity needs.
Risk
Factors Affecting Our Business and Prospects
There are numerous risk factors that affect our business and the
results of our operations. Some of these risks are beyond our
control. These risk factors include:
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general economic, business, and industry conditions;
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our ability to reestablish a cost advantage over our competitors;
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local economic and labor conditions, political instability,
unexpected regulatory changes, trade protection measures, tax
laws, copyright levies, and fluctuations in foreign currency
exchange rates;
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our ability to accurately predict product, customer, and
geographic sales mix and seasonal sales trends;
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|
information technology and manufacturing infrastructure failures;
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our ability to effectively manage periodic product transitions;
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our ability to maintain a strong internal control environment;
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disruptions in component or product availability could
unfavorably affect our performance;
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our reliance on third-party suppliers for quality product
components, including reliance on several single-source or
limited-source suppliers;
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our ability to access the capital markets;
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risks relating to our internal controls;
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unfavorable results of legal proceedings could harm our business
and result in substantial costs;
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our acquisition of other companies may present new risks;
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our ability to properly manage the distribution of our products
and services;
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our success in achieving the benefits of our cost cutting
measures;
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effective hedging of our exposure to fluctuations in foreign
currency exchange rates and interest rates;
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obtaining licenses to intellectual property developed by others
on commercially reasonable and competitive terms;
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our ability to attract, retain, and motivate key personnel;
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loss of government contracts;
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expiration of tax holidays or favorable tax rate structures;
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changing environmental laws; and
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the effect of armed hostilities, terrorism, natural disasters,
and public health issues.
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For a discussion of these risk factors affecting our business
and prospects, see Part I
Item 1A Risk Factors.
41
Critical
Accounting Policies
We prepare our financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP). The preparation of financial
statements in accordance with GAAP requires certain estimates,
assumptions, and judgments to be made that may affect our
Consolidated Statement of Financial Position and Consolidated
Statement of Income. We believe our most critical accounting
policies relate to revenue recognition, business combinations,
warranty accruals, income taxes, stock-based compensation, and
loss contingencies. We have discussed the development,
selection, and disclosure of our critical accounting policies
with the Audit Committee of our Board of Directors. These
critical accounting policies and our other accounting policies
are also described in Note 1 of Notes to Consolidated
Financial Statements included in Part II
Item 8 Financial Statements and Supplementary
Data.
Revenue Recognition and Related Allowances We
frequently enter into sales arrangements with customers that
contain multiple elements or deliverables such as hardware,
software, peripherals, and services. Judgments and estimates are
necessary to ensure compliance with GAAP. These judgments relate
to the allocation of the proceeds received from an arrangement
to the multiple elements, the determination of whether any
undelivered elements are essential to the functionality of the
delivered elements, and the appropriate timing of revenue
recognition. We offer extended warranty and service contracts to
customers that extend
and/or
enhance the technical support, parts, and labor coverage offered
as part of the base warranty included with the product. Revenue
from extended warranty and service contracts, for which we are
obligated to perform, is recorded as deferred revenue and
subsequently recognized over the term of the contract or when
the service is completed. Revenue from sales of third-party
extended warranty and service contracts, for which we are not
obligated to perform, is recognized on a net basis at the time
of sale, as we do not meet the criteria for gross recognition
under Emerging Issues Task Force
99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent.
Estimates also related to revenue recognition relate primarily
to customer sales returns and allowance for doubtful accounts.
Generally, estimates are reasonably predictable based on
historical experience. The primary factors affecting our accrual
for estimated customer returns include estimated return rates as
well as the number of units shipped that still have a right of
return as of the balance sheet date. For sales to retailers, our
accrual for estimated returns is generally based on the
contractual caps specified in the sales arrangements. In the
absence of contractual caps, revenue is deferred until the
product has been sold by the retailer, the return rights expire,
or a reliable estimate of returns can be made. Factors affecting
our allowance for doubtful accounts include historical and
anticipated customer default rates of the various aging
categories of accounts receivable and financing receivables.
Each quarter, we reevaluate our estimates to assess the adequacy
of our recorded accruals for customer returns and allowance for
doubtful accounts, and adjust the amounts as necessary. The
expense associated with the allowance for doubtful accounts is
recognized as selling, general, and administrative expense.
We report revenue net of any revenue-based taxes assessed by
governmental authorities that are imposed on and concurrent with
specific revenue-producing transactions.
Business Combinations and Intangible Assets Including
Goodwill We account for business combinations
using the purchase method of accounting and accordingly, the
assets and liabilities of the acquired entities are recorded at
their estimated fair values at the acquisition date. Goodwill
represents the excess of the purchase price over the fair value
of net assets, including the amount assigned to identifiable
intangible assets. Given the time it takes to obtain pertinent
information to finalize the acquired companys balance
sheet, it may be several quarters before we are able to finalize
those initial fair value estimates. Accordingly, it is not
uncommon for the initial estimates to be subsequently revised.
The results of operations of acquired businesses are included in
the Consolidated Financial Statements from the acquisition date.
Identifiable intangible assets with finite lives are amortized
over their estimated useful lives. They are generally amortized
on a non-straight-line approach based on the associated
projected cash flows in order to match the amortization pattern
to the pattern in which the economic benefits of the assets are
expected to be consumed. They are reviewed for impairment if
indicators of potential impairment exist. Goodwill and
indefinite lived intangibles assets are tested for impairment on
an annual basis in the second fiscal quarter, or sooner if an
indicator of impairment occurs.
42
Warranty We record warranty liabilities at
the time of sale for the estimated costs that may be incurred
under the terms of the limited warranty. The specific warranty
terms and conditions vary depending upon the product sold and
country in which we do business, but generally include technical
support, parts, and labor over a period ranging from one to
three years. Factors that affect our warranty liability include
the number of installed units currently under warranty,
historical and anticipated rates of warranty claims on those
units, and cost per claim to satisfy our warranty obligation.
The anticipated rate of warranty claims is the primary factor
impacting our estimated warranty obligation. The other factors
are less significant due to the fact that the average remaining
aggregate warranty period of the covered installed base is
approximately 20 months, repair parts are generally already
in stock or available at pre-determined prices, and labor rates
are generally arranged at pre-established amounts with service
providers. Warranty claims are reasonably predictable based on
historical experience of failure rates. If actual results differ
from our estimates, we revise our estimated warranty liability
to reflect such changes. Each quarter, we reevaluate our
estimates to assess the adequacy of the recorded warranty
liabilities and adjust the amounts as necessary.
Income Taxes We calculate a provision for
income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized by
identifying the temporary differences arising from the different
treatment of items for tax and accounting purposes. In
determining the future tax consequences of events that have been
recognized in our financial statements or tax returns, judgment
is required. Differences between the anticipated and actual
outcomes of these future tax consequences could have a material
impact on our consolidated results of operations or financial
position.
Stock-Based Compensation Effective
February 4, 2006, we adopted SFAS 123(R) using the
modified prospective transition method which does not require
revising the presentation in prior periods for stock-based
compensation. Under this transition method, stock-based
compensation expense for Fiscal 2008 and Fiscal 2007 includes
compensation expense for all stock-based compensation awards
granted prior to February 4, 2006, but not yet vested at
February 3, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Stock-based
compensation expense for all stock-based compensation awards
granted after February 3, 2006 is based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123(R). We recognize this compensation expense net of
an estimated forfeiture rate over the requisite service period
of the award, which is generally the vesting term of
three-to-five years for stock options and three-to-five years
for restricted stock awards. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107)
regarding the SECs interpretation of SFAS 123(R) and
the valuation of share-based payments for public companies. We
have applied the provisions of SAB 107 in our adoption of
SFAS 123(R).
SFAS 123(R) requires the use of a valuation model to
calculate the fair value of stock option awards. We have elected
to use the Black-Scholes option pricing model, which
incorporates various assumptions, including volatility, expected
term, and risk-free interest rates. The volatility is based on a
blend of implied and historical volatility of our common stock
over the most recent period commensurate with the estimated
expected term of our stock options. We use this blend of implied
and historical volatility, as well as other economic data,
because we believe such volatility is more representative of
prospective trends. The expected term of an award is based on
historical experience and on the terms and conditions of the
stock awards granted to employees. The dividend yield of zero is
based on the fact that we have never paid cash dividends and
have no present intention to pay cash dividends.
The cost of restricted stock awards is determined using the fair
market value of our common stock on the date of grant.
Prior to the adoption of SFAS 123(R), we measured
compensation expense for our employee stock-based compensation
plan using the intrinsic value method prescribed by APB 25. We
applied the disclosure provisions of SFAS 123 such that the
fair value of employee stock-based compensation was disclosed in
the notes to our consolidated financial statements. Under APB
25, when the exercise price of our employee stock options
equaled the market price of the underlying stock at the date of
the grant, no compensation expense was recognized.
Loss Contingencies We are subject to the
possibility of various losses arising in the ordinary course of
business. We consider the likelihood of loss or impairment of an
asset or the incurrence of a liability, as well as our ability
to reasonably estimate the amount of loss, in determining loss
contingencies. An estimated loss contingency is accrued
43
when it is probable that an asset has been impaired or a
liability has been incurred and the amount of loss can be
reasonably estimated. We regularly evaluate current information
available to us to determine whether such accruals should be
adjusted and whether new accruals are required. Third parties
have in the past and may in the future assert claims or initiate
litigation related to exclusive patent, copyright, and other
intellectual property rights to technologies and related
standards that are relevant to us. If any infringement or other
intellectual property claim made against us by any third party
is successful, or if we fail to develop non-infringing
technology or license the proprietary rights on commercially
reasonable terms and conditions, our business, operating
results, and financial condition could be materially and
adversely affected.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS 157, which defines
fair value, provides a framework for measuring fair value, and
expands the disclosures required for assets and liabilities
measured at fair value. SFAS 157 applies to existing
accounting pronouncements that require fair value measurements;
it does not require any new fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and is required to be adopted by us
beginning in the first quarter of Fiscal 2009. We are currently
evaluating the impact that SFAS 157 may have on our results
of operations, financial position, and cash flows, and we do not
expect the impact to be material.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which provides companies with
an option to report selected financial assets and liabilities at
fair value with the changes in fair value recognized in earnings
at each subsequent reporting date. SFAS 159 provides an
opportunity to mitigate potential volatility in earnings caused
by measuring related assets and liabilities differently, and it
may reduce the need for applying complex hedge accounting
provisions. If elected, SFAS 159 is effective for fiscal
years beginning after November 15, 2007, which is our
Fiscal 2009. We are currently evaluating the impact that this
statement may have on our results of operations and financial
position and have yet to make a decision on the elective
adoption of SFAS 159.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)).
SFAS 141(R) requires that the acquisition method of
accounting be applied to a broader set of business combinations
and establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill
acquired. SFAS 141(R) also establishes the disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141(R)
is effective for fiscal years beginning after December 15,
2008 and is required to be adopted by us beginning in the first
quarter of Fiscal 2010. We are currently evaluating the impact
that SFAS 141(R) may have on our results of operations,
financial position, and cash flows.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that the
noncontrolling interest in the equity of a subsidiary be
accounted for and reported as equity, provides revised guidance
on the treatment of net income and losses attributable to the
noncontrolling interest and changes in ownership interests in a
subsidiary, and requires additional disclosures that identify
and distinguish between the interests of the controlling and
noncontrolling owners. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008 and is required to be adopted by us
beginning in the first quarter of Fiscal 2010. We do not expect
SFAS 160 to have an impact on our results of operations,
financial position, and cash flows.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Response to this item is included in
Part II Item 7
Managements Discussion and Analysis of Financial Condition
and Results of Operations Market Risk and is
incorporated herein by reference.
44
|
|
ITEM 8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Financial Statements:
|
|
|
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
Financial Statement Schedule:
|
|
|
|
|
|
|
|
100
|
|
All other schedules are omitted because they are not applicable.
|
|
|
|
|
45
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Dell Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Dell Inc. and its subsidiaries
(Company) at February 1, 2008 and
February 2, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
February 1, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
February 1, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements and the financial statement
schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in the
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Companys internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 1, the Company changed the manner in
which it accounts for uncertain tax positions in Fiscal 2008 and
the manner in which it accounts for stock-based compensation in
Fiscal 2007. As discussed in Note 6, the Company changed
the manner in which it accounts for certain hybrid financial
instruments in Fiscal 2008.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Austin, Texas
March 31, 2008
46
DELL
INC.
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
February 2,
|
|
|
2008
|
|
2007
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,764
|
|
|
$
|
9,546
|
|
Short-term investments
|
|
|
208
|
|
|
|
752
|
|
Accounts receivable, net of allowance
|
|
|
5,961
|
|
|
|
4,622
|
|
Financing receivables, net of allowance
|
|
|
1,732
|
|
|
|
1,530
|
|
Inventories, net of allowance
|
|
|
1,180
|
|
|
|
660
|
|
Other
|
|
|
3,035
|
|
|
|
2,829
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
19,880
|
|
|
|
19,939
|
|
Property, plant, and equipment, net of depreciation
|
|
|
2,668
|
|
|
|
2,409
|
|
Investments
|
|
|
1,560
|
|
|
|
2,147
|
|
Long-term financing receivables, net of allowance
|
|
|
407
|
|
|
|
323
|
|
Goodwill
|
|
|
1,648
|
|
|
|
110
|
|
Intangible assets, net of amortization
|
|
|
780
|
|
|
|
45
|
|
Other non-current assets
|
|
|
618
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
27,561
|
|
|
$
|
25,635
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
225
|
|
|
$
|
188
|
|
Accounts payable
|
|
|
11,492
|
|
|
|
10,430
|
|
Accrued and other
|
|
|
4,323
|
|
|
|
5,141
|
|
Short-term deferred service revenue
|
|
|
2,486
|
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
18,526
|
|
|
|
17,791
|
|
Long-term debt
|
|
|
362
|
|
|
|
569
|
|
Long-term deferred service revenue
|
|
|
2,774
|
|
|
|
2,189
|
|
Other non-current liabilities
|
|
|
2,070
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,732
|
|
|
|
21,196
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common stock and capital in excess of $.01 par
value; shares issued and outstanding: 4 and 5, respectively
(Note 4)
|
|
|
94
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock and capital in excess of $.01 par value;
shares issued and outstanding: none
|
|
|
-
|
|
|
|
-
|
|
Common stock and capital in excess of $.01 par value;
shares authorized: 7,000; shares issued: 3,320 and 3,307,
respectively; shares outstanding: 2,060 and 2,226, respectively
|
|
|
10,589
|
|
|
|
10,107
|
|
Treasury stock at cost: 785 and 606 shares, respectively
|
|
|
(25,037
|
)
|
|
|
(21,033
|
)
|
Retained earnings
|
|
|
18,199
|
|
|
|
15,282
|
|
Accumulated other comprehensive loss
|
|
|
(16
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
3,735
|
|
|
|
4,328
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
27,561
|
|
|
$
|
25,635
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
DELL
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3
|
|
|
2008
|
|
2007
|
|
2006
|
|
Net revenue
|
|
$
|
61,133
|
|
$
|
57,420
|
|
$
|
55,788
|
Cost of net
revenue(1)
|
|
|
49,462
|
|
|
47,904
|
|
|
45,897
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
11,671
|
|
|
9,516
|
|
|
9,891
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general, and
administrative(1)
|
|
|
7,538
|
|
|
5,948
|
|
|
5,051
|
In-process research and development
|
|
|
83
|
|
|
-
|
|
|
-
|
Research, development, and
engineering(1)
|
|
|
610
|
|
|
498
|
|
|
458
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,231
|
|
|
6,446
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,440
|
|
|
3,070
|
|
|
4,382
|
Investment and other income, net
|
|
|
387
|
|
|
275
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,827
|
|
|
3,345
|
|
|
4,608
|
Income tax provision
|
|
|
880
|
|
|
762
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,947
|
|
$
|
2,583
|
|
$
|
3,602
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
$
|
1.15
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.31
|
|
$
|
1.14
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,223
|
|
|
2,255
|
|
|
2,403
|
Diluted
|
|
|
2,247
|
|
|
2,271
|
|
|
2,449
|
|
|
|
(1)
|
|
Cost of net revenue and operating
expenses for the fiscal years ended February 1, 2008 and
February 2, 2007, include stock-based compensation expense
pursuant to Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment,
(SFAS 123(R)). See Note 5 of Notes to
Consolidated Financial Statements for additional information.
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
DELL
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,947
|
|
|
$
|
2,583
|
|
|
$
|
3,602
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
607
|
|
|
|
471
|
|
|
|
394
|
|
Stock-based compensation
|
|
|
329
|
|
|
|
368
|
|
|
|
17
|
|
In-process research and development charges
|
|
|
83
|
|
|
|
-
|
|
|
|
-
|
|
Excess tax benefits from stock-based compensation
|
|
|
(12
|
)
|
|
|
(80
|
)
|
|
|
-
|
|
Tax benefits from employee stock plans
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies
|
|
|
30
|
|
|
|
37
|
|
|
|
(3
|
)
|
Other
|
|
|
133
|
|
|
|
61
|
|
|
|
157
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating working capital
|
|
|
(519
|
)
|
|
|
397
|
|
|
|
(53
|
)
|
Non-current assets and liabilities
|
|
|
351
|
|
|
|
132
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,949
|
|
|
|
3,969
|
|
|
|
4,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(2,394
|
)
|
|
|
(8,343
|
)
|
|
|
(6,796
|
)
|
Maturities and sales
|
|
|
3,679
|
|
|
|
10,320
|
|
|
|
11,692
|
|
Capital expenditures
|
|
|
(831
|
)
|
|
|
(896
|
)
|
|
|
(747
|
)
|
Acquisition of business, net of cash received
|
|
|
(2,217
|
)
|
|
|
(118
|
)
|
|
|
-
|
|
Proceeds from sale of building
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,763
|
)
|
|
|
1,003
|
|
|
|
4,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(4,004
|
)
|
|
|
(3,026
|
)
|
|
|
(7,249
|
)
|
Issuance of common stock under employee plans
|
|
|
136
|
|
|
|
314
|
|
|
|
1,051
|
|
Excess tax benefits from stock-based compensation
|
|
|
12
|
|
|
|
80
|
|
|
|
-
|
|
(Repayment) issuance of commercial paper, net
|
|
|
(100
|
)
|
|
|
100
|
|
|
|
-
|
|
Repayments of borrowings
|
|
|
(165
|
)
|
|
|
(63
|
)
|
|
|
(81
|
)
|
Proceeds from borrowings
|
|
|
66
|
|
|
|
52
|
|
|
|
55
|
|
Other
|
|
|
(65
|
)
|
|
|
(8
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,120
|
)
|
|
|
(2,551
|
)
|
|
|
(6,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
152
|
|
|
|
71
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(1,782
|
)
|
|
|
2,492
|
|
|
|
2,575
|
|
Cash and cash equivalents at beginning of year
|
|
|
9,546
|
|
|
|
7,054
|
|
|
|
4,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
7,764
|
|
|
$
|
9,546
|
|
|
$
|
7,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
DELL
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Capital in Excess of
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Par Value
|
|
Treasury Sock
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Issued Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Retained Earnings
|
|
Loss
|
|
Other
|
|
Total
|
|
Balances at January 28, 2005
|
|
|
2,769
|
|
$
|
8,195
|
|
|
|
284
|
|
$
|
(10,758
|
)
|
|
$
|
9,097
|
|
|
$
|
(78
|
)
|
|
$
|
(44
|
)
|
|
$
|
6,412
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
3,602
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,602
|
|
Change in net unrealized loss on investments, net of taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
(24
|
)
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(8
|
)
|
Change in net unrealized loss on derivative instruments, net of
taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,579
|
|
Stock issuances under employee plans, including tax benefits
|
|
|
49
|
|
|
1,308
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,308
|
|
Repurchases
|
|
|
-
|
|
|
-
|
|
|
|
204
|
|
|
(7,249
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,249
|
)
|
Other
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 3, 2006
|
|
|
2,818
|
|
$
|
9,503
|
|
|
|
488
|
|
$
|
(18,007
|
)
|
|
$
|
12,699
|
|
|
$
|
(101
|
)
|
|
$
|
(47
|
)
|
|
$
|
4,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
2,583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,583
|
|
Change in net unrealized loss on investments, net of taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
31
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(11
|
)
|
Change in net unrealized gain on derivative instruments, net of
taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
Valuation of retained interests in securitized assets, net of
taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,656
|
|
Stock issuances under employee
plans(b)
|
|
|
14
|
|
|
196
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196
|
|
Repurchases
|
|
|
-
|
|
|
-
|
|
|
|
118
|
|
|
(3,026
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,026
|
)
|
Stock-based compensation expense under SFAS 123(R)
|
|
|
-
|
|
|
368
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
368
|
|
Tax benefit from employee stock plans
|
|
|
-
|
|
|
56
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
Other and shares issued to subsidiaries
|
|
|
475
|
|
|
(16
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at February 2, 2007
|
|
|
3,307
|
|
$
|
10,107
|
|
|
|
606
|
|
$
|
(21,033
|
)
|
|
$
|
15,282
|
|
|
$
|
(28
|
)
|
|
$
|
-
|
|
|
$
|
4,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
2,947
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,947
|
|
Impact of adoption of SFAS 155
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
29
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
6
|
|
Change in net unrealized gain on investments, net of taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
56
|
|
Foreign currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
Change in net unrealized loss on derivative instruments, net of
taxes
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,988
|
|
Impact of adoption of FIN 48
|
|
|
-
|
|
|
(3
|
)
|
|
|
-
|
|
|
-
|
|
|
|
(59
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(62
|
)
|
Stock issuances under employee
plans(a)
|
|
|
13
|
|
|
153
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
Repurchases
|
|
|
-
|
|
|
-
|
|
|
|
179
|
|
|
(4,004
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,004
|
)
|
Stock-based compensation expense under SFAS 123(R)
|
|
|
-
|
|
|
329
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
329
|
|
Tax benefit from employee stock plans
|
|
|
-
|
|
|
3
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 1, 2008
|
|
|
3,320
|
|
$
|
10,589
|
|
|
|
785
|
|
$
|
(25,037
|
)
|
|
$
|
18,199
|
|
|
$
|
(16
|
)
|
|
$
|
-
|
|
|
$
|
3,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes 1 million shares and
$17 million related to redeemable common stock. See
Note 4 of Notes to Consolidated Financial Statements.
|
|
(b)
|
|
Excludes 5 million shares and
$111 million related to redeemable common stock. See
Note 4 of Notes to Consolidated Financial Statements.
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
DELL
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Description of Business Dell Inc., a Delaware
corporation (both individually and together with its
consolidated subsidiaries, Dell), offers a broad
range of product categories, including desktop PCs, servers and
networking products, storage, mobility products, software and
peripherals, and services. Dell sells its products and services
directly to customers through dedicated sales representatives,
telephone-based sales, and online at www.dell.com, and through a
variety of indirect sales channels. Dells customers
include large corporate, government, healthcare, and education
accounts, as well as small-to-medium businesses and individual
consumers.
Fiscal Year Dells fiscal year is the
52- or 53-week period ending on the Friday nearest
January 31. The fiscal years ending February 1, 2008
and February 2, 2007 included 52 weeks, and the fiscal
year ending February 3, 2006 included 53 weeks.
Principles of Consolidation The accompanying
consolidated financial statements include the accounts of Dell
Inc. and its wholly-owned subsidiaries and have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). All significant
intercompany transactions and balances have been eliminated.
Dell was formerly a partner in Dell Financial Services L.P.
(DFS), a joint venture with CIT Group Inc.
(CIT). Dell purchased the remaining 30% interest in
DFS from CIT effective December 31, 2007; therefore, DFS is
a wholly-owned subsidiary at February 1, 2008. DFS
financial results have previously been consolidated by Dell in
accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46R
(FIN 46R), as Dell was the primary beneficiary.
DFS allows Dell to provide its customers with various financing
alternatives. See Note 6 of Notes to Consolidated Financial
Statements for additional information.
Use of Estimates The preparation of financial
statements in accordance with GAAP requires the use of
managements estimates. These estimates are subjective in
nature and involve judgments that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at fiscal year-end, and the reported amounts of
revenues and expenses during the fiscal year. Actual results
could differ from those estimates.
Cash and Cash Equivalents All highly liquid
investments, including credit card receivables, with original
maturities of three months or less at date of purchase are
carried at cost, which approximates fair value, and are
considered to be cash equivalents. All other investments not
considered to be cash equivalents are separately categorized as
investments.
Investments Dells investments in debt
securities and publicly traded equity securities are classified
as available-for-sale and are reported at fair value (based on
quoted prices and market prices) using the specific
identification method. Unrealized gains and losses, net of
taxes, are reported as a component of stockholders equity.
Realized gains and losses on investments are included in
investment and other income, net when realized. All other
investments are initially recorded at cost. Any impairment loss
to reduce an investments carrying amount to its fair
market value is recognized in income when a decline in the fair
market value of an individual security below its cost or
carrying value is determined to be other than temporary.
Financing Receivables Financing receivables
consist of customer receivables, residual interest and retained
interest in securitized receivables. Customer receivables
include fixed-term loans and leases and revolving loans
resulting from the sale of Dell products and services. Financing
receivables are presented net of the allowance for losses. See
Note 6 of Notes to Consolidated Financial Statements for
additional information.
Asset Securitization Dell sells certain
financing receivables to unconsolidated qualifying special
purpose entities in securitization transactions. These
receivables are removed from the Consolidated Statement of
Financial Position at the time they are sold in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities a
Replacement of SFAS No. 125
(SFAS 140). Receivables are considered sold
when the receivables are transferred beyond the reach
51
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of Dells creditors, the transferee has the right to pledge
or exchange the assets, and Dell has surrendered control over
the rights and obligations of the receivables. Gains and losses
from the sale of fixed-term loans and leases and revolving loans
are recognized in the period the sale occurs, based upon the
relative fair value of the assets sold and the remaining
retained interests. Subsequent to the sale, retained interest
estimates are periodically updated based upon current
information and events to determine the current fair value. In
estimating the value of retained interest, Dell makes a variety
of financial assumptions, including pool credit losses, payment
rates, and discount rates. These assumptions are supported by
both Dells historical experience and anticipated trends
relative to the particular receivable pool.
Allowance for Financing Receivables Losses
Dell recognizes an allowance for losses on financing receivables
in an amount equal to the probable future losses net of
recoveries. The allowance for losses is determined based on a
variety of factors, including historical experience, past due
receivables, receivable type, and risk composition. Financing
receivables are charged to the allowance at the earlier of when
an account is deemed to be uncollectible or when the account is
180 days delinquent. Recoveries on receivables previously
charged off as uncollectible are recorded to the allowance for
doubtful accounts. See Note 6 of Notes to Consolidated
Financial Statements for additional information.
Inventories Inventories are stated at the
lower of cost or market with cost being determined on a
first-in,
first-out basis.
Property, Plant, and Equipment Property,
plant, and equipment are carried at depreciated cost.
Depreciation is provided using the straight-line method over the
estimated economic lives of the assets, which range from ten to
thirty years for buildings and two to five years for all other
assets. Leasehold improvements are amortized over the shorter of
five years or the lease term. Gains or losses related to
retirements or disposition of fixed assets are recognized in the
period incurred. Dell performs reviews for the impairment of
fixed assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Dell capitalizes eligible internal-use software
development costs incurred subsequent to the completion of the
preliminary project stage. Development costs are amortized over
the shorter of the expected useful life of the software or five
years.
Impairment of Long-Lived Assets In
accordance with the provisions SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, Dell reviews long-lived assets for impairment
when circumstances indicate the carrying amount of an asset may
not be recoverable based on the undiscounted future cash flows
of the asset. If the carrying amount of the asset is determined
not to be recoverable, a write-down to fair value is recorded.
Fair values are determined based on quoted market values,
discounted cash flows, or external appraisals, as applicable.
Dell reviews long-lived assets for impairment at the individual
asset or the asset group level for which the lowest level of
independent cash flows can be identified. During Fiscal 2008 and
2007, there were no significant impairments to long-lived assets.
Business Combinations and Intangible Assets Including
Goodwill Dell accounts for business combinations
using the purchase method of accounting and accordingly, the
assets and liabilities of the acquired entities are recorded at
their estimated fair values at the acquisition date. Goodwill
represents the excess of the purchase price over the fair value
of net assets, including the amount assigned to identifiable
intangible assets. Given the time it takes to obtain pertinent
information to finalize the fair value of the acquired assets
and liabilities, it may be several quarters before Dell is able
to finalize those initial fair value estimates. Accordingly, it
is not uncommon for the initial estimates to be subsequently
revised. The results of operations of acquired businesses are
included in the Consolidated Financial Statements from the
acquisition date.
Identifiable intangible assets with finite lives are amortized
over their estimated useful lives. They are generally amortized
on a non-straight line approach based on the associated
projected cash flows in order to match the amortization pattern
to the pattern in which the economic benefits of the assets are
expected to be consumed. They are reviewed for impairment if
indicators of potential impairment exist. Goodwill and
indefinite lived intangible
52
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assets are tested for impairment on an annual basis in the
second fiscal quarter, or sooner if an indicator of impairment
occurs.
Foreign Currency Translation The majority of
Dells international sales are made by international
subsidiaries, most of which have the U.S. dollar as their
functional currency. Dells subsidiaries that do not have
the U.S. dollar as their functional currency translate
assets and liabilities at current rates of exchange in effect at
the balance sheet date. Revenue and expenses from these
international subsidiaries are translated using the monthly
average exchange rates in effect for the period in which the
items occur. The resulting gains and losses from these foreign
currency translation adjustments totaled a $16 million
loss, $33 million loss, and $22 million loss at
February 1, 2008, February 2, 2007, and
February 3, 2006, respectively, and are included as a
component of accumulated other comprehensive income (loss) in
stockholders equity.
Local currency transactions of international subsidiaries that
have the U.S. dollar as the functional currency are
remeasured into U.S. dollars using current rates of
exchange for monetary assets and liabilities and historical
rates of exchange for nonmonetary assets and liabilities. Gains
and losses from remeasurement of monetary assets and liabilities
are included in investment and other income, net.
Hedging Instruments Dell uses derivative
financial instruments, primarily forwards, options, and swaps to
hedge certain foreign currency and interest rate exposures. Dell
also uses other derivative instruments not designated as hedges
such as forwards to hedge foreign currency balance sheet
exposures. Dell does not use derivatives for speculative
purposes.
Dell applies SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,
(SFAS 133) as amended, which establishes
accounting and reporting standards for derivative instruments
and hedging activities. SFAS 133 requires Dell to recognize
all derivatives as either assets or liabilities in its
Consolidated Statements of Financial Position and measure those
instruments at fair value. See Note 2 of Notes to
Consolidated Financial Statements for a full description of
Dells derivative financial instrument activities and
related accounting policies.
Treasury Stock Effective with the beginning
of the second quarter of Fiscal 2002, Dell began holding
repurchased shares of its common stock as treasury stock. Prior
to that date, Dell retired all such repurchased shares, which
were recorded as a reduction to retained earnings. Dell accounts
for treasury stock under the cost method and includes treasury
stock as a component of stockholders equity.
Revenue Recognition Dells revenue
recognition policy is in accordance with the requirements of
Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition, (SAB 104), Emerging
Issues Task Force
(EITF) 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, AICPA Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition,
EITF 01-09,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products)
(EITF 01-09)
and other applicable revenue recognition guidance and
interpretations. Net revenues include sales of hardware,
software and peripherals, and services (including extended
service contracts and professional services). Dell recognizes
revenue for these products when it is realized or realizable and
earned. Revenue is considered realized and earned when:
|
|
|
|
|
persuasive evidence of an arrangement exists;
|
|
|
delivery has occurred or services have been rendered;
|
|
|
Dells fee to its customer is fixed or determinable; and
|
|
|
collection of the resulting receivable is reasonably assured.
|
Revenue from the sale of products are recognized when title and
risk of loss passes to the customer. Delivery is considered
complete when products have been shipped to Dells customer
or services have been rendered, title and risk of loss has
transferred to the customer, and customer acceptance has been
satisfied through obtaining acceptance from the customer, the
acceptance provision lapses, or Dell has evidence that the
acceptance provisions have been satisfied.
53
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During Fiscal 2008, Dell began selling its products through
retailers. Sales to Dells retail customers are generally
made under agreements allowing for limited rights of return,
price protection, rebates, and marketing development funds. Dell
has generally limited these rights through contractual caps
within Dells agreements with its retailers. Dells
policy on sales to retailers is to recognize revenue and related
costs of revenue, net of returns and price adjustments, which
are estimated using the contractual caps specified in the sales
arrangement. To the extent return rights or price adjustments
are not limited by a contractual cap, the revenue and related
cost are deferred until the product has been sold by the
retailer, the rights expire, or a reliable estimate of such
amounts can be made. Dell records estimated reductions to
revenue or an expense for retail customer programs at the time
revenue is recognized. Dells customer programs primarily
involve rebates, which are designed to serve as sales incentives
to resellers of Dell products and marketing development funds,
which represent monies paid to retailers that are generally
earmarked for market segment development and expansion and are
designed to support Dell retail partners activities while
also promoting Dell products. Dell accounts for customer
programs in accordance with
EITF 01-09.
Dell sells its products and services either separately or as
part of a multiple-element arrangement. Dell allocates revenue
from multiple-element arrangements to the elements based on the
relative fair value of each element, which is generally based on
the relative sales price of each element when sold separately.
The allocation of fair value for a multiple-element arrangement
involving software is based on vendor specific objective
evidence (VSOE), or in the absence of VSOE for
delivered elements, the residual method. Under the residual
method, Dell allocates the residual amount of revenue from the
arrangement to software licenses at the inception of the license
term when VSOE for all undelivered elements, such as Post
Contract Customer Support (PCS), exists and all
other revenue recognition criteria have been satisfied. In the
absence of VSOE for undelivered elements, revenue is deferred
and subsequently recognized over the term of the arrangement.
For sales of extended warranties with a separate contract price,
Dell defers revenue equal to the separately stated price.
Revenue associated with undelivered elements is deferred and
recorded when delivery occurs. Product revenue is recognized,
net of an allowance for estimated returns, when both title and
risk of loss transfer to the customer, provided that no
significant obligations remain. Revenue from extended warranty
and service contracts, for which Dell is obligated to perform,
is recorded as deferred revenue and subsequently recognized over
the term of the contract or when the service is completed.
Revenue from sales of third-party extended warranty and service
contracts or other products or software PCS, for which Dell is
not obligated to perform, and for which Dell does not meet the
criteria for gross revenue recognition under
EITF 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, is recognized on a net basis. All other revenue is
recognized on a gross basis.
Dell defers the cost of shipped products awaiting revenue
recognition until revenue is recognized. These deferred costs
totaled $519 million and $424 million at
February 1, 2008 and February 2, 2007, respectively,
and are included in other current assets on Dells
Consolidated Statement of Financial Position.
Dell records revenue from the sale of equipment under sales-type
leases as product revenue at the inception of the lease.
Sales-type leases also produce financing income, which Dell
recognizes at consistent rates of return over the lease term.
Customer revolving loan financing income is recognized when
billed to the customer.
Dell reports revenue net of any revenue-based taxes assessed by
governmental authorities that are imposed on and concurrent with
specific revenue-producing transactions.
Warranty Dell records warranty liabilities at
the time of sale for the estimated costs that may be incurred
under its limited warranty. The specific warranty terms and
conditions vary depending upon the product sold and country in
which Dell does business, but generally includes technical
support, parts, and labor over a period ranging from one to
three years. Factors that affect Dells warranty liability
include the number of installed units currently under warranty,
historical and anticipated rates of warranty claims on those
units, and cost per claim to satisfy Dells warranty
obligation. The anticipated rate of warranty claims is the
primary factor impacting the estimated warranty obligation. The
other factors are less significant due to the fact that the
average remaining aggregate warranty period of the covered
installed base is approximately 20 months, repair parts are
generally already in stock or available at
54
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pre-determined prices, and labor rates are generally arranged at
pre-established amounts with service providers. Warranty claims
are relatively predictable based on historical experience of
failure rates. If actual results differ from the estimates, Dell
revises its estimated warranty liability. Each quarter, Dell
reevaluates its estimates to assess the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary.
Vendor Rebates Dell may receive consideration
from vendors in the normal course of business. Certain of these
funds are rebates of purchase price paid and others are related
to reimbursement of costs incurred by Dell to sell the
vendors products. Dells policy for accounting for
these funds is in accordance with
EITF 02-16,
Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor. The funds are
recognized as a reduction of cost of goods sold and inventory if
the funds are a reduction of the price of the vendors
products. If the consideration is a reimbursement of costs
incurred by Dell to sell or develop the vendors products,
then the consideration is classified as a reduction of that cost
in the income statement, most often operating expenses. In order
to be recognized as a reduction of operating expenses, the
reimbursement must be for a specific, incremental, identifiable
cost incurred by Dell in selling or developing the vendors
products or services.
Loss Contingencies Dell is subject to the
possibility of various losses arising in the ordinary course of
business. Dell considers the likelihood of loss or impairment of
an asset or the incurrence of a liability, as well as
Dells ability to reasonably estimate the amount of loss,
in determining loss contingencies. An estimated loss contingency
is accrued when it is probable that an asset has been impaired
or a liability has been incurred and the amount of loss can be
reasonably estimated. Dell regularly evaluates current
information available to determine whether such accruals should
be adjusted and whether new accruals are required. Third parties
have in the past and may in the future assert claims or initiate
litigation related to exclusive patent, copyright, and other
intellectual property rights to technologies and related
standards that are relevant to Dell. If any infringement or
other intellectual property claim made against Dell by any third
party is successful, or if Dell fails to develop non-infringing
technology or license the proprietary rights on commercially
reasonable terms and conditions, Dells business, operating
results, and financial condition could be materially and
adversely affected.
Shipping Costs Dells shipping and
handling costs are included in cost of sales in the accompanying
Consolidated Statements of Income for all periods presented.
Selling, General, and Administrative Selling
expenses include items such as sales commissions, marketing and
advertising costs, and contractor services. Advertising costs
are expensed as incurred and were $943 million,
$836 million, and $773 million, during Fiscal 2008,
2007, and 2006 respectively. General and administrative expenses
include items for Dells administrative functions, such as
Finance, Legal, Human Resources, and Information Technology
support. These functions include costs for items such as
salaries, maintenance and supplies, insurance, depreciation
expense, and allowance for doubtful accounts.
Research, Development, and Engineering Costs
Research, development, and engineering costs are expensed as
incurred, in accordance with SFAS 2, Accounting for
Research and Development Costs. Research, development, and
engineering expenses primarily include payroll and headcount
related costs, contractor fees, infrastructure costs, and
administrative expenses directly related to research and
development support.
In Process Research and Development
(IPR&D) IPR&D represents
the fair value of the technology acquired in a business
combination where technological feasibility has not been
established and no future alternative uses exist. IPR&D is
expensed immediately upon completion of the associated
acquisition.
Website Development Costs Dell expenses, as
incurred, the costs of maintenance and minor enhancements to the
features and functionality of its websites.
Income Taxes Deferred tax assets and
liabilities are recorded based on the difference between the
financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. Dell calculates a provision
for income taxes using the asset and liability method, under
which deferred tax assets and liabilities are recognized by
identifying the temporary differences arising from the
55
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
different treatment of items for tax and accounting purposes. In
determining the future tax consequences of events that have been
recognized in the financial statements or tax returns, judgment
is required. Differences between the anticipated and actual
outcomes of these future tax consequences and changes in enacted
tax rates could have a material impact on Dells
consolidated results of operations or financial position.
Comprehensive Income Dells
comprehensive income is comprised of net income, unrealized
gains and losses on marketable securities classified as
available-for-sale, unrealized gains and losses related to the
change in valuation of retained interests in securitized assets,
foreign currency translation adjustments, and unrealized gains
and losses on derivative financial instruments related to
foreign currency hedging. Upon the adoption of
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB
Statements No. 133 and 140,
(SFAS 155), beginning the first quarter of
Fiscal 2008, all gains and losses in valuation of retained
interests in securitized assets are recognized in income
immediately and no longer included as a component of accumulated
other comprehensive income (loss).
Earnings Per Common Share Basic earnings per
share is based on the weighted-average effect of all common
shares issued and outstanding, and is calculated by dividing net
income by the weighted-average shares outstanding during the
period. Diluted earnings per share is calculated by dividing net
income by the weighted-average number of common shares used in
the basic earnings per share calculation plus the number of
common shares that would be issued assuming exercise or
conversion of all potentially dilutive common shares
outstanding. Dell excludes equity instruments from the
calculation of diluted earnings per share if the effect of
including such instruments is antidilutive. Accordingly, certain
stock-based incentive awards have been excluded from the
calculation of diluted earnings per share totaling
230 million, 268 million, and 127 million, shares
during Fiscal 2008, 2007, and 2006 respectively.
In December 2006, Dell modified the organizational structure of
certain subsidiaries to achieve more integrated global
operations and to provide various financial, operational, and
tax efficiencies. In connection with this internal
restructuring, Dell issued 475 million shares of common
stock to a wholly-owned subsidiary. Pursuant to Accounting
Research Bulletin 51, Consolidated Financial Statements
(as amended), these shares are not considered to be
outstanding.
The following table sets forth the computation of basic and
diluted earnings per share for each of the past three fiscal
years:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,947
|
|
$
|
2,583
|
|
$
|
3,602
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,223
|
|
|
2,255
|
|
|
2,403
|
Effect of dilutive options, restricted stock units, restricted
stock, and other
|
|
|
24
|
|
|
16
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,247
|
|
|
2,271
|
|
|
2,449
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
$
|
1.15
|
|
$
|
1.50
|
Diluted
|
|
$
|
1.31
|
|
$
|
1.14
|
|
$
|
1.47
|
56
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation At February 1,
2008, Dell has stock-based compensation plans and an employee
stock purchase plan with outstanding stock or stock options;
however, Dell discontinued the employee stock purchase plan
effective February 2, 2008, as part of an overall
assessment of its benefits strategy.
Effective February 4, 2006, Dell adopted SFAS 123(R)
using the modified prospective transition method which does not
require revising the presentation in prior periods for
stock-based compensation. Under this transition method,
stock-based compensation expense for Fiscal 2008 and Fiscal 2007
includes compensation expense for all stock-based compensation
awards granted prior to February 4, 2006, but not yet
vested at February 3, 2006, based on the grant date fair
value estimated in accordance with the original provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Stock-based
compensation expense for all stock-based compensation awards
granted after February 3, 2006 is based on the grant-date
fair value estimated in accordance with the provisions of
SFAS 123(R). Dell recognizes this compensation expense net
of an estimated forfeiture rate over the requisite service
period of the award, which is generally the vesting term of
three to five years for stock options and restricted stock
awards. In March 2005, the United States Securities and Exchange
Commission (SEC) issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding
the SECs interpretation of SFAS 123(R) and the
valuation of share-based payments for public companies. Dell has
applied the provisions of SAB 107 in its adoption of
SFAS 123(R). See Note 5 of Notes to Consolidated
Financial Statements for further discussion of stock-based
compensation.
Prior to the adoption of SFAS 123(R), Dell measured
compensation expense for its employee stock-based compensation
plan using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Dell applied the
disclosure provisions of SFAS 123 such that the fair value
of employee stock-based compensation was disclosed in the notes
to its financial statements. Under APB 25, when the exercise
price of Dells employee stock options equaled the market
price of the underlying stock at the date of the grant, no
compensation expense was recognized.
Recently Issued Accounting Pronouncements In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (SFAS 157), which
defines fair value, provides a framework for measuring fair
value, and expands the disclosures required for assets and
liabilities measured at fair value. SFAS 157 applies to
existing accounting pronouncements that require fair value
measurements; it does not require any new fair value
measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and is required to be
adopted by Dell beginning in the first quarter of Fiscal 2009.
Management is currently evaluating the impact that SFAS 157
may have on Dells results of operations, financial
position, and cash flows and does not expect the impact to be
material.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which provides companies with
an option to report selected financial assets and liabilities at
fair value with the changes in fair value recognized in earnings
at each subsequent reporting date. SFAS 159 provides an
opportunity to mitigate potential volatility in earnings caused
by measuring related assets and liabilities differently, and it
may reduce the need for applying complex hedge accounting
provisions. If elected, SFAS 159 is effective for fiscal
years beginning after November 15, 2007, which is
Dells Fiscal 2009. Management is currently evaluating the
impact that this statement may have on Dells results of
operations and financial position and has yet to make a decision
on the elective adoption of SFAS 159.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)).
SFAS 141(R) requires that the acquisition method of
accounting be applied to a broader set of business combinations
and establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, any
noncontrolling interest in the acquiree, and the goodwill
acquired. SFAS 141(R) also establishes the disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141(R)
is effective for fiscal years beginning after December 15,
2008 and is required to be adopted by Dell beginning in the
first quarter of Fiscal 2010. Management is currently evaluating
the impact that SFAS 141(R) may have on Dells results
of operations, financial position, and cash flows.
57
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 requires that the
noncontrolling interest in the equity of a subsidiary be
accounted for and reported as equity, provides revised guidance
on the treatment of net income and losses attributable to the
noncontrolling interest and changes in ownership interests in a
subsidiary and requires additional disclosures that identify and
distinguish between the interests of the controlling and
noncontrolling owners. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning
after December 15, 2008 and is required to be adopted by
Dell beginning in the first quarter of Fiscal 2010. Management
does not expect SFAS 160 to have an impact on Dells
results of operations, financial position, and cash flows.
|
|
NOTE 2
|
FINANCIAL
INSTRUMENTS
|
Disclosures
About Fair Values of Financial Instruments
The fair value of investments and related interest rate
derivative instruments has been estimated based upon quoted
rates and pricing models. The fair value of foreign currency
forward contracts has been estimated using market quoted rates
of foreign currencies at the applicable balance sheet date. The
estimated fair value of foreign currency purchased option
contracts is based on market quoted rates at the applicable
balance sheet date and the Black-Scholes option pricing model.
The estimates presented herein are not necessarily indicative of
the amounts that Dell could realize in a current market
exchange. Changes in assumptions could significantly affect the
estimates.
Cash and cash equivalents, accounts receivable, accounts
payable, and accrued and other liabilities are reflected in the
accompanying Consolidated Statements of Financial Position at
cost, which approximates fair value because of the short-term
maturity of these assets and liabilities.
See Note 6 of Notes to Consolidated Financial Statements
for a discussion on financing receivables and retained interest.
58
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments
The following table summarizes, by major security type, the fair
value and cost of Dells investments. All investments with
remaining maturities in excess of one year are recorded as
long-term investments in the accompanying Consolidated
Statements of Financial Position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2008
|
|
February 2, 2007
|
|
|
Fair
|
|
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Value
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
Value
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
|
(in millions)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
1,013
|
|
$
|
991
|
|
$
|
23
|
|
$
|
(1
|
)
|
|
$
|
1,424
|
|
$
|
1,449
|
|
$
|
-
|
|
$
|
(25
|
)
|
U.S. corporate
|
|
|
571
|
|
|
569
|
|
|
10
|
|
|
(8
|
)
|
|
|
1,163
|
|
|
1,170
|
|
|
-
|
|
|
(7
|
)
|
International corporate
|
|
|
68
|
|
|
67
|
|
|
1
|
|
|
-
|
|
|
|
156
|
|
|
159
|
|
|
-
|
|
|
(3
|
)
|
State and municipal governments
|
|
|
5
|
|
|
5
|
|
|
-
|
|
|
-
|
|
|
|
41
|
|
|
41
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
1,657
|
|
|
1,632
|
|
|
34
|
|
|
(9
|
)
|
|
|
2,784
|
|
|
2,819
|
|
|
-
|
|
|
(35
|
)
|
Equity and other securities
|
|
|
111
|
|
|
111
|
|
|
-
|
|
|
-
|
|
|
|
115
|
|
|
109
|
|
|
6
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,768
|
|
$
|
1,743
|
|
$
|
34
|
|
$
|
(9
|
)
|
|
$
|
2,899
|
|
$
|
2,928
|
|
$
|
6
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
208
|
|
$
|
206
|
|
$
|
2
|
|
$
|
-
|
|
|
$
|
752
|
|
$
|
756
|
|
$
|
-
|
|
$
|
(4
|
)
|
Long-term
|
|
|
1,560
|
|
|
1,537
|
|
|
32
|
|
|
(9
|
)
|
|
|
2,147
|
|
|
2,172
|
|
|
6
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
1,768
|
|
$
|
1,743
|
|
$
|
34
|
|
$
|
(9
|
)
|
|
$
|
2,899
|
|
$
|
2,928
|
|
$
|
6
|
|
$
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of Dells portfolio is affected primarily by
interest rates more than the credit and liquidity issues
currently facing the capital markets. Dell attempts to mitigate
these risks by investing primarily in high credit quality
securities with AAA and AA ratings and short-term securities
with an A-1
rating, limiting the amount that can be invested in any single
issuer, and by investing in short to intermediate term
investments whose market value is less sensitive to interest
rate changes. As part of its cash and risk management processes,
Dell performs periodic evaluations of the credit standing of the
institutions in accordance with its investment policy.
Dells investments in debt securities have effective
maturities of less than five years. Management believes that no
significant concentration of credit risk for investments exists
for Dell.
As of February 1, 2008, Dell did not hold any auction rate
securities. At February 2, 2007, Dell held auction rate
securities that had a carrying value of $255 million. The
total carrying value of investments in asset-backed and
mortgage-backed debt securities was approximately
$550 million.
59
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes Dells debt securities that
had unrealized losses at February 1, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
12 Months or Greater
|
|
Total
|
|
|
Fair Value
|
|
Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
Fair Value
|
|
Unrealized Loss
|
|
|
(in millions)
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
|
$
|
29
|
|
$
|
(1
|
)
|
|
$
|
59
|
|
$
|
(0
|
)
|
|
$
|
88
|
|
$
|
(1
|
)
|
U.S. corporate
|
|
|
38
|
|
|
(8
|
)
|
|
|
27
|
|
|
(0
|
)
|
|
|
65
|
|
|
(8
|
)
|
International corporate
|
|
|
-
|
|
|
-
|
|
|
|
2
|
|
|
-
|
|
|
|
2
|
|
|
-
|
|
State and municipal governments
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
$
|
67
|
|
$
|
(9
|
)
|
|
$
|
88
|
|
$
|
(0
|
)
|
|
$
|
155
|
|
$
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 1, 2008, Dell had 40 debt securities that had
fair values below their carrying values for a period of less
than 12 months and 51 debt securities that had fair values
below their carrying values for a period of more than
12 months. The unrealized losses are due to changes in
interest rates and are expected to be recovered over the
contractual term of the instruments.
Dell periodically reviews its investment portfolio to determine
if any investment is other-than-temporarily impaired due to
changes in credit risk or other potential valuation concerns.
The unrealized loss of $9 million has been recorded in
other comprehensive income (loss), as Dell believes that the
investments are not other-than-temporarily impaired. While
certain available-for-sale securities have market values below
cost, Dell believes it is probable that the principal and
interest will be collected in accordance with the contractual
terms, and that the decline in the market value is exacerbated
by the overall credit concerns in the market. Factors considered
in determining whether a loss is other-than-temporary include
the length of time and extent to which fair value has been less
than the cost basis, the underlying collateral, agency ratings,
future cash flows, and Dells intent and ability to hold
the investment for a period of time sufficient to allow for any
anticipated recovery in fair value. Dells assessment that
an investment is not other-than-temporarily impaired could
change in the future due to new developments or changes in any
particular investment.
The fair value of Dells portfolio was based on quoted
market prices, which Dell currently believes are indicative of
fair value. Dell will continue to evaluate whether the inputs
are market observable as it implements SFAS 157.
The following table summarizes Dells realized gains and
losses on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Gains
|
|
$
|
17
|
|
|
$
|
9
|
|
|
$
|
13
|
|
Losses
|
|
|
(3
|
)
|
|
|
(14
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss)
|
|
$
|
14
|
|
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dell routinely enters into securities lending agreements with
financial institutions in order to enhance investment income.
Dell requires that the loaned securities be collateralized in
the form of cash or securities for values which generally exceed
the value of the loaned security. At February 1, 2008 and
February 2, 2007, there were no securities on loan.
60
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign
Currency Instruments
As part of its risk management strategy, Dell uses derivative
instruments, primarily forward contracts and options, to hedge
certain foreign currency exposures. Dells objective is to
offset gains and losses resulting from these exposures with
gains and losses on the derivative contracts used to hedge them,
thereby reducing volatility of earnings and protecting fair
values of assets and liabilities. Dell does not use derivative
contracts for speculative purposes. Dell applies hedge
accounting based upon the criteria established by SFAS 133,
whereby Dell designates its derivatives as fair value hedges or
cash flow hedges. Dell estimates the fair values of derivatives
based on quoted market prices or pricing models using current
market rates and records all derivatives in the Consolidated
Statements of Financial Position at fair value.
Cash Flow
Hedges
Dell uses a combination of forward contracts and options
designated as cash flow hedges to protect against the foreign
currency exchange rate risks inherent in its forecasted
transactions denominated in currencies other than the
U.S. dollar. The risk of loss associated with purchased
options is limited to premium amounts paid for the option
contracts. The risk of loss associated with forward contracts is
equal to the exchange rate differential from the time the
contract is entered into until the time it is settled. These
contracts typically expire in 12 months or less. For
derivative instruments that are designated and qualify as cash
flow hedges, Dell records the effective portion of the gain or
loss on the derivative instrument in accumulated other
comprehensive income (loss) as a separate component of
stockholders equity and reclassifies these amounts into
earnings in the period during which the hedged transaction is
recognized in earnings. Dell reports the effective portion of
cash flow hedges in the same financial statement line item,
within earnings, as the changes in value of the hedged item.
For foreign currency option and forward contracts designated as
cash flow hedges, Dell assesses hedge effectiveness both at the
onset of the hedge as well as at the end of each fiscal quarter
throughout the life of the derivative. Dell measures hedge
ineffectiveness by comparing the cumulative change in the fair
value of the hedge contract with the cumulative change in the
fair value of the hedged item, both of which are based on
forward rates. Dell recognizes any ineffective portion of the
hedge, as well as amounts not included in the assessment of
effectiveness, currently in earnings as a component of
investment and other income, net. Hedge ineffectiveness for cash
flow hedges was not material for Fiscal 2008, 2007 and 2006.
During Fiscal 2008, 2007, and 2006, Dell did not discontinue any
cash flow hedges that had a material impact on Dells
results of operations as substantially all forecasted foreign
currency transactions were realized in Dells actual
results.
61
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the aggregate unrealized net gain (loss) of
Dells cash flow hedges that are recorded as a component of
comprehensive income (loss), net of tax are presented in the
table below. Dell expects to reclassify substantially all of the
unrealized net loss recorded in accumulated other comprehensive
income (loss) at February 1, 2008 into earnings during the
next fiscal year providing an offsetting economic impact against
the underlying transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Aggregate unrealized net gain (loss) at beginning of year
|
|
$
|
13
|
|
|
$
|
(17
|
)
|
|
$
|
(26
|
)
|
Net (losses) gains reclassified to earnings
|
|
|
(392
|
)
|
|
|
(260
|
)
|
|
|
225
|
|
Change in fair value of cash flow hedges
|
|
|
354
|
|
|
|
290
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate unrealized net (loss) gain at end of year
|
|
$
|
(25
|
)
|
|
$
|
13
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Foreign Currency Derivative Instruments
Dell uses forward contracts to hedge monetary assets and
liabilities, primarily receivables and payables, denominated in
a foreign currency. The change in the fair value of these
instruments represents a natural hedge as their gains and losses
offset the changes in the underlying fair value of the monetary
assets and liabilities due to movements in currency exchange
rates. These contracts generally expire in three months or less.
These contracts are not designated as hedges under
SFAS 133, and therefore, the change in the
instruments fair value is recognized currently in earnings
as a component of investment and other income, net.
The gross notional value of foreign currency derivative
financial instruments and the related net asset or liability
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2008
|
|
February 2, 2007
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
Notional
|
|
Net Asset (Liability)
|
|
Notional
|
|
Net Asset (Liability)
|
|
|
(in millions)
|
|
Cash flow hedges
|
|
$
|
7,772
|
|
|
$
|
(9
|
)
|
|
$
|
7,443
|
|
|
$
|
80
|
|
Other derivatives
|
|
|
(1,338
|
)
|
|
|
8
|
|
|
|
(1,125
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,434
|
|
|
$
|
(1
|
)
|
|
$
|
6,318
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Paper
On June 1, 2006, Dell implemented a $1.0 billion
commercial paper program with a supporting $1.0 billion
senior unsecured revolving credit facility. This program allows
Dell to obtain favorable short-term borrowing rates. Dell pays
facility commitment and letter of credit participation fees at
rates based upon Dells credit rating. Unless extended,
this facility expires on June 1, 2011, at which time any
outstanding amounts under the facility will be due and payable.
The facility requires compliance with conditions that must be
satisfied prior to any borrowing, as well as ongoing compliance
with specified affirmative and negative covenants, including
maintenance of a minimum interest coverage ratio. Amounts
outstanding under the facility may be accelerated for typical
defaults, including failure to pay principal or interest,
breaches of covenants, non-payment of judgments or debt
obligations in excess of $200 million, occurrence of a
change of control, and certain bankruptcy events. Dell believes
it will be able to access the capital markets to increase the
size of its existing commercial paper program.
There were no outstanding advances under the commercial paper
program as of February 1, 2008. At February 2, 2007,
$100 million was outstanding under the program, and the
weighted-average interest rate on those outstanding short-term
borrowings was 5.3%. Dell uses the proceeds of the program and
facility for general corporate purposes.
62
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DFS
Credit Facilities
Prior to Dells purchase of CITs 30% ownership
interest in DFS in December 2007, DFS maintained credit
facilities with CIT that provided a maximum capacity of
$750 million to fund leased equipment. These borrowings
were secured by DFS assets and contained certain customary
restrictive covenants. Interest on the outstanding loans was
paid quarterly and calculated based on an average of the two-
and three-year U.S. Treasury Notes plus 4.45%. DFS was
required to make quarterly payments if the value of the leased
equipment securing the loans was less than the outstanding
principal balance. At February 1, 2008, there were no
outstanding advances from CIT as the credit facilities
terminated upon Dells acquisition of the remaining
ownership interest in DFS. At February 2, 2007, outstanding
advances from CIT totaled $122 million, of which
$87 million was included in short-term borrowings, and
$35 million was included in long-term debt on Dells
Consolidated Statements of Financial Position.
India
Credit Facilities
Dell India Pvt Ltd., Dells wholly-owned subsidiary,
maintains unsecured short-term credit facilities with Citibank
N.A. Bangalore Branch India (Citibank India) that
provide a maximum capacity of $30 million to fund Dell
Indias working capital and import buyers credit
needs. Financing is available in both Indian rupees and foreign
currencies. The borrowings are extended on an unsecured basis
based on Dells guarantee to Citibank U.S. Citibank
India can cancel the facilities in whole or in part without
prior notice, at which time any amounts owed under the
facilities will become immediately due and payable. Interest on
the outstanding loans is charged monthly and is calculated based
on Citibank Indias internal cost of funds plus 0.25%. At
February 1, 2008, outstanding advances from Citibank India
totaled $23 million, which is included in short-term
borrowings on Dells Consolidated Statement of Financial
Position.
Long-Term
Debt and Interest Rate Risk Management
In April 1998, Dell issued $200 million 6.55% fixed rate
senior notes with the principal balance due April 15, 2008
(the Senior Notes) and $300 million 7.10% fixed
rate senior debentures with the principal balance due
April 15, 2028 (the Senior Debentures).
Interest on the Senior Notes and Senior Debentures is paid
semi-annually, on April 15 and October 15. The Senior
Notes and Senior Debentures rank equally and are redeemable, in
whole or in part, at the election of Dell for principal, any
accrued interest, and a redemption premium based on the present
value of interest to be paid over the term of the debt
agreements. The Senior Notes and Senior Debentures generally
contain no restrictive covenants, other than a limitation on
liens on Dells assets and a limitation on sale-leaseback
transactions involving Dell property. In early Fiscal 2009, we
plan to obtain additional long-term debt financing.
Concurrent with the issuance of the Senior Notes and Senior
Debentures, Dell entered into interest rate swap agreements
converting Dells interest rate exposure from a fixed rate
to a floating rate basis to better align the associated interest
rate characteristics to its cash and investments portfolio. The
interest rate swap agreements have an aggregate notional amount
of $200 million maturing April 15, 2008 and
$300 million maturing April 15, 2028. The floating
rates are based on three-month London Interbank Offered Rates
plus 0.41% and 0.79% for the Senior Notes and Senior Debentures,
respectively. As a result of the interest rate swap agreements,
Dells effective interest rates for the Senior Notes and
Senior Debentures were 5.9% and 6.2%, respectively, for Fiscal
2008.
The interest rate swap agreements are designated as fair value
hedges. Although the Senior Notes and Senior Debentures allow
for settlement before their stated maturity, such settlement
would always be at an amount greater than the fair value of the
Senior Notes and Senior Debentures. Accordingly, the Senior
Notes and Senior Debentures are not considered to be pre-payable
as defined by SFAS 133 and related interpretations. The
changes in the fair value of the interest rate swaps are
assessed in accordance with SFAS 133 and reflected in the
carrying value of the interest rate swaps on the balance sheet.
The estimated fair value is based primarily on projected future
swap rates. The carrying value of the debt is adjusted by an
equal and offsetting amount. The estimated fair value of the
short
63
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and long-term debt was approximately $563 million at
February 1, 2008, compared to a carrying value of
$497 million at that date.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
901
|
|
|
$
|
846
|
|
|
$
|
1,141
|
|
Foreign
|
|
|
287
|
|
|
|
178
|
|
|
|
263
|
|
Tax repatriation benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
(85
|
)
|
Deferred
|
|
|
(308
|
)
|
|
|
(262
|
)
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
880
|
|
|
$
|
762
|
|
|
$
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes included approximately
$3.2 billion, $2.6 billion, and $3.0 billion
related to foreign operations in Fiscal 2008, 2007, and 2006
respectively. On October 22, 2004, the American Jobs
Creation Act of 2004 (the Act) was signed into law.
Among other items, the Act created a temporary incentive for
U.S. multinationals to repatriate accumulated income earned
outside the U.S. at an effective tax rate of 5.25%, versus
the U.S. federal statutory rate of 35%. In the fourth
quarter of Fiscal 2005, Dell recorded an initial estimated
income tax charge of $280 million based on the decision to
repatriate $4.1 billion of foreign earnings. This tax
charge included an amount relating to a drafting oversight that
Congressional leaders expected to correct in calendar year 2005.
On May 10, 2005, the Department of Treasury issued further
guidance that addressed the drafting oversight. In the second
quarter of Fiscal 2006, Dell reduced its original estimate of
the tax charge by $85 million as a result of the guidance
issued by the Treasury Department in May 2005. As of
February 3, 2006, Dell had completed the repatriation of
the $4.1 billion in foreign earnings. No foreign income was
repatriated during Fiscal 2007 or Fiscal 2008.
Deferred tax assets and liabilities for the estimated tax impact
of temporary differences between the tax and book basis of
assets and liabilities are recognized based on the enacted
statutory tax rates for the year in which Dell expects the
differences to reverse. Deferred taxes have not been recorded on
the excess book basis in the amount of approximately
$10.8 billion in the shares of certain foreign subsidiaries
because these basis differences are not expected to reverse in
the foreseeable future and are expected to be permanent in
duration. These basis differences arose primarily through the
undistributed book earnings of substantially all of the
subsidiaries that Dell intends to reinvest indefinitely. The
basis differences could reverse through a sale of the
subsidiaries, the receipt of dividends from the subsidiaries as
well as various other events. Net of available foreign tax
credits, residual income tax of approximately $3.5 billion
at February 1, 2008, would be due upon reversal of this
excess book basis.
64
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of Dells net deferred tax asset are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
|
2008
|
|
2007
|
|
|
(in millions)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
597
|
|
|
$
|
440
|
|
Inventory and warranty provisions
|
|
|
46
|
|
|
|
128
|
|
Investment impairments and unrealized gains
|
|
|
10
|
|
|
|
-
|
|
Provisions for product returns and doubtful accounts
|
|
|
61
|
|
|
|
51
|
|
Capital loss
|
|
|
7
|
|
|
|
13
|
|
Leasing and financing
|
|
|
302
|
|
|
|
222
|
|
Credit carryforwards
|
|
|
3
|
|
|
|
22
|
|
Stock-based and deferred compensation
|
|
|
188
|
|
|
|
145
|
|
Operating accruals
|
|
|
58
|
|
|
|
34
|
|
Other
|
|
|
134
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
1,406
|
|
|
|
1,180
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(105
|
)
|
|
|
(96
|
)
|
Acquired intangibles
|
|
|
(199
|
)
|
|
|
(16
|
)
|
Other
|
|
|
(21
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(325
|
)
|
|
|
(151
|
)
|
Valuation allowance
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,081
|
|
|
$
|
1,001
|
|
|
|
|
|
|
|
|
|
|
Current portion (included in other current assets)
|
|
$
|
596
|
|
|
$
|
445
|
|
Non-current portion (included in other non-current assets)
|
|
|
485
|
|
|
|
556
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,081
|
|
|
$
|
1,001
|
|
|
|
|
|
|
|
|
|
|
A portion of Dells foreign operations operate at a reduced
tax rate or free of tax under various tax holidays which expire
in whole or in part during Fiscal 2010 through 2021. Many of
these holidays may be extended when certain conditions are met.
The income tax benefits attributable to the tax status of these
subsidiaries were estimated to be approximately
$502 million ($0.23 per share) in Fiscal 2008,
$282 million ($0.13 per share) in Fiscal 2007, and
$368 million ($0.15 per share) in Fiscal 2006.
In March 2007, China announced a broad program to reform tax
rates and incentives, effective January 1, 2008, including
introduction of phased-in transition rules that could
significantly alter the Chinese tax structure for
U.S. companies operating in China. Clarification of the
rules, which phase in higher statutory tax rates over a five
year period, was issued in late Fiscal 2008. As a result, Dell
increased the relevant deferred tax assets to reflect the
enacted statutory rates for the year in which it expects the
differences to reverse.
65
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective tax rate differed from the statutory
U.S. federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Foreign income taxed at different rates
|
|
|
(18.2
|
)
|
|
|
(17.8
|
)
|
|
|
(13.9
|
)
|
Tax repatriation benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.9
|
)
|
Foreign earnings subject to U.S. taxation
|
|
|
4.6
|
|
|
|
2.9
|
|
|
|
1.6
|
|
Imputed intercompany charges
|
|
|
-
|
|
|
|
2.0
|
|
|
|
1.2
|
|
In-process research and development
|
|
|
0.8
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
23.0
|
%
|
|
|
22.8
|
%
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in Dells Fiscal 2008 effective tax rate,
compared to Fiscal 2007, is due to the tax related to accessing
foreign cash and the nondeductibility of acquisition-related
IPR&D charges offset primarily by the increase of
consolidated profitability in lower foreign tax jurisdictions
during Fiscal 2008 as compared to a year ago. The increase in
Dells Fiscal 2007 effective tax rate, compared to Fiscal
2006, is due to the $85 million tax reduction in the second
quarter of Fiscal 2006 discussed above, offset by a higher
proportion of its operating profits being generated in lower
foreign tax jurisdictions during Fiscal 2007.
Dell adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109 (FIN 48),
effective February 3, 2007. The cumulative effect of
adopting FIN 48 was a $62 million increase in tax
liabilities and a corresponding decrease to the February 2,
2007 stockholders equity balance of which $59 million
related to retained earnings and $3 million related to
additional-paid-in-capital. In addition, consistent with the
provisions of FIN 48, Dell changed the classification of
$1.1 billion of income tax liabilities from current to
non-current because payment of cash is not anticipated within
one year of the balance sheet date. These non-current income tax
liabilities are recorded in other non-current liabilities in the
Consolidated Statements of Financial Position. A reconciliation
of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
|
|
|
|
|
|
Total
|
|
|
(in millions)
|
|
Balance at February 3, 2007
|
|
$
|
1,096
|
|
Increases related to tax positions of the current year
|
|
|
390
|
|
Increases related to tax positions of prior years
|
|
|
34
|
|
Reductions for tax positions of prior years
|
|
|
(13
|
)
|
Lapse of statue of limitations
|
|
|
(6
|
)
|
Settlements
|
|
|
(18
|
)
|
|
|
|
|
|
Balance at February 1, 2008
|
|
$
|
1,483
|
|
|
|
|
|
|
Associated with the unrecognized tax benefits of
$1.5 billion at February 1, 2008, are interest and
penalties as well as $171 million of offsetting tax
benefits associated with estimated transfer pricing, the benefit
of interest deductions, and state income tax benefits. The net
amount of $1.6 billion, if recognized, would favorably
affect Dells effective tax rate.
Interest and penalties related to income tax liabilities are
included in income tax expense. The balance of gross accrued
interest and penalties recorded in the Consolidated Statements
of Financial Position at February 1, 2008
66
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and February 2, 2007, was $288 million and
$200 million, respectively. During Fiscal 2008,
$88 million related to interest and penalties was included
in income tax expense.
Dell is currently under audit in various jurisdictions,
including the United States. The tax periods open to examination
by the major taxing jurisdictions to which Dell is subject
include fiscal years 1997 through 2008. Dell does not anticipate
a significant change to the total amount of unrecognized
benefits within the next 12 months.
Preferred
Stock
Authorized Shares Dell has the authority to
issue five million shares of preferred stock, par value $.01 per
share. At February 1, 2008 and February 2, 2007, no
shares of preferred stock were issued or outstanding.
Redeemable
Common Stock
In prior years, Dell inadvertently failed to register with the
SEC the issuance of some shares under certain employee benefit
plans. As a result, certain purchasers of common stock pursuant
to those plans may have the right to rescind their purchases for
an amount equal to the purchase price paid for the shares, plus
interest from the date of purchase. At February 1, 2008 and
February 2, 2007, Dell has classified 4 million shares
($94 million) and 5 million shares
($111 million), respectively, which are subject to
potential rescission rights outside stockholders equity,
because the redemption features are not within the control of
Dell. No shareholder exercised these rescission rights in Fiscal
2008. Dell may also be subject to civil and other penalties by
regulatory authorities as a result of the failure to register.
These shares have always been treated as outstanding for
financial reporting purposes.
Common
Stock
Authorized Shares At February 1, 2008,
Dell is authorized to issue 7.0 billion shares of common
stock, par value $.01 per share.
Share Repurchase Program Dell has a share
repurchase program that authorizes it to purchase shares of
common stock in order to increase shareholder value and manage
dilution resulting from shares issued under Dells equity
compensation plans. However, Dell does not currently have a
policy that requires the repurchase of common stock in
conjunction with stock-based payment arrangements. On
December 3, 2007, Dells Board of Directors approved a
new authorization for an additional $10.0 billion for share
repurchases. Dell suspended its repurchase program in September
2006, and after recommencing the program during the fourth
quarter of Fiscal 2008, Dell repurchased 179 million shares
for an aggregate cost of approximately $4.0 billion.
NOTE 5
BENEFIT PLANS
Description
of the Plans
Employee Stock Plans Dell is currently
issuing stock grants under the Dell Amended and Restated 2002
Long-Term Incentive Plan (the 2002 Incentive Plan),
which was approved by shareholders on December 4, 2007.
There are previous plans that have been terminated except for
options previously granted under those plans that are still
outstanding. These are all collectively referred to as the
Stock Plans.
The 2002 Incentive Plan provides for the granting of stock-based
incentive awards to Dells employees, non-employee
directors, and certain consultants and advisors to Dell. Awards
may be incentive stock options within the meaning of
Section 422 of the Internal Revenue Code, nonqualified
stock options, restricted stock, or restricted stock units.
There were approximately 292 million, 271 million, and
272 million shares of Dells common stock available
for future grants under the Stock Plans at February 1,
2008, February 2, 2007, and February 3, 2006,
respectively. To satisfy stock option exercises, Dell has a
policy of issuing new shares as opposed to repurchasing shares
on the open market.
67
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option Agreements The right to purchase
shares pursuant to existing stock option agreements typically
vests pro-rata at each option anniversary date over a three- to
five-year period. The options, which are granted with option
exercise prices equal to the fair market value of Dells
common stock on the date of grant, generally expire within ten
to twelve years from the date of grant. Dell has not issued any
options to consultants or advisors to Dell since Fiscal 1999. In
conjunction with the adoption of SFAS 123(R) in the first
quarter of Fiscal 2007, Dell changed its method of attributing
the value of stock-based compensation expense from an
accelerated approach to a straight-line method. Compensation
expense for all stock option awards granted on or prior to
February 3, 2006, uses the accelerated approach with an
exception of stock options granted in Fiscal 2002 and Fiscal
2003, for which the straight-line method is used.
Restricted Stock Awards Awards of restricted
stock may be either grants of restricted stock, restricted stock
units, or performance-based stock units that are issued at no
cost to the recipient. For restricted stock grants, at the date
of grant, the recipient has all rights of a stockholder, subject
to certain restrictions on transferability and a risk of
forfeiture. Restricted stock grants typically vest over a three-
to seven-year period beginning on the date of grant. For
restricted stock units, legal ownership of the shares is not
transferred to the employee until the unit vests, which is
generally over a three-to five-year period. Dell also grants
performance-based restricted stock units as a long-term
incentive in which an award recipient receives shares contingent
upon Dell achieving performance objectives and the
employees continuing employment through the vesting
period, which is generally over a three- to five-year period.
Compensation expense recorded in connection with these
performance-based restricted stock units is based on Dells
best estimate of the number of shares that will eventually be
issued upon achievement of the specified performance criteria
and when it becomes probable that certain performance goals will
be achieved. The cost of these awards is determined using the
fair market value of Dells common stock on the date of the
grant. Compensation expense for restricted stock awards with a
service condition is recognized on a straight-line basis over
the vesting term. Compensation expense for performance-based
restricted stock awards is recognized on an accelerated
multiple-award approach based on the most probable outcome of
the performance condition. In accordance with SFAS 123(R),
deferred compensation related to restricted stock awards issued
prior to Fiscal 2007, which was previously classified as
other in stockholders equity, was classified
as capital in excess of par value upon adoption.
Temporary Suspension of Option Exercises, Vesting of
Restricted Stock Units, and Employee Stock Purchase Plan
(ESPP) Purchases As a result of
Dells inability to timely file its Annual Report on
Form 10-K
for Fiscal 2007, Dell suspended the exercise of employee stock
options, settlement vesting of restricted stock units, and the
purchase of shares under the ESPP on April 4, 2007. Dell
resumed allowing the exercise of employee stock options by
employees and the settlement of restricted stock units on
October 31, 2007. The purchase of shares under the ESPP
will not be resumed as the plan has been discontinued effective
the first quarter of Fiscal 2009.
Dell agreed to pay cash to current and former employees who held
in-the-money stock options (options that have an exercise price
less than the current market stock price) that expired during
the period of unexercisability due to Dells inability to
timely file its Annual Report on
Form 10-K
for Fiscal 2007. Dell has made payments of approximately
$107 million relating to in-the-money stock options that
expired in the second and third quarters of Fiscal 2008. Of the
$107 million total, $17 million is included in cost of
net revenue and $90 million in operating expenses. As
options have again become exercisable, Dell does not expect to
pay cash for expired in-the-money stock options in the future.
68
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
General
Information
Stock Option Activity The following table
summarizes stock option activity for the Stock Plans during
Fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
Number
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
(in millions)
|
|
(per share)
|
|
(in years)
|
|
(in millions)
|
|
Options outstanding February 2, 2007
|
|
|
314
|
|
|
$
|
32.16
|
|
|
|
|
|
|
Granted
|
|
|
12
|
|
|
|
24.45
|
|
|
|
|
|
|
Exercised
|
|
|
(7
|
)
|
|
|
18.99
|
|
|
|
|
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
26.80
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(50
|
)
|
|
|
32.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding February 1, 2008
|
|
|
264
|
|
|
$
|
32.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest (net of estimated
forfeitures) February 1,
2008(a)
|
|
|
259
|
|
|
$
|
32.43
|
|
|
4.5
|
|
$
|
13
|
Exercisable February 1, 2008
|
|
|
242
|
|
|
$
|
32.89
|
|
|
4.2
|
|
$
|
12
|
The following table summarizes stock option activity for the
Stock Plans during Fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
Number
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
(in millions)
|
|
(per share)
|
|
(in years)
|
|
(in millions)
|
|
Options outstanding February 3, 2006
|
|
|
343
|
|
|
$
|
31.86
|
|
|
|
|
|
|
Granted
|
|
|
10
|
|
|
|
25.97
|
|
|
|
|
|
|
Exercised
|
|
|
(13
|
)
|
|
|
14.09
|
|
|
|
|
|
|
Forfeited
|
|
|
(4
|
)
|
|
|
25.84
|
|
|
|
|
|
|
Cancelled/expired
|
|
|
(22
|
)
|
|
|
36.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding February 2, 2007
|
|
|
314
|
|
|
$
|
32.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest (net of estimated
forfeitures) February 2,
2007(a)
|
|
|
309
|
|
|
$
|
32.26
|
|
|
5.2
|
|
$
|
148
|
Exercisable February 2,
2007(a)
|
|
|
284
|
|
|
$
|
32.74
|
|
|
5.1
|
|
$
|
145
|
|
|
|
(a)
|
|
For options vested and expected to
vest and options exercisable, the aggregate intrinsic value in
the table above represents the total pre-tax intrinsic value
(the difference between Dells closing stock price on
February 1, 2008 and February 2, 2007, and the
exercise price multiplied by the number of in-the-money options)
that would have been received by the option holders had the
holders exercised their options on February 1, 2008 and
February 2, 2007. The intrinsic value changes based on
changes in the fair market value of Dells common stock.
|
69
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other information pertaining to stock options for Fiscal 2008,
Fiscal 2007, and Fiscal 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions, except per option data)
|
|
Weighted-average grant date fair value of stock options granted
per option
|
|
$
|
6.29
|
|
$
|
6.90
|
|
$
|
10.22
|
Total fair value of options
vested(a)
|
|
$
|
208
|
|
$
|
415
|
|
$
|
2,029
|
Total intrinsic value of options
exercised(b)
|
|
$
|
64
|
|
$
|
171
|
|
$
|
688
|
|
|
|
(a)
|
|
Includes the Fiscal 2006
acceleration of vesting of certain unvested and
out-of-the-money stock options with exercise prices
equal to or greater than the $30.75 per share previously awarded
under equity compensation plans.
|
|
(b)
|
|
The total intrinsic value of
options exercised represents the total pre-tax intrinsic value
(the difference between the stock price at exercise and the
exercise price multiplied by the number of options exercised)
that was received by the option holders who exercised their
options during the fiscal year.
|
At February 1, 2008, $93 million of total unrecognized
stock-based compensation expense, net of estimated forfeitures,
related to stock options is expected to be recognized over a
weighted-average period of approximately 2.0 years.
Non-vested Restricted Stock Activity
Non-vested restricted stock awards at February 1, 2008 and
February 2, 2007, and activities during Fiscal 2008 and
Fiscal 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Number
|
|
Average
|
|
|
of
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
|
|
(in millions)
|
|
(per share)
|
|
Non-vested restricted stock February 2, 2007
|
|
|
17
|
|
|
$
|
28.76
|
Granted
|
|
|
26
|
|
|
|
22.85
|
Vested
|
|
|
(3
|
)
|
|
|
28.79
|
Forfeited
|
|
|
(4
|
)
|
|
|
24.71
|
|
|
|
|
|
|
|
|
Non-vested restricted stock February 1, 2008
|
|
|
36
|
|
|
$
|
24.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Number
|
|
Average
|
|
|
of
|
|
Grant Date
|
|
|
Shares
|
|
Fair Value
|
|
|
(in millions)
|
|
(per share)
|
|
Non-vested restricted stock February 3, 2006
|
|
|
2
|
|
|
$
|
34.66
|
Granted
|
|
|
21
|
|
|
|
28.36
|
Vested
|
|
|
(1
|
)
|
|
|
28.84
|
Forfeited
|
|
|
(5
|
)
|
|
|
29.29
|
|
|
|
|
|
|
|
|
Non-vested restricted stock February 2, 2007
|
|
|
17
|
|
|
$
|
28.76
|
|
|
|
|
|
|
|
|
70
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
(in millions, except per share data)
|
|
Weighted-average grant date fair value of restricted stock
awards granted
|
|
$
|
22.85
|
|
$
|
28.36
|
|
$
|
39.70
|
Total estimated fair value of restricted stock awards vested
|
|
$
|
103
|
|
$
|
16
|
|
$
|
-
|
At February 1, 2008, $600 million of unrecognized
stock-based compensation expense, net of estimated forfeitures,
related to non-vested restricted stock awards is expected to be
recognized over a weighted-average period of approximately
1.9 years.
Expense
Information under SFAS 123(R)
For Fiscal 2008 and Fiscal 2007, stock-based compensation
expense, net of income taxes, was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
|
2008
|
|
2007
|
|
|
(in millions)
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
Cost of net revenue
|
|
$
|
62
|
|
|
$
|
59
|
|
Operating expenses
|
|
|
374
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before taxes
|
|
|
436
|
|
|
|
368
|
|
Income tax benefit
|
|
|
(127
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense, net of income taxes
|
|
$
|
309
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation in the table above includes
$107 million of cash expense in Fiscal 2008 for expired
stock options as previously discussed.
Prior to the adoption of SFAS 123(R), net income included
compensation expense related to restricted stock awards but did
not include stock-based compensation expense for employee stock
options or the purchase discount under Dells ESPP. As a
result of adopting SFAS 123(R), income before income taxes
and net income were lower by $272 million and
$191 million, respectively, for Fiscal 2007 as compared to
Fiscal 2006, than if Dell had not adopted SFAS 123(R). The
impact on both basic and diluted earnings per share for the
fiscal year ended February 2, 2007, was $0.08 per share.
The remaining $96 million of pre-tax stock compensation
expense for the fiscal year ended February 2, 2007, is
associated with restricted stock awards that, consistent with
APB 25, are expensed over the associated vesting period.
Stock-based compensation expense is based on awards expected to
vest, reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the pro forma
information required under SFAS 123, forfeitures were
accounted for as they occurred.
Prior to the adoption of SFAS 123(R), tax benefits
resulting from tax deductions in excess of the stock-based
compensation expense recognized for those options were
classified as operating cash flows. The excess windfall tax
benefits are now classified as a source of financing cash flows,
with an offsetting amount classified as a use of operating cash
flows. This amount was $12 million in Fiscal 2008 and
$80 million in Fiscal 2007. In addition, there was no
material stock-based compensation expense capitalized as part of
the cost of an asset.
71
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro Forma
Information under SFAS 123 for Periods Prior to Fiscal
2007
Prior to the adoption of SFAS 123(R), Dell measured
compensation expense for its employee stock-based compensation
plan using the intrinsic value method prescribed by APB 25.
Under APB 25, when the exercise price of Dells employee
stock options equaled or exceeded the market price of the
underlying stock on the date of the grant, no compensation
expense was recognized. Dell applied the disclosure provisions
of SFAS 123, as amended by SFAS 148, as if the
fair-value based method had been applied in measuring
compensation expense.
The following table illustrates the effect on net income and
earnings per share for the fiscal year ended February 3,
2006, as if Dell had applied the fair value recognition
provisions of SFAS 123 to stock options and stock purchase
plans:
|
|
|
|
|
|
|
Fiscal Year Ended
|
(in millions, except per share data)
|
|
February 3, 2006
|
|
Net income
|
|
$
|
3,602
|
|
Deduct: Total stock options and stock purchase plans employee
compensation determined under fair value method for these
awards, net of related tax effects
|
|
|
(1,094
|
)
|
|
|
|
|
|
Net income pro forma
|
|
$
|
2,508
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
Basic
|
|
$
|
1.50
|
|
Basic pro forma
|
|
$
|
1.04
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.47
|
|
Diluted pro forma
|
|
$
|
1.02
|
|
On January 5, 2006, Dells Board of Directors approved
the acceleration of vesting of certain unvested and
out-of-the-money stock options with exercise prices
equal to or greater than $30.75 per share previously awarded
under equity compensation plans. Options to purchase
approximately 101 million shares of common stock, or 29% of
the outstanding unvested options, were subject to the
acceleration. The weighted-average exercise price of the options
that were accelerated was $36.37. The purpose of the
acceleration was to enable Dell to reduce future compensation
expense associated with these options upon the adoption of
SFAS 123(R).
Valuation
Information
SFAS 123(R) requires the use of a valuation model to
calculate the fair value of stock option awards. Dell has
elected to use the Black-Scholes option pricing model, which
incorporates various assumptions, including volatility, expected
term, and risk-free interest rates. The volatility is based on a
blend of implied and historical volatility of Dells common
stock over the most recent period commensurate with the
estimated expected term of Dell stock options. Dell uses this
blend of implied and historical volatility because management
believes such volatility is more representative of prospective
trends. The expected term of an award is based on historical
experience and on the terms and conditions of the stock awards
granted to employees. The dividend yield of zero is based on the
fact that Dell has never paid cash dividends and has no present
intention to pay cash dividends.
72
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average fair value of stock options and purchase
rights under the employee stock purchase plan was determined
based on the Black-Scholes option pricing model weighted for all
grants during Fiscal 2008, 2007, and 2006 utilizing the
assumptions in the following table:
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
February 1,
|
|
February 2,
|
|
February 3,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected term:
|
|
|
|
|
|
|
Stock options
|
|
3.5 years
|
|
3.6 years
|
|
3.8 years
|
Employee stock purchase plan
|
|
N/A(a)
|
|
3 months
|
|
3 months
|
Risk-free interest rate (U.S. Government Treasury Note)
|
|
4.4%
|
|
4.8%
|
|
3.9%
|
Volatility
|
|
27%
|
|
26%
|
|
25%
|
Dividends
|
|
0%
|
|
0%
|
|
0%
|
|
|
|
(a)
|
|
No purchase rights were granted
under the ESPP in Fiscal 2008 due to Dell suspending the ESPP on
April 4, 2007, and subsequently discontinuing the plan
effective the first quarter of Fiscal 2009 as a part of an
overall assessment of its benefits strategy.
|
401(k) Plan Dell has a defined contribution
retirement plan (the 401(k) Plan) that complies with
Section 401(k) of the Internal Revenue Code. Substantially
all employees in the U.S. are eligible to participate in
the Plan. Effective January 1, 2008, Dell matches 100% of
each participants voluntary contributions, subject to a
maximum contribution of 5% of the participants
compensation, and participants vest immediately in all Dell
contributions to the Plan. From January 1, 2005 to
December 31, 2007, Dell matched 100% of each
participants voluntary contributions, subject to a maximum
contribution of 4% of the participants compensation. Prior
to January 1, 2005, Dell matched 100% of each
participants voluntary contributions, subject to a maximum
contribution of 3% of the participants compensation.
Dells contributions during Fiscal 2008, 2007, and 2006
were $76 million, $70 million, and $66 million,
respectively. Dells contributions are invested according
to each participants elections in the investment options
provided under the Plan. Investment options include Dell stock,
but neither participant nor Dell contributions are required to
be invested in Dell stock. As a result of Dells failure to
file its Annual Report on
Form 10-K
for fiscal 2007 by the original due date, April 3, 2007,
Dell suspended the right of Plan participants to invest
additional contributions in Dell stock on April 4, 2007.
Effective December 7, 2007, with the filing of a
registration statement on
Form S-8,
Dell ended the suspension and began allowing Plan participants
to invest contributions in Dell stock.
Deferred Compensation Plan Dell has a
nonqualified deferred compensation plan (the Deferred
Compensation Plan) for the benefit of certain management
employees and non-employee directors. The Deferred Compensation
Plan permits the deferral of base salary and annual incentive
bonus. The deferrals are held in a separate trust, which has
been established by Dell to administer the Plan. The assets of
the trust are subject to the claims of Dells creditors in
the event that Dell becomes insolvent. Consequently, the trust
qualifies as a grantor trust for income tax purposes (i.e. a
Rabbi Trust). In accordance with the provisions of
EITF
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned are Held in a Rabbi Trust and Invested
(EITF 97-14),
the assets and liabilities of the Plan are presented in
investments and accrued and other liabilities in the
accompanying Consolidated Statements of Financial Position,
respectively. The assets held by the trust are classified as
trading securities with changes recorded to investment and other
income, net, and changes in the deferred compensation liability
recorded to compensation expense.
Employee Stock Purchase Plan Dell
discontinued its shareholder approved employee stock purchase
plan during the first quarter of Fiscal 2009. Prior to
discontinuance, the ESPP allowed participating employees to
purchase common stock through payroll deductions at the end of
each three-month participation period at a purchase price equal
to 85% of the fair market value of the common stock at the end
of the participation period. Upon adoption of SFAS 123(R)
in Fiscal 2007, Dell began recognizing compensation expense for
the 15% discount received by the participating employees. No
common stock was issued under this plan in Fiscal 2008 due to
Dell suspending the
73
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ESPP on April 4, 2007, and subsequently discontinuing the
ESPP as part of an overall assessment of its benefits strategy.
Common stock issued under the ESPP totaled 6 million shares
in Fiscal 2007 and 5 million shares in Fiscal 2006. The
weighted-average fair value of the purchase rights under the
ESPP during Fiscal 2007 and Fiscal 2006 was $3.89 and $6.30 per
right, respectively.
|
|
NOTE 6
|
FINANCIAL
SERVICES
|
Dell Financial Services L.P.
Dell offers or arranges various financing options and services
for its business and consumer customers in the U.S. through
DFS, a wholly-owned subsidiary of Dell. DFS was formerly a joint
venture between Dell and CIT, but on December 31, 2007,
Dell purchased CITs remaining 30% interest in DFS, making
it a wholly-owned subsidiary. DFS is a full service financial
services entity; key activities include the origination,
collection, and servicing of customer receivables related to the
purchase of Dell products.
Dell utilizes DFS to facilitate financing for a significant
number of customers who elect to finance products sold by Dell.
New financing originations, which represent the amounts of
financing provided to customers for equipment and related
software and services through DFS, were $5.7 billion,
$6.1 billion, and $6.5 billion during the fiscal year
ended February 1, 2008, February 2, 2007, and
February 3, 2006, respectively.
CIT continues to have the right to purchase a minimum percentage
of DFS customer receivables until January 29, 2010
(Fiscal 2010), with the option to accelerate all or a portion of
the Fiscal 2010 funding rights into Fiscal 2009. CITs
minimum funding right is approximately 35% of the new customer
receivables facilitated by DFS, but could be as much as 60% if
CIT fully accelerates its Fiscal 2010 minimum funding right.
DFS services the receivables purchased by CIT. However,
Dells obligation related to the performance of the DFS
originated receivables purchased by CIT is limited to the cash
funded credit reserves established at the time of funding.
74
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financing
Receivables
The following table summarizes the components of Dells
financing receivables, net of the allowance for doubtful
accounts:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 1,
|
|
February 2,
|
|
|
2008
|
|
2007
|
|
|
(in millions)
|
|
Financing receivables, net:
|
|
|
|
|
|
|
|
|
Customer receivables:
|
|
|
|
|
|
|
|
|
Revolving loans, gross
|
|
$
|
1,063
|
|
|
$
|
805
|
|
Fixed-term leases and loans, gross
|
|
|
654
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
Customer receivables, gross
|
|
|
1,717
|
|
|
|
1,437
|
|
Customer receivables allowance
|
|
|
(96
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Customer receivables, net
|
|
|
1,621
|
|
|
|
1,398
|
|
Residual interest
|
|
|
295
|
|
|
|
296
|
|
Retained interest
|
|
|
223
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
2,139
|
|
|
$
|
1,853
|
|
|
|
|
|
|
|
|
|
|
Short-term
|
|
$
|
1,732
|
|
|
$
|
1,530
|
|
Long-term
|
|
|
407
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
Financing receivables, net
|
|
$
|
2,139
|
|
|
$
|
1,853
|
|
|
|
|
|
|
|
|
|
|
Financing receivables consist of customer receivables, residual
interest, and retained interest in securitized receivables.
Customer receivables include fixed-term loans and leases and
revolving loans resulting from the sale of Dell products and
services. For customers who desire lease financing, Dell enters
into sales-type lease arrangements with the customers. Of the
customer receivables balance, $444 million represent
balances which are due from CIT in connection with specified
promotional programs.
|
|
|
Customer receivables are presented net of allowance for
uncollectible accounts. The allowance is based on factors
including historical experience, past due receivables,
receivable type, and the risk composition of the receivables.
The composition and credit quality varies from investment grade
commercial customers to subprime consumers. Subprime receivables
comprise less than 20% of the net customer receivable balance at
February 1, 2008. Financing receivables are charged to the
allowance at the earlier of when an account is deemed to be
uncollectible or when an account is 180 days delinquent.
Recoveries on customer receivables previously charged off as
uncollectible are recorded to the allowance for uncollectible
accounts. The following is a description of the components of
financing receivables.
|
|
|
|
|
|
Revolving loans offered under private label credit financing
programs provide qualified customers with a revolving credit
line for the purchase of products and services offered by Dell.
Revolving loans bear interest at a variable annual percentage
rate that is tied to the prime rate. From time to time, account
holders may have the opportunity to finance their Dell purchases
with special programs during which, if the outstanding balance
is paid in full, no interest is charged. These special programs
generally range from 3 to 12 months and have an average
original term of approximately 11 months. At
February 1, 2008 and February 2, 2007,
$668 million and $694 million, respectively, were
receivables under these special programs.
|
|
|
|
Leases with business customers generally have fixed terms of two
to three years. Future maturities of minimum lease payments at
February 1, 2008, are as follows: 2009: $137 million;
2010: $74 million; 2011:
|
75
DELL
INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
$30 million; and 2012: $4 million. Fixed-term loans
are also offered to qualified small businesses and primarily
consist of loans with short-term maturities.
|
The following table presents the net credit losses and accounts
60 days or more past due of customer receivables. Net
credit losses on leases and loans represent net investment
balances. Net credit losses on revolving loans represent
principal losses, net of recoveries. Net credit losses increased
in Fiscal 2008 due to higher delinquencies driven by
deterioration in the credit environment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1, 2008
|
|
|
February 2, 2007
|
|
|
|
Dollars
|
|
%
|
|
|
Dollars
|
|
%
|
|
|
|
(in millions, except percentages)
|
|
|
Net credit losses of customer financing receivables
|
|
$
|
40
|
|
|
2.7
|
%(a)
|
|
$
|
20
|
|
|
1.5
|
%(a)
|
Customer financing receivables 60 days or more delinquent
|
|
$
|
34
|
|
|
2.1
|
%(b)
|
|
$
|
10
|
|
|
0.7
|
%(b)
|
|
|
|
(a)
|
|
Net credit losses as a percentage
of the outstanding average customer receivables balance over the
year.
|
|
(b)
|
|
Customer financing receivables
60 days or more delinquent divided by the ending customer
financing receivables balance.
|
|
|
|
Dell retains a residual interest in the leased equipment. The
amount of the residual interest is established at the inception
of the lease based upon estimates of the value of the equipment
at the end of the lease term using historical studies, industry
data, and future
value-at-risk
demand valuation methods. On a periodic basis, Dell assesses the
carrying amount of its recorded residual values for impairment.
Anticipated declines in specific future residual values that are
considered to be other-than-temporary are reco |