ITEM 1
—
FINANCIAL STATEMENTS
Index
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
11,706
|
|
|
$
|
9,474
|
|
|
Short-term investments
|
2,008
|
|
|
1,975
|
|
|
Accounts receivable, net
|
9,189
|
|
|
9,420
|
|
|
Short-term financing receivables, net
|
3,643
|
|
|
3,222
|
|
|
Inventories, net
|
2,582
|
|
|
2,538
|
|
|
Other current assets
|
5,397
|
|
|
4,144
|
|
|
Total current assets
|
34,525
|
|
|
30,773
|
|
|
Property, plant, and equipment, net
|
5,378
|
|
|
5,653
|
|
|
Long-term investments
|
4,273
|
|
|
3,802
|
|
|
Long-term financing receivables, net
|
3,317
|
|
|
2,651
|
|
|
Goodwill
|
39,330
|
|
|
38,910
|
|
|
Intangible assets, net
|
29,846
|
|
|
35,053
|
|
|
Other non-current assets
|
1,725
|
|
|
1,364
|
|
|
Total assets
|
$
|
118,394
|
|
|
$
|
118,206
|
|
|
LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
Short-term debt
|
$
|
6,235
|
|
|
$
|
6,329
|
|
|
Accounts payable
|
16,711
|
|
|
14,422
|
|
|
Accrued and other
|
6,901
|
|
|
7,119
|
|
|
Short-term deferred revenue
|
10,895
|
|
|
10,265
|
|
|
Total current liabilities
|
40,742
|
|
|
38,135
|
|
|
Long-term debt (Note 7)
|
45,416
|
|
|
43,061
|
|
|
Long-term deferred revenue
|
9,161
|
|
|
8,431
|
|
|
Other non-current liabilities
|
7,487
|
|
|
9,339
|
|
|
Total liabilities
|
102,806
|
|
|
98,966
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
Redeemable shares (Note 18)
|
362
|
|
|
231
|
|
|
Stockholders' equity:
|
|
|
|
|
Common stock and capital in excess of $.01 par value (Note 17)
|
19,927
|
|
|
20,199
|
|
|
Treasury stock at cost
|
(1,440
|
)
|
|
(752
|
)
|
|
Accumulated deficit
|
(8,742
|
)
|
|
(5,609
|
)
|
|
Accumulated other comprehensive loss
|
(226
|
)
|
|
(595
|
)
|
|
Total Dell Technologies Inc. stockholders’ equity
|
9,519
|
|
|
13,243
|
|
|
Non-controlling interests
|
5,707
|
|
|
5,766
|
|
|
Total stockholders' equity
|
15,226
|
|
|
19,009
|
|
|
Total liabilities, redeemable shares, and stockholders' equity
|
$
|
118,394
|
|
|
$
|
118,206
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per share amounts; unaudited
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
Products
|
$
|
14,680
|
|
|
$
|
12,366
|
|
|
$
|
42,003
|
|
|
$
|
33,510
|
|
|
Services
|
4,930
|
|
|
3,881
|
|
|
14,722
|
|
|
8,058
|
|
|
Total net revenue
|
19,610
|
|
|
16,247
|
|
|
56,725
|
|
|
41,568
|
|
|
Cost of net revenue:
|
|
|
|
|
|
|
|
|
Products
|
12,369
|
|
|
10,562
|
|
|
36,206
|
|
|
28,856
|
|
|
Services
|
2,078
|
|
|
1,786
|
|
|
6,245
|
|
|
4,284
|
|
|
Total cost of net revenue
|
14,447
|
|
|
12,348
|
|
|
42,451
|
|
|
33,140
|
|
|
Gross margin
|
5,163
|
|
|
3,899
|
|
|
14,274
|
|
|
8,428
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
4,625
|
|
|
4,556
|
|
|
13,989
|
|
|
8,647
|
|
|
Research and development
|
1,071
|
|
|
855
|
|
|
3,297
|
|
|
1,365
|
|
|
Total operating expenses
|
5,696
|
|
|
5,411
|
|
|
17,286
|
|
|
10,012
|
|
|
Operating loss
|
(533
|
)
|
|
(1,512
|
)
|
|
(3,012
|
)
|
|
(1,584
|
)
|
|
Interest and other, net
|
(682
|
)
|
|
(794
|
)
|
|
(1,800
|
)
|
|
(1,362
|
)
|
|
Loss from continuing operations before income taxes
|
(1,215
|
)
|
|
(2,306
|
)
|
|
(4,812
|
)
|
|
(2,946
|
)
|
|
Income tax benefit
|
(274
|
)
|
|
(669
|
)
|
|
(1,510
|
)
|
|
(623
|
)
|
|
Net loss from continuing operations
|
(941
|
)
|
|
(1,637
|
)
|
|
(3,302
|
)
|
|
(2,323
|
)
|
|
Income (loss) from discontinued operations, net of income taxes (Note 3)
|
—
|
|
|
(438
|
)
|
|
—
|
|
|
875
|
|
|
Net loss
|
(941
|
)
|
|
(2,075
|
)
|
|
(3,302
|
)
|
|
(1,448
|
)
|
|
Less: Net loss attributable to non-controlling interests
|
(4
|
)
|
|
(11
|
)
|
|
(85
|
)
|
|
(12
|
)
|
|
Net loss attributable to Dell Technologies Inc.
|
$
|
(937
|
)
|
|
$
|
(2,064
|
)
|
|
$
|
(3,217
|
)
|
|
$
|
(1,436
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Dell Technologies Inc. - basic:
|
|
|
|
|
|
|
|
Continuing operations - Class V Common Stock - basic
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
$
|
2.50
|
|
|
$
|
0.79
|
|
|
Continuing operations - DHI Group - basic
|
$
|
(2.05
|
)
|
|
$
|
(3.62
|
)
|
|
$
|
(6.57
|
)
|
|
$
|
(5.70
|
)
|
|
Discontinued operations - DHI Group - basic
|
$
|
—
|
|
|
$
|
(0.88
|
)
|
|
$
|
—
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted:
|
|
|
|
|
|
|
|
Continuing operations - Class V Common Stock - diluted
|
$
|
1.09
|
|
|
$
|
0.78
|
|
|
$
|
2.46
|
|
|
$
|
0.78
|
|
|
Continuing operations - DHI Group - diluted
|
$
|
(2.05
|
)
|
|
$
|
(3.63
|
)
|
|
$
|
(6.58
|
)
|
|
$
|
(5.70
|
)
|
|
Discontinued operations - DHI Group - diluted
|
$
|
—
|
|
|
$
|
(0.88
|
)
|
|
$
|
—
|
|
|
$
|
2.01
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
Net loss
|
$
|
(941
|
)
|
|
$
|
(2,075
|
)
|
|
$
|
(3,302
|
)
|
|
$
|
(1,448
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(125
|
)
|
|
(256
|
)
|
|
325
|
|
|
(214
|
)
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
|
(3
|
)
|
|
(5
|
)
|
|
44
|
|
|
(5
|
)
|
|
Reclassification adjustment for net losses realized in net loss
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Net change in market value of investments
|
(3
|
)
|
|
(5
|
)
|
|
47
|
|
|
(5
|
)
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
|
76
|
|
|
82
|
|
|
(81
|
)
|
|
(25
|
)
|
|
Reclassification adjustment for net (gains) losses included in net loss
|
31
|
|
|
(17
|
)
|
|
80
|
|
|
64
|
|
|
Net change in cash flow hedges
|
107
|
|
|
65
|
|
|
(1
|
)
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax expense (benefit) of $9 and ($3), respectively, and $24 and $2, respectively
|
(21
|
)
|
|
(196
|
)
|
|
371
|
|
|
(180
|
)
|
|
Comprehensive loss, net of tax
|
(962
|
)
|
|
(2,271
|
)
|
|
(2,931
|
)
|
|
(1,628
|
)
|
|
Less: Net loss attributable to non-controlling interests
|
(4
|
)
|
|
(11
|
)
|
|
(85
|
)
|
|
(12
|
)
|
|
Less: Other comprehensive income (loss) attributable to non-controlling interests
|
(2
|
)
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Comprehensive loss attributable to Dell Technologies Inc.
|
$
|
(956
|
)
|
|
$
|
(2,260
|
)
|
|
$
|
(2,848
|
)
|
|
$
|
(1,616
|
)
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited; continued on next page)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
$
|
(3,302
|
)
|
|
$
|
(1,448
|
)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
6,491
|
|
|
2,897
|
|
|
Stock-based compensation expense
|
630
|
|
|
183
|
|
|
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
|
77
|
|
|
52
|
|
|
Deferred income taxes
|
(1,957
|
)
|
|
(2,036
|
)
|
|
Provision for doubtful accounts — including financing receivables
|
117
|
|
|
80
|
|
|
Net loss on sale of businesses
|
20
|
|
|
—
|
|
|
Amortization of debt issuance costs
|
140
|
|
|
141
|
|
|
Other
|
227
|
|
|
29
|
|
|
Changes in assets and liabilities, net of effects from acquisitions and dispositions:
|
|
|
|
|
Accounts receivable
|
258
|
|
|
(1,156
|
)
|
|
Financing receivables
|
(1,026
|
)
|
|
(253
|
)
|
|
Inventories
|
(205
|
)
|
|
152
|
|
|
Other assets
|
(1,286
|
)
|
|
(65
|
)
|
|
Accounts payable
|
2,272
|
|
|
968
|
|
|
Deferred revenue
|
1,293
|
|
|
1,019
|
|
|
Accrued and other liabilities
|
(70
|
)
|
|
1,006
|
|
|
Change in cash from operating activities
|
3,679
|
|
|
1,569
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Investments:
|
|
|
|
|
|
Purchases
|
(3,454
|
)
|
|
(511
|
)
|
|
Maturities and sales
|
2,993
|
|
|
561
|
|
|
Capital expenditures
|
(902
|
)
|
|
(417
|
)
|
|
Proceeds from sale of facilities, land, and other assets
|
—
|
|
|
24
|
|
|
Capitalized software development costs
|
(281
|
)
|
|
(85
|
)
|
|
Collections on purchased financing receivables
|
25
|
|
|
31
|
|
|
Acquisition of businesses, net
|
(223
|
)
|
|
(37,614
|
)
|
|
Asset acquisitions, net
|
(95
|
)
|
|
—
|
|
|
Asset dispositions, net
|
(53
|
)
|
|
—
|
|
|
Other
|
—
|
|
|
(48
|
)
|
|
Change in cash from investing activities
|
(1,990
|
)
|
|
(38,059
|
)
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued; in millions; unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
Cash flows from financing activities:
|
|
|
|
|
Payment of dissenting shares obligation
|
—
|
|
|
(446
|
)
|
|
Proceeds from the issuance of DHI Group Common Stock
|
—
|
|
|
4,404
|
|
|
Proceeds from the issuance of common stock of subsidiaries
|
110
|
|
|
101
|
|
|
Repurchases of DHI Group Common Stock
|
(6
|
)
|
|
(10
|
)
|
|
Repurchases of Class V Common Stock
|
(722
|
)
|
|
(132
|
)
|
|
Repurchases of common stock of subsidiaries
|
(555
|
)
|
|
(611
|
)
|
|
Issuance of common stock under employee plans
|
1
|
|
|
—
|
|
|
Payments for debt issuance costs
|
(44
|
)
|
|
(849
|
)
|
|
Proceeds from debt
|
13,192
|
|
|
45,986
|
|
|
Repayments of debt
|
(11,181
|
)
|
|
(9,638
|
)
|
|
Share repurchases for tax withholdings on vesting of equity awards
|
(299
|
)
|
|
(28
|
)
|
|
Other
|
—
|
|
|
10
|
|
|
Change in cash from financing activities
|
496
|
|
|
38,787
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
47
|
|
|
31
|
|
|
Change in cash and cash equivalents
|
2,232
|
|
|
2,328
|
|
|
Cash and cash equivalents at beginning of period, including amounts held for sale
|
9,474
|
|
|
6,576
|
|
|
Cash and cash equivalents at end of the period
|
11,706
|
|
|
8,904
|
|
|
Less: Cash included in current assets held for sale
|
—
|
|
|
82
|
|
|
Cash and cash equivalents from continuing operations
|
$
|
11,706
|
|
|
$
|
8,822
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; unaudited; continued on next page
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and Capital in Excess of Par Value
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
DHI Group
|
|
Class V Common Stock
|
|
DHI Group
|
|
Class V Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued Shares
|
|
Amount
|
|
Issued Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income/(Loss)
|
|
Dell Technologies Stockholders' Equity
|
|
Non-Controlling Interests
|
|
Total Stockholders' Equity
|
|
Balances as of February 3, 2017
|
569
|
|
|
$
|
10,158
|
|
|
223
|
|
|
$
|
10,041
|
|
|
—
|
|
|
$
|
(10
|
)
|
|
14
|
|
|
$
|
(742
|
)
|
|
$
|
(5,609
|
)
|
|
$
|
(595
|
)
|
|
$
|
13,243
|
|
|
$
|
5,766
|
|
|
$
|
19,009
|
|
|
Adjustment for adoption of accounting standard (Note 1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
—
|
|
|
84
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,217
|
)
|
|
—
|
|
|
(3,217
|
)
|
|
(85
|
)
|
|
(3,302
|
)
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
325
|
|
|
325
|
|
|
—
|
|
|
325
|
|
|
Investments, net change
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
45
|
|
|
2
|
|
|
47
|
|
|
Cash flow hedges, net change
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Issuance of common stock
|
2
|
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
(25
|
)
|
|
Stock-based compensation expense
|
—
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
|
545
|
|
|
631
|
|
|
Treasury stock repurchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(6
|
)
|
|
10
|
|
|
(682
|
)
|
|
—
|
|
|
—
|
|
|
(688
|
)
|
|
—
|
|
|
(688
|
)
|
|
Revaluation of redeemable shares
|
—
|
|
|
(131
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(131
|
)
|
|
—
|
|
|
(131
|
)
|
|
Impact from equity transactions of non-controlling interests
|
—
|
|
|
(202
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(202
|
)
|
|
(521
|
)
|
|
(723
|
)
|
|
Balances as of November 3,
2017
|
571
|
|
|
$
|
9,886
|
|
|
223
|
|
|
$
|
10,041
|
|
|
1
|
|
|
$
|
(16
|
)
|
|
24
|
|
|
$
|
(1,424
|
)
|
|
$
|
(8,742
|
)
|
|
$
|
(226
|
)
|
|
$
|
9,519
|
|
|
$
|
5,707
|
|
|
$
|
15,226
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; unaudited; continued
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock and Capital in Excess of Par Value
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
DHI Group
|
|
Class V Common Stock
|
|
DHI Group
|
|
Class V Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued Shares
|
|
Amount
|
|
Issued Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income/(Loss)
|
|
Dell Technologies Stockholders' Equity
|
|
Non-Controlling Interests
|
|
Total Stockholders' Equity
|
|
Balances as of January 29, 2016
|
405
|
|
|
$
|
5,727
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,937
|
)
|
|
$
|
(324
|
)
|
|
$
|
1,466
|
|
|
$
|
—
|
|
|
$
|
1,466
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,436
|
)
|
|
—
|
|
|
(1,436
|
)
|
|
(12
|
)
|
|
(1,448
|
)
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(214
|
)
|
|
(214
|
)
|
|
—
|
|
|
(214
|
)
|
|
Investments, net change
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
Cash flow hedges, net change
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
39
|
|
|
—
|
|
|
39
|
|
|
Fair value of non-controlling interests assumed in business combination
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,097
|
|
|
6,097
|
|
|
Issuance of common stock
|
163
|
|
|
4,427
|
|
|
223
|
|
|
10,041
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,468
|
|
|
—
|
|
|
14,468
|
|
|
Stock-based compensation expense
|
—
|
|
|
183
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
183
|
|
|
—
|
|
|
183
|
|
|
Tax benefit from stock-based compensation
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Treasury stock repurchases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
4
|
|
|
(165
|
)
|
|
—
|
|
|
—
|
|
|
(175
|
)
|
|
—
|
|
|
(175
|
)
|
|
Revaluation of redeemable shares
|
—
|
|
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
|
(81
|
)
|
|
Impact from equity transactions of non-controlling interests
|
—
|
|
|
(361
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(361
|
)
|
|
(146
|
)
|
|
(507
|
)
|
|
Other
|
—
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
Balances as of October 28, 20
16
|
568
|
|
|
$
|
9,884
|
|
|
223
|
|
|
$
|
10,041
|
|
|
—
|
|
|
$
|
(10
|
)
|
|
4
|
|
|
$
|
(165
|
)
|
|
$
|
(5,366
|
)
|
|
$
|
(504
|
)
|
|
$
|
13,880
|
|
|
$
|
5,939
|
|
|
$
|
19,819
|
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1
—
BASIS OF PRESENTATION
EMC Merger Transaction
— On September 7, 2016, EMC Corporation, a Massachusetts corporation ("EMC"), became a wholly-owned subsidiary of Dell Technologies Inc. (the "Company") as a result of the merger of Universal Acquisition Co., a Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"), with and into EMC, with EMC surviving as a wholly-owned subsidiary of the Company (the "EMC merger transaction"). See
Note 2
of the
Notes to the Condensed Consolidated Financial Statements
for additional information on the EMC merger transaction.
Divestitures
— On November 2, 2016, the Company completed substantially all of the divestiture of Dell Services. On October 31, 2016, the Company completed the divestiture of Dell Software Group ("DSG"). On January 23, 2017, the Company completed the divestiture of the Dell EMC Enterprise Content Division ("ECD"). In accordance with applicable accounting guidance, the results of Dell Services, DSG, and ECD are presented as discontinued operations in the
Condensed Consolidated Statements of Income (Loss)
and, as such, have been excluded from both continuing operations and segment results for the relevant periods. See
Note 3
of the
Notes to the Condensed Consolidated Financial Statements
for additional information.
SecureWorks Initial Public Offering
— On April 27, 2016, SecureWorks Corp. ("SecureWorks") completed a registered underwritten initial public offering ("IPO") of its Class A common stock. The results of the SecureWorks operations are included in other businesses. See
Note 15
of the
Notes to the Condensed Consolidated Financial Statements
for more information.
Basis of Presentation —
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes filed with the U.S. Securities and Exchange Commission ("SEC") in the Company's Annual Report on Form 10-K for the fiscal year ended
February 3, 2017
. These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of Dell Technologies Inc. (individually and together with its consolidated subsidiaries, the "Company" or "Dell Technologies") as of
November 3, 2017
and
February 3, 2017
, the results of its operations and corresponding comprehensive income (loss) for the
three and nine months ended November 3, 2017 and October 28, 2016
, as well as its cash flows for the
nine months ended November 3, 2017 and October 28, 2016
.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and the accompanying Notes. Actual results could differ materially from those estimates. The results of operations and comprehensive income (loss) for the
three and nine months ended November 3, 2017 and October 28, 2016
and cash flows for the
nine months ended November 3, 2017 and October 28, 2016
are not necessarily indicative of the results to be expected for the full fiscal year or for any other fiscal period.
The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. The fiscal year ended
February 3, 2017
("
Fiscal 2017
") was a 53-week period while the fiscal year ending
February 2, 2018
("
Fiscal 2018
") will be a 52-week period.
As a result of the EMC merger transaction completed on September 7, 2016, the Company's results of operations, comprehensive income (loss), and cash flows for the fiscal periods reflected in these Condensed Consolidated Financial Statements are not directly comparable as the results of the acquired businesses are only included in the consolidated results from September 7, 2016.
Unless the context indicates otherwise, references in these
Notes to the Condensed Consolidated Financial Statements
to "VMware" mean the VMware reportable segment, which reflects the operations of VMware, Inc. (NYSE: VMW) within Dell Technologies. See Exhibit 99.1 filed with the Company's quarterly report on Form 10-Q for the quarterly period ended
November 3, 2017
for information on the differences between VMware reportable segment results and VMware, Inc. results.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
—
In May 2014, the Financial Accounting Standards Board (the "FASB") issued amended guidance on the recognition of revenue from contracts with customers. The objective of the new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede substantially all of the existing revenue recognition guidance, including industry-specific guidance. The new standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also provides guidance on the accounting for costs to fulfill or obtain a customer contract. Further, the new standard requires additional disclosures to help enable users of the financial statements to better understand the nature, amount, timing, risks, and judgments related to revenue recognition and related cash flows from contracts with customers.
In August 2015, the FASB approved a one-year deferral of the effective date of this standard. Public entities are required to adopt the new standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The new revenue standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (modified retrospective method). The Company currently expects to adopt this standard retrospectively to each prior period presented for the fiscal year beginning February 3, 2018.
While the Company is currently evaluating the financial and system impacts that the new standard will have on the Consolidated Financial Statements, the Company expects that unearned license revenue related to the sale of software licenses and related deliverables will decline upon adoption. Currently, the Company defers revenue for certain software arrangements due to the absence of vendor specific objective evidence ("VSOE") of fair value for all or a portion of the deliverables. Under the new standard, the Company will no longer be required to establish VSOE of fair value in order to account for elements in an arrangement as separate units of accounting, and will be able to record revenue upon satisfaction of each performance obligation. Additionally, the Company expects the new standard to have an impact on the way the transaction price is allocated for certain non-standard warranties. The new standard is expected to result in more of the aggregate transaction price related to the non-standard warranty being recorded as revenue upon delivery of the underlying product, because the Company will no longer defer revenue based on the separately stated price of the non-standard warranty provided under the contract. The Company continues to make progress in assessing the impacts of the standard on the Consolidated Financial Statements and will continue to evaluate the impact of any changes to the standard or interpretations should they become available.
Recognition and Measurement of Financial Assets and Financial Liabilities
—
In January 2016, the FASB issued amended guidance that addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Public entities must adopt the new guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amended guidance requires changes in the fair value of equity investments to be recognized through net income, rather than other comprehensive income. Adoption of the standard will be applied through a cumulative one-time adjustment to retained earnings. For the Company’s equity investments without readily determinable fair values, the Company expects to elect the measurement alternative to record those investments at cost, less impairment, and adjusted by observable price changes on a prospective basis. The impact of the standard on the Consolidated Statements of Income (Loss) will depend on the relative changes in market price of the equity investments.
Leases
—
In February 2016, the FASB issued amended guidance on the accounting for leasing transactions. The primary objective of this update is to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance makes some changes to lessor accounting, including the elimination of the use of third-party residual value guarantee insurance in the sales-type lease test. Public entities must adopt the new guidance for reporting periods beginning after December 15, 2018, with early adoption permitted. Companies are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.
Measurement of Credit Losses on Financial Instruments
—
In June 2016, the FASB issued amended guidance which replaces the current incurred loss impairment methodology for measurement of credit losses on financial instruments with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Public entities must adopt the new guidance for fiscal years beginning after
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for fiscal periods beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.
Classification of Certain Cash Receipts and Cash Payments —
In August 2016, the FASB issued amended guidance on the presentation and classification of eight specific cash flow issues with the objective of reducing existing diversity in practice. Public entities must adopt the new guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Companies should reflect any adjustments on a retrospective basis, if practicable; otherwise, adoption is required to be applied as of the earliest date practicable. The Company will adopt this standard as of May 4, 2018, and will apply adjustments retrospectively to each prior period presented on the Condensed Consolidated Statements of Cash Flows for that period. The Company is currently evaluating the impact of the standard, and other than certain reclassifications on the Consolidated Statements of Cash Flows, it is not expected to have a material impact on the Consolidated Financial Statements.
Statement of Cash Flows, Restricted Cash —
In November 2016, the FASB issued amended guidance requiring entities to include explanations of changes in restricted cash and restricted cash equivalents on the cash flow statement, and also to provide a supplemental reconciliation of cash, cash equivalents and restricted cash. Public entities must adopt the new guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company will adopt this standard as of May 4, 2018, and will apply adjustments retrospectively to each prior period presented on the Condensed Consolidated Statements of Cash Flows for that period and provide the supplemental reconciliation. The Company does not expect that the standard will have a material impact on its Consolidated Financial Statements as its restricted cash balance does not change significantly from period to period.
Simplifying the Test for Goodwill Impairment —
In January 2017, the FASB issued amended guidance to simplify the subsequent measurement of goodwill by removing Step 2 of the goodwill impairment test. Instead, under the amendments in the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Public entities must adopt the new guidance in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the new guidance, but does not expect that the standard will have an impact on its Consolidated Financial Statements.
Derivatives and Hedging
—
In August 2017, the FASB issued amended guidance that will make more financial and non-financial hedging strategies eligible for hedge accounting. The amended guidance changes how companies assess effectiveness, and also amends the presentation and disclosure requirements. The guidance is intended to simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. Immediate early adoption is permitted in any interim or annual period. The Company will early adopt this guidance at the beginning of the fiscal year ending February 1, 2019. The Company is currently evaluating the application of the new guidance, but does not expect that it will have a material impact on the Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
Improvements to Employee Share-Based Payment Accounting —
In March 2016, the FASB issued amended guidance on the accounting for employee share-based payments, including the accounting for income taxes and forfeitures, classification of awards as either equity or liabilities, and classification of cash flows. The Company adopted this guidance at the beginning of Fiscal 2018. In accordance with the new guidance, excess tax benefits or deficiencies for stock-based compensation are now reflected as a component of the provision for income taxes on the Consolidated Statements of Income (Loss), whereas they were previously recorded as additional paid-in capital. The Company has elected to continue to estimate expected forfeitures. Additionally, the Company now presents excess tax benefits as an operating activity rather than a financing activity on the Consolidated Statements of Cash Flows, while the cash flows related to employee taxes paid for withheld shares are presented as a financing activity with prior periods adjusted accordingly. The adoption of the amended guidance did not have a material impact on the Consolidated Financial Statements. The prospective impact of the new standard will depend on the Company's stock price at the vesting or exercise dates of the awards and the number of awards that vest or are exercised in each period, but the Company does not expect the impact to be material in future periods.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Intra-Entity Transfers of Assets Other Than Inventory —
In October 2016, the FASB issued amended guidance on the accounting for income taxes. The new guidance requires companies to recognize the income tax effects of intra-entity asset transfers, other than transfers of inventory, when the transfer occurs instead of when the asset is sold to a third party. The new guidance should be applied on a modified-retrospective basis with the cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company early adopted this guidance at the beginning of Fiscal 2018. At adoption, approximately
$84 million
was reclassified from other non-current liabilities to retained earnings, resulting in a net credit to retained earnings.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 2
—
BUSINESS COMBINATIONS
EMC Merger Transaction
Transaction Overview
— On September 7, 2016, EMC became a wholly-owned subsidiary of the Company as a result of the merger of Merger Sub with and into EMC, with EMC surviving as a wholly-owned subsidiary of the Company. Pursuant to the terms of the merger agreement, upon the completion of the EMC merger transaction, each issued and outstanding share of common stock, par value
$0.01
per share, of EMC (approximately
2.0 billion
shares as of September 7, 2016) was converted into the right to receive (1)
$24.05
in cash, without interest, and (2)
0.11146
validly issued, fully paid, and non-assessable shares of common stock of the Company designated as Class V Common Stock, par value
$0.01
per share (the "Class V Common Stock"), plus cash in lieu of any fractional shares. Shares of the Class V Common Stock were approved for listing on the New York Stock Exchange (the "NYSE") under the ticker symbol "DVMT" and began trading on September 7, 2016.
In connection with the EMC merger transaction, the Company authorized
343 million
shares of Class V Common Stock. On September 7, 2016, Dell Technologies issued
223 million
shares of Class V Common Stock to EMC shareholders at a purchase price of
$45.07
per share for an aggregate purchase price of approximately
$10 billion
. The total fair value of consideration transferred to effect the EMC merger transaction was approximately
$64 billion
, which primarily consisted of cash and such shares of Class V Common Stock, as well as the fair value of non-controlling interests in VMware, Inc. and Pivotal Software, Inc. ("Pivotal"), majority-owned consolidated subsidiaries of EMC. See
Note 17
of the
Notes to the Condensed Consolidated Financial Statements
for additional information on the Class V Common Stock.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Assets Acquired and Liabilities Assumed
— The EMC merger transaction has been accounted for as a business combination under the acquisition method of accounting. The cumulative impact of any subsequent changes resulting from the facts and circumstances that existed as of the transaction date will be adjusted in the reporting period in which the adjustment amount is determined. The following table summarizes, as of
November 3, 2017
, the purchase price allocation to the assets acquired and the liabilities assumed in the EMC merger transaction (in millions):
|
|
|
|
|
|
|
|
Current assets:
|
|
|
Cash and cash equivalents
|
$
|
10,080
|
|
|
Short-term investments
|
1,765
|
|
|
Accounts receivable
|
2,810
|
|
|
Short-term financing receivables
|
64
|
|
|
Inventories, net
|
1,993
|
|
|
Other current assets
|
903
|
|
|
Total current assets
|
17,615
|
|
|
Property, plant, and equipment
|
4,490
|
|
|
Long-term investments
|
4,317
|
|
|
Long-term financing receivables, net
|
65
|
|
|
Goodwill
|
31,539
|
|
|
Purchased intangibles
|
31,218
|
|
|
Other non-current assets
|
445
|
|
|
Total assets
|
$
|
89,689
|
|
|
Current liabilities:
|
|
|
Short-term debt
|
$
|
905
|
|
|
Accounts payable
|
728
|
|
|
Accrued and other
|
3,259
|
|
|
Short-term deferred revenue
|
4,954
|
|
|
Total current liabilities
|
9,846
|
|
|
Long-term debt
|
5,474
|
|
|
Long-term deferred revenue
|
3,469
|
|
|
Deferred tax liabilities
|
6,625
|
|
|
Other non-current liabilities
|
324
|
|
|
Total liabilities
|
25,738
|
|
|
Total net assets
|
$
|
63,951
|
|
The table above includes amounts allocated to ECD, which was divested in the fiscal year ended
February 3, 2017
. See
Note 3
of the
Notes to the Condensed Consolidated Financial Statements
for more information on discontinued operations.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Pro Forma Financial Information
— The following table provides unaudited pro forma results of operations for the periods presented as if the transaction date had occurred on January 31, 2015, the first day of the fiscal year ended January 29, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 28, 2016
|
|
October 28, 2016
|
|
|
(in millions, except per share amounts)
|
|
Total net revenue (a)
|
$
|
17,891
|
|
|
$
|
53,658
|
|
|
Net loss attributable to Dell Technologies Inc. (a)
|
$
|
(810
|
)
|
|
$
|
(3,352
|
)
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Dell Technologies Inc. - basic (b):
|
|
|
|
|
Continuing operations - Class V Common Stock
|
$
|
0.79
|
|
|
$
|
1.84
|
|
|
Continuing operations - DHI Group
|
$
|
(1.71
|
)
|
|
$
|
(6.58
|
)
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted (b):
|
|
|
|
|
Continuing operations - Class V Common Stock
|
$
|
0.78
|
|
|
$
|
1.83
|
|
|
Continuing operations - DHI Group
|
$
|
(1.71
|
)
|
|
$
|
(6.58
|
)
|
____________________
(a) The amounts presented for the
three and nine months ended October 28, 2016
are different from those reported in the Company's Form 10-Q for the quarterly period ended October 28, 2016 previously filed with the SEC due to the finalization of purchase accounting related to the amortization amount and periods for deferred revenue and intangible asset fair value adjustments.
|
|
|
|
(b)
|
For purposes of calculating pro forma earnings (loss) per share, the Company used the two-class method. Earnings are allocated between the Class V Common Stock and the DHI Group on a basis consistent with historical earnings (loss) per share.
|
The pro forma information for the
three and nine months ended October 28, 2016
combines the Company's historical results for the
three and nine months ended October 28, 2016
and EMC's historical results for the
three and nine months ended October 28, 2016
. The historical results have been adjusted in the pro forma information to give effect to items that are (a) directly attributable to the EMC merger transaction, (b) factually supportable, and (c) expected to have a continuing impact on the combined company's results. The pro forma information is presented for informational purposes only. The unaudited pro forma results include the elimination of non-recurring transaction and integration costs of
$1.2 billion
and
$1.4 billion
for the
three and nine months ended October 28, 2016
, respectively. The pro forma information does not purport to represent what the combined company's results of operations or financial condition would have been had the EMC merger transaction actually occurred on the date indicated, and does not purport to project the combined company's results of operations for any future period or as of any future date.
Acquisitions by VMware, Inc.
During the three months ended August 4, 2017, VMware, Inc. completed the acquisitions of Wavefront and Apteligent, Inc., which were not material to the Condensed Consolidated Financial Statements. These acquisitions are a part of VMware, Inc.’s
strategy to accelerate the development of VMware Inc.'s Cloud services and other technologies. The aggregate purchase price for the
two
acquisitions was
$323 million
, inclusive of the fair value of the Company's existing investment in Wavefront of
$69 million
and cash acquired of
$35 million
. The aggregate purchase price included
$36 million
of identifiable intangible assets and
$238 million
of goodwill that is not expected to be deductible for tax purposes. The identifiable intangible assets primarily relate to purchased technology, with estimated useful lives of
five years
. The fair value of assumed unvested equity attributable to post-combination services was
$37 million
and will be expensed over the remaining requisite service periods on a straight-line basis. The estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.
Prior to the closing of the acquisition, Dell Technologies, including VMware, Inc., held an ownership interest in Wavefront. Upon completion of the step acquisition, Dell Technologies recognized a
$45 million
gain in interest and other, net for the remeasurement of its ownership interest to fair value. The gain recognized in the step acquisition is not expected to be taxable.
The Company has not presented pro forma results of operations for the foregoing acquisitions because they are not material to the Company's consolidated results of operations, financial position, or cash flows.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 3
—
DISCONTINUED OPERATIONS
Dell Inc. ("Dell") entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services, and on November 2, 2016, the parties closed substantially all of the transaction. Dell Inc. entered into a definitive agreement with Francisco Partners and Elliot Management Corporation to divest substantially all of DSG, and on October 31, 2016, the parties closed the transaction. EMC, a subsidiary of the Company, entered into a definitive agreement with OpenText Corporation to divest the Dell EMC Enterprise Content Division, and on January 23, 2017, the parties closed the transaction. Upon closing of the respective transactions, the Company entered into transition services agreements with NTT Data International L.L.C., Francisco Partners and Elliot Management, and OpenText Corporation pursuant to which the Company provides various administrative services on an interim transitional basis. Transition services may be provided for up to
one year
, with an option to renew after that period. The Company also entered into various commercial agreements with NTT Data International L.L.C., Francisco Partners and Elliot Management, and OpenText Corporation that include reseller agreements for certain offerings.
In accordance with applicable accounting guidance, the Company reclassified the financial results of Dell Services, DSG, and ECD as discontinued operations in the
Condensed Consolidated Statements of Income (Loss)
for the relevant periods. The following two tables present key financial results of Dell Services, DSG, and ECD included in "Income from discontinued operations, net of income taxes" for the
three and nine months ended October 28, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 28, 2016
|
|
|
Dell Services
|
|
DSG
|
|
ECD (b)
|
|
Total
|
|
|
(in millions)
|
|
Net revenue
|
$
|
658
|
|
|
$
|
326
|
|
|
$
|
74
|
|
|
$
|
1,058
|
|
|
Cost of net revenue
|
523
|
|
|
74
|
|
|
28
|
|
|
625
|
|
|
Operating expenses
|
116
|
|
|
233
|
|
|
66
|
|
|
415
|
|
|
Interest and other, net
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
(8
|
)
|
|
Income from discontinued operations before income taxes
|
19
|
|
|
11
|
|
|
(20
|
)
|
|
10
|
|
|
Income tax provision (benefit) (a)
|
(37
|
)
|
|
489
|
|
|
(4
|
)
|
|
448
|
|
|
Income (loss) from discontinued operations, net of income taxes
|
$
|
56
|
|
|
$
|
(478
|
)
|
|
$
|
(16
|
)
|
|
$
|
(438
|
)
|
____________________
|
|
|
|
(a)
|
The income tax provision (benefit) for Dell Services and DSG for the
three months ended October 28, 2016
was primarily due to the Company's determination that it could no longer assert permanent reinvestment in the outside basis of the entities that would be divested.
|
|
|
|
|
(b)
|
The results for ECD are shown for the period from September 7, 2016 through October 28, 2016.
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 28, 2016
|
|
|
Dell Services
|
|
DSG
|
|
ECD (b)
|
|
Total
|
|
|
(in millions)
|
|
Net revenue
|
$
|
1,968
|
|
|
$
|
968
|
|
|
$
|
74
|
|
|
$
|
3,010
|
|
|
Cost of net revenue
|
1,555
|
|
|
249
|
|
|
28
|
|
|
1,832
|
|
|
Operating expenses
|
322
|
|
|
721
|
|
|
66
|
|
|
1,109
|
|
|
Interest and other, net
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Income from discontinued operations before income taxes
|
91
|
|
|
(3
|
)
|
|
(20
|
)
|
|
68
|
|
|
Income tax provision (benefit) (a)
|
(955
|
)
|
|
152
|
|
|
(4
|
)
|
|
(807
|
)
|
|
Income (loss) from discontinued operations, net of income taxes
|
$
|
1,046
|
|
|
$
|
(155
|
)
|
|
$
|
(16
|
)
|
|
$
|
875
|
|
____________________
|
|
|
|
(a)
|
The income tax provision (benefit) for Dell Services and DSG for the
nine months ended October 28, 2016
was primarily due to the Company's determination that it could no longer assert permanent reinvestment in the outside basis of the entities that would be divested.
|
|
|
|
|
(b)
|
The results for ECD are shown for the period from September 7, 2016 through October 28, 2016.
|
Cash flows from the Company's discontinued operations are included in the accompanying Condensed Consolidated Statements of Cash Flows.
The significant cash flow items from Dell Services and DSG for the
nine months ended October 28, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 28, 2016
|
|
|
Dell Services
|
|
DSG
|
|
Total
|
|
|
(in millions)
|
|
Depreciation and amortization (a)
|
$
|
32
|
|
|
$
|
66
|
|
|
$
|
98
|
|
|
Capital expenditures
|
$
|
82
|
|
|
$
|
20
|
|
|
$
|
102
|
|
____________________
|
|
|
|
(a)
|
Depreciation and amortization ceased upon determination that Dell Services and DSG had met the criteria for discontinued operations reporting as of March 27, 2016 and June 19, 2016, respectively.
|
Depreciation and amortization for ECD ceased upon determination that the held-for-sale criteria were met. Capital expenditures for ECD were immaterial for the period from September 7, 2016 through October 28, 2016.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4
—
FAIR VALUE MEASUREMENTS
The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of
November 3, 2017
and
February 3, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017 (a)
|
|
February 3, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
Quoted
Prices
in Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
(in millions)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
7,256
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,256
|
|
|
$
|
4,866
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,866
|
|
|
Municipal obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
U.S. and foreign corporate debt securities
|
—
|
|
|
89
|
|
|
—
|
|
|
89
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
U.S. government and agencies
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
726
|
|
|
400
|
|
|
—
|
|
|
1,126
|
|
|
444
|
|
|
470
|
|
|
—
|
|
|
914
|
|
|
U.S. corporate
|
—
|
|
|
1,992
|
|
|
—
|
|
|
1,992
|
|
|
—
|
|
|
1,800
|
|
|
—
|
|
|
1,800
|
|
|
Foreign
|
—
|
|
|
2,426
|
|
|
—
|
|
|
2,426
|
|
|
—
|
|
|
2,083
|
|
|
—
|
|
|
2,083
|
|
|
Municipal obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
352
|
|
|
—
|
|
|
352
|
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
Equity and other securities
|
227
|
|
|
3
|
|
|
—
|
|
|
230
|
|
|
169
|
|
|
—
|
|
|
—
|
|
|
169
|
|
|
Derivative instruments
|
—
|
|
|
91
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
205
|
|
|
—
|
|
|
205
|
|
|
Total assets
|
$
|
8,214
|
|
|
$
|
5,001
|
|
|
$
|
—
|
|
|
$
|
13,215
|
|
|
$
|
5,479
|
|
|
$
|
4,917
|
|
|
$
|
—
|
|
|
$
|
10,396
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
64
|
|
____________________
(a)
The Company did not transfer any securities between levels during the
nine months ended November 3, 2017
.
The following section describes the valuation methodologies the Company uses to measure financial instruments at fair value:
Money Market Funds
— The Company's investment in money market funds that are classified as cash equivalents hold underlying investments with a weighted average maturity of
90
days or less and are recognized at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Company reviews security pricing and assesses liquidity on a quarterly basis. As of
November 3, 2017
, the Company's U.S. portfolio had no material exposure to money market funds with a fluctuating net asset value.
Equity and Other Securities
— The majority of the Company's investments in equity and other securities that are measured at fair value on a recurring basis consist of strategic investments in publicly traded companies.
The valuation of these securities is based on quoted prices in active markets.
Debt Securities
— The majority of the Company's debt securities consists of various fixed income securities such as U.S. government and agencies, U.S. corporate, and foreign. Valuation is based on pricing models whereby all significant inputs, including benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers, and other
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
market related data, are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset. Inputs are documented in accordance with the fair value measurements hierarchy. The Company reviews security pricing and assesses liquidity on a quarterly basis. See
Note 5
of the
Notes to the Condensed Consolidated Financial Statements
for additional information about investments.
Derivative Instruments
— The Company's derivative financial instruments consist primarily of foreign currency forward and purchased option contracts and interest rate swaps. The fair value of the portfolio is determined using valuation models based on market observable inputs, including interest rate curves, forward and spot prices for currencies, and implied volatilities. Credit risk is also factored into the fair value calculation of the Company's derivative instrument portfolio. See
Note 8
of the
Notes to the Condensed Consolidated Financial Statements
for a description of the Company's derivative financial instrument activities.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
— Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the recurring fair value table above. These assets consist primarily of non-financial assets such as goodwill and intangible assets. See
Note 9
of the
Notes to the Condensed Consolidated Financial Statements
for additional information about goodwill and intangible assets.
As of
November 3, 2017
and
February 3, 2017
, the Company held strategic investments of
$507 million
and
$455 million
, respectively. These investments are accounted for under the cost method and are not included in the recurring fair value table above. Investments accounted for under the cost method are recorded at cost initially, which approximates fair value. Subsequently, if there is an indicator of impairment, the impairment is recognized. In evaluating these investments for impairment, the Company uses inputs including pre- and post-money valuations of recent financing events and the impact of those on its fully diluted ownership percentages, as well as other available information regarding the issuer's historical and forecasted performance. As these investments are early-stage companies which are not publicly traded, it is not practicable for the Company to reliably estimate the fair value of these investments.
Carrying Value and Estimated Fair Value of Outstanding Debt
— The following table summarizes the carrying value and estimated fair value of the Company's outstanding debt as described in
Note 7
of the
Notes to the Condensed Consolidated Financial Statements
, including the current portion, as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
(in billions)
|
|
Senior Secured Credit Facilities
|
$
|
10.7
|
|
|
$
|
10.9
|
|
|
$
|
11.4
|
|
|
$
|
11.7
|
|
|
First Lien Notes
|
$
|
19.7
|
|
|
$
|
22.2
|
|
|
$
|
19.7
|
|
|
$
|
21.8
|
|
|
Unsecured Notes and Debentures
|
$
|
2.3
|
|
|
$
|
2.5
|
|
|
$
|
2.3
|
|
|
$
|
2.5
|
|
|
Senior Notes
|
$
|
3.1
|
|
|
$
|
3.5
|
|
|
$
|
3.1
|
|
|
$
|
3.5
|
|
|
EMC Notes
|
$
|
5.5
|
|
|
$
|
5.4
|
|
|
$
|
5.5
|
|
|
$
|
5.4
|
|
|
VMware Notes
|
$
|
4.0
|
|
|
$
|
4.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Margin Loan Facility
|
$
|
2.0
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Bridge Facilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.0
|
|
|
$
|
4.0
|
|
The fair values of the outstanding Senior Secured Credit Facilities, First Lien Notes, Unsecured Notes and Debentures, Senior Notes, EMC Notes, VMware Notes, Margin Loan Facility, and Bridge Facilities were determined based on observable market prices in a less active market or based on valuation methodologies using observable inputs and were categorized as Level 2 in the fair value hierarchy. The fair values of the other short-term debt and the structured financing debt approximate their carrying values due to their short-term maturities.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 5
—
INVESTMENTS
The following table summarizes, by major security type, the carrying value and amortized cost of the Company's investments. All debt security investments with remaining effective maturities in excess of one year and substantially all equity and other securities are recorded as long-term investments in the Condensed Consolidated Statements of Financial Position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
Cost
|
|
Unrealized Gain
|
|
Unrealized (Loss)
|
|
Carrying Value
|
|
Cost
|
|
Unrealized Gain
|
|
Unrealized (Loss)
|
|
Carrying Value
|
|
|
(in millions)
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies
|
$
|
479
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
478
|
|
|
$
|
231
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
231
|
|
|
U.S. corporate debt securities
|
649
|
|
|
—
|
|
|
(1
|
)
|
|
648
|
|
|
651
|
|
|
—
|
|
|
(1
|
)
|
|
650
|
|
|
Foreign debt securities
|
883
|
|
|
—
|
|
|
(1
|
)
|
|
882
|
|
|
743
|
|
|
—
|
|
|
(1
|
)
|
|
742
|
|
|
Municipal obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
348
|
|
|
—
|
|
|
—
|
|
|
348
|
|
|
Asset-backed securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Total short-term investments
|
2,011
|
|
|
—
|
|
|
(3
|
)
|
|
2,008
|
|
|
1,977
|
|
|
—
|
|
|
(2
|
)
|
|
1,975
|
|
|
U.S. government and agencies
|
652
|
|
|
—
|
|
|
(4
|
)
|
|
648
|
|
|
689
|
|
|
—
|
|
|
(6
|
)
|
|
683
|
|
|
U.S. corporate debt securities
|
1,349
|
|
|
2
|
|
|
(7
|
)
|
|
1,344
|
|
|
1,164
|
|
|
—
|
|
|
(14
|
)
|
|
1,150
|
|
|
Foreign debt securities
|
1,550
|
|
|
1
|
|
|
(7
|
)
|
|
1,544
|
|
|
1,356
|
|
|
—
|
|
|
(15
|
)
|
|
1,341
|
|
|
Municipal obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Equity and other securities (a)
|
659
|
|
|
78
|
|
|
—
|
|
|
737
|
|
|
604
|
|
|
22
|
|
|
(2
|
)
|
|
624
|
|
|
Total long-term investments
|
4,210
|
|
|
81
|
|
|
(18
|
)
|
|
4,273
|
|
|
3,817
|
|
|
22
|
|
|
(37
|
)
|
|
3,802
|
|
|
Total investments
|
$
|
6,221
|
|
|
$
|
81
|
|
|
$
|
(21
|
)
|
|
$
|
6,281
|
|
|
$
|
5,794
|
|
|
$
|
22
|
|
|
$
|
(39
|
)
|
|
$
|
5,777
|
|
____________________
|
|
|
|
(a)
|
The majority of equity and other securities are strategic investments accounted for under the cost method, while the remainder are investments that are measured at fair value on a recurring basis. See
Note 4
of the
Notes to the Condensed Consolidated Financial Statements
for additional information on investments measured at fair value on a recurring basis.
|
The Company's investments in debt securities are classified as available-for-sale securities, which are carried at fair value.
As of
November 3, 2017
, the aggregate fair value of investments held in a continuous unrealized loss position for greater than 12 months was
$1.7 billion
, and the unrealized loss of these investments was
$13 million
.
The maturities of debt securities held at
November 3, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Carrying Value
|
|
|
(in millions)
|
|
Due within one year
|
$
|
2,011
|
|
|
$
|
2,008
|
|
|
Due after 1 year through 5 years
|
3,491
|
|
|
3,476
|
|
|
Due after 5 years through 10 years
|
60
|
|
|
60
|
|
|
Total
|
$
|
5,562
|
|
|
$
|
5,544
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 6
—
FINANCIAL SERVICES
The Company offers or arranges various financing options and services for its business and consumer customers in North America, Europe, Australia, and New Zealand through Dell Financial Services and its affiliates (collectively, "DFS"). The key activities of DFS include the origination, collection, and servicing of customer receivables primarily related to the purchase of Dell Technologies' products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including originations of third-party technology products, were
$1.6 billion
and
$1.1 billion
for
three months ended November 3, 2017 and October 28, 2016
, respectively, and
$4.3 billion
and
$3.0 billion
for the
nine months ended November 3, 2017 and October 28, 2016
, respectively.
In June 2017, as part of the global expansion of Dell Technologies' captive financing model, the Company purchased a portfolio of customer fixed-term financing receivables totaling approximately
$89 million
from Bank of Queensland. Bank of Queensland was previously the Company's preferred financing partner in Australia and New Zealand.
The Company's financing receivables are aggregated into the following categories:
|
|
|
|
•
|
Revolving loans
— Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by Dell Technologies. These private label credit financing programs are referred to as Dell Preferred Account ("DPA") and Dell Business Credit ("DBC"). The DPA product is primarily offered to individual consumer customers, and the DBC product is primarily offered to small and medium-sized commercial customers. Revolving loans in the United States bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within
twelve months
on average.
|
|
|
|
|
•
|
Fixed-term sales-type leases and loans
— The Company enters into sales-type lease arrangements with customers who seek lease financing. Leases with business customers have fixed terms of generally
two
to
four years
. Future maturities of minimum lease payments as of
November 3, 2017
were as follows:
Fiscal 2018 (remaining three months)
-
$665 million
;
Fiscal 2019
-
$1,755 million
;
Fiscal 2020
-
$1,151 million
;
Fiscal 2021
-
$503 million
;
Fiscal 2022 and beyond
-
$148 million
. The Company also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally
three
to
five years
.
|
The following table summarizes the components of the Company's financing receivables segregated by portfolio segment as of
November 3, 2017
and
February 3, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
Revolving
|
|
Fixed-term
|
|
Total
|
|
Revolving
|
|
Fixed-term
|
|
Total
|
|
|
(in millions)
|
|
Financing receivables, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer receivables, gross
|
$
|
871
|
|
|
$
|
5,665
|
|
|
$
|
6,536
|
|
|
$
|
1,009
|
|
|
$
|
4,530
|
|
|
$
|
5,539
|
|
|
Allowances for losses
|
(79
|
)
|
|
(52
|
)
|
|
(131
|
)
|
|
(91
|
)
|
|
(52
|
)
|
|
(143
|
)
|
|
Customer receivables, net
|
792
|
|
|
5,613
|
|
|
6,405
|
|
|
918
|
|
|
4,478
|
|
|
5,396
|
|
|
Residual interest
|
—
|
|
|
555
|
|
|
555
|
|
|
—
|
|
|
477
|
|
|
477
|
|
|
Financing receivables, net
|
$
|
792
|
|
|
$
|
6,168
|
|
|
$
|
6,960
|
|
|
$
|
918
|
|
|
$
|
4,955
|
|
|
$
|
5,873
|
|
|
Short-term
|
$
|
792
|
|
|
$
|
2,851
|
|
|
$
|
3,643
|
|
|
$
|
918
|
|
|
$
|
2,304
|
|
|
$
|
3,222
|
|
|
Long-term
|
$
|
—
|
|
|
$
|
3,317
|
|
|
$
|
3,317
|
|
|
$
|
—
|
|
|
$
|
2,651
|
|
|
$
|
2,651
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following tables summarize the changes in the allowance for financing receivable losses for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
Revolving
|
|
Fixed-term
|
|
Total
|
|
Revolving
|
|
Fixed-term
|
|
Total
|
|
|
(in millions)
|
|
Allowance for financing receivable losses:
|
|
Balances at beginning of period
|
$
|
81
|
|
|
$
|
54
|
|
|
$
|
135
|
|
|
$
|
100
|
|
|
$
|
56
|
|
|
$
|
156
|
|
|
Charge-offs, net of recoveries
|
(21
|
)
|
|
(5
|
)
|
|
(26
|
)
|
|
(21
|
)
|
|
(8
|
)
|
|
(29
|
)
|
|
Provision charged to income statement
|
19
|
|
|
3
|
|
|
22
|
|
|
16
|
|
|
3
|
|
|
19
|
|
|
Balances at end of period
|
$
|
79
|
|
|
$
|
52
|
|
|
$
|
131
|
|
|
$
|
95
|
|
|
$
|
51
|
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
Revolving
|
|
Fixed-term
|
|
Total
|
|
Revolving
|
|
Fixed-term
|
|
Total
|
|
|
(in millions)
|
|
Allowance for financing receivable losses:
|
|
Balances at beginning of period
|
$
|
91
|
|
|
$
|
52
|
|
|
$
|
143
|
|
|
$
|
118
|
|
|
$
|
58
|
|
|
$
|
176
|
|
|
Charge-offs, net of recoveries
|
(63
|
)
|
|
(13
|
)
|
|
(76
|
)
|
|
(69
|
)
|
|
(13
|
)
|
|
(82
|
)
|
|
Provision charged to income statement
|
51
|
|
|
13
|
|
|
64
|
|
|
46
|
|
|
6
|
|
|
52
|
|
|
Balances at end of period
|
$
|
79
|
|
|
$
|
52
|
|
|
$
|
131
|
|
|
$
|
95
|
|
|
$
|
51
|
|
|
$
|
146
|
|
The following table summarizes the aging of the Company's customer financing receivables, gross, including accrued interest, as of
November 3, 2017
and
February 3, 2017
, segregated by class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
Current
|
|
Past Due 1 — 90 Days
|
|
Past Due > 90 Days
|
|
Total
|
|
Current
|
|
Past Due 1 — 90 Days
|
|
Past Due > 90 Days
|
|
Total
|
|
|
(in millions)
|
|
Revolving — DPA
|
$
|
613
|
|
|
$
|
57
|
|
|
$
|
23
|
|
|
$
|
693
|
|
|
$
|
715
|
|
|
$
|
66
|
|
|
$
|
27
|
|
|
$
|
808
|
|
|
Revolving — DBC
|
154
|
|
|
19
|
|
|
5
|
|
|
178
|
|
|
175
|
|
|
22
|
|
|
4
|
|
|
201
|
|
|
Fixed-term — Consumer and Commercial
|
4,759
|
|
|
809
|
|
|
97
|
|
|
5,665
|
|
|
3,994
|
|
|
506
|
|
|
30
|
|
|
4,530
|
|
|
Total customer receivables, gross
|
$
|
5,526
|
|
|
$
|
885
|
|
|
$
|
125
|
|
|
$
|
6,536
|
|
|
$
|
4,884
|
|
|
$
|
594
|
|
|
$
|
61
|
|
|
$
|
5,539
|
|
The increase in our fixed-term past due balances is primarily due to administrative processes for larger transactions, in part due to additional originations from the EMC merger transaction, and does not indicate a deterioration in the credit quality of the portfolio.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Credit Quality
The following table summarizes customer receivables, gross, including accrued interest, by credit quality indicator segregated by class, as of
November 3, 2017
and
February 3, 2017
. The categories shown in the table below segregate customer receivables based on the relative degrees of credit risk. The credit quality indicators for DPA revolving accounts are measured primarily as of each quarter-end date, while all other indicators are generally updated on a periodic basis.
For DPA revolving receivables shown in the table below, the Company makes credit decisions based on proprietary scorecards, which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of
720
or above. The mid-category represents the mid-tier accounts that are comparable to U.S. customer FICO scores from
660
to
719
. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S. customer FICO scores below
660
. For the DBC revolving receivables and fixed-term commercial receivables shown in the table below, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The grading criteria and classifications for the fixed-term products differ from those for the revolving products as loss experience varies between these product and customer groups. The credit quality categories cannot be compared between the different classes as loss experience varies substantially between the classes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
Higher
|
|
Mid
|
|
Lower
|
|
Total
|
|
Higher
|
|
Mid
|
|
Lower
|
|
Total
|
|
|
(in millions)
|
|
Revolving — DPA
|
$
|
126
|
|
|
$
|
214
|
|
|
$
|
353
|
|
|
$
|
693
|
|
|
$
|
136
|
|
|
$
|
244
|
|
|
$
|
428
|
|
|
$
|
808
|
|
|
Revolving — DBC
|
$
|
46
|
|
|
$
|
54
|
|
|
$
|
78
|
|
|
$
|
178
|
|
|
$
|
61
|
|
|
$
|
60
|
|
|
$
|
80
|
|
|
$
|
201
|
|
|
Fixed-term — Consumer and Commercial (a)
|
$
|
2,843
|
|
|
$
|
1,694
|
|
|
$
|
1,128
|
|
|
$
|
5,665
|
|
|
$
|
2,232
|
|
|
$
|
1,428
|
|
|
$
|
870
|
|
|
$
|
4,530
|
|
____________________
|
|
|
|
(a)
|
During the three months ended May 5, 2017, the Company modified its credit scoring methodology for fixed-term financing receivables in response to changes in its go-to-market strategy. This methodology has been modified to a single, consistent, and comparable model across all fixed-term product customers. In connection with this change, the Company has recategorized existing fixed-term customers and has recast prior period credit quality categories to align with the current period presentation.
|
Structured Financing Debt
The Company maintains programs which facilitate the funding of financing receivables in the capital markets in the United States, Canada, and Europe. The Company's total structured financing debt, which is collateralized by financing receivables, was
$4.3 billion
and
$3.5 billion
as of
November 3, 2017
and
February 3, 2017
, respectively, under the following programs:
|
|
|
|
•
|
Securitization Programs
—
The Company maintains securitization programs in the United States and Europe. The securitization programs in the United States include the fixed-term lease and loan securitization program and the revolving loan securitization program. The outstanding balance of debt under these U.S. programs was
$1.0 billion
and
$1.5 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. This debt is collateralized solely by the U.S. financing receivables in the programs. The debt has a variable interest rate and the duration of this debt is based on the terms of the underlying financing receivables. As of
November 3, 2017
, the total debt capacity related to the U.S. securitization programs was
$2.1 billion
. The Company enters into interest swap agreements to effectively convert this portion of its structured financing debt from a floating rate to a fixed rate. See
Note 8
of the
Notes to the Condensed Consolidated Financial Statements
for additional information about interest rate swaps.
|
The Company's U.S. securitization programs
became effective on October 29, 2013. The revolving program, which was extended during the third quarter of Fiscal 2017, is effective through June 10, 2018. The fixed-term program, which was extended during the second quarter of Fiscal 2018, is effective through June 10, 2018.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The Company established a securitization program in Europe for fixed-term leases and loans. This program
is effective through January 13, 2019
. As of
November 3, 2017
, the outstanding balance of debt under this program was
$387 million
, and the total debt capacity related to the securitization program was
$699 million
.
The securitization programs contain standard structural features related to the performance of the securitized receivables which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the program, no further funding of receivables will be permitted and the timing of the Company's expected cash flows from over-collateralization will be delayed. As of
November 3, 2017
, these criteria were met.
|
|
|
|
•
|
Fixed-Term Securitization Programs
—
The Company periodically issues asset-backed debt securities under fixed-term securitization programs to private investors. As of
November 3, 2017
and
February 3, 2017
, the associated debt balance of these securities was
$2.5 billion
and
$1.4 billion
, respectively. The asset-backed debt securities are collateralized solely by the U.S. fixed-term financing receivables in the offerings, which are held by SPEs, as discussed below. The interest rate on these securities is fixed and ranges from
0.42%
to
3.61%
, and the duration of these securities is based on the terms of the underlying financing receivables.
|
|
|
|
|
•
|
Other Structured Financing Programs
—
In connection with the Company's international financing operations, the Company has entered into revolving structured financing debt programs related to its fixed-term lease and loan products sold in Canada and Europe. The aggregate outstanding balances of the Canadian and European revolving structured loans as of
November 3, 2017
and
February 3, 2017
were
$460 million
and
$382 million
, respectively. As of
November 3, 2017
, the Canadian program, which was extended during the fiscal year ended February 3, 2017, had a total debt capacity of
$172 million
. This program is effective through April 15, 2018, and is collateralized solely by the Canadian financing receivables. The European program is effective through February 14, 2018. The program is collateralized solely by the European financing receivables and had a total debt capacity of
$350 million
as of
November 3, 2017
.
|
Variable Interest Entities
In connection with the securitization programs discussed above, the Company transfers certain U.S. and European customer financing receivables to Special Purpose Entities ("SPEs") that meet the definition of a Variable Interest Entity ("VIE") and are consolidated, along with the associated debt, into the Condensed Consolidated Financial Statements, as the Company is the primary beneficiary of those VIEs. These SPEs are bankruptcy-remote legal entities with separate assets and liabilities. The purpose of these SPEs is to facilitate the funding of customer receivables in the capital markets.
The following table shows financing receivables held by the consolidated VIEs as of the respective dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
(in millions)
|
|
Financing receivables held by consolidated VIEs, net:
|
|
|
|
|
|
|
Short-term, net
|
$
|
2,552
|
|
|
$
|
2,227
|
|
|
Long-term, net
|
1,896
|
|
|
1,381
|
|
|
Financing receivables held by consolidated VIEs, net
|
$
|
4,448
|
|
|
$
|
3,608
|
|
Financing receivables transferred via securitization through SPEs were
$1.0 billion
and
$0.6 billion
for the
three months ended November 3, 2017 and October 28, 2016
, respectively, and
$2.9 billion
and
$2.0 billion
for the
nine months ended November 3, 2017 and October 28, 2016
, respectively.
Some of the SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. The structured financing debt outstanding, which is collateralized by the financing receivables held by the consolidated VIEs, was
$3.9 billion
and
$3.1 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. The Company's risk of loss related to securitized receivables is limited to the amount by which the Company's right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities. The Company provides credit enhancement to the securitization in the form of over-collateralization.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Financing Receivable Sales
To manage certain concentrations of customer credit exposure, the Company may sell selected fixed-term financing receivables to unrelated third parties on a periodic basis. The amount of financing receivables sold was
$541 million
and
$200 million
for the
nine months ended November 3, 2017 and October 28, 2016
, respectively.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 7
—
DEBT
The following table summarizes the Company's outstanding debt as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
(in millions)
|
|
Secured Debt
|
|
|
|
|
Structured financing debt
|
$
|
4,348
|
|
|
$
|
3,464
|
|
|
Senior Secured Credit Facilities:
|
|
|
|
|
3.25% Term Loan B Facility due September 2023
|
5,000
|
|
|
4,987
|
|
|
Term Loan A-1 Facility due December 2018
|
—
|
|
|
600
|
|
|
3.00% Term Loan A-2 Facility due September 2021
|
4,450
|
|
|
3,876
|
|
|
2.75% Term Loan A-3 Facility due December 2018
|
1,438
|
|
|
1,800
|
|
|
2.75% Revolving Credit Facility due September 2021
|
—
|
|
|
375
|
|
|
First Lien Notes:
|
|
|
|
|
3.48% due June 2019
|
3,750
|
|
|
3,750
|
|
|
4.42% due June 2021
|
4,500
|
|
|
4,500
|
|
|
5.45% due June 2023
|
3,750
|
|
|
3,750
|
|
|
6.02% due June 2026
|
4,500
|
|
|
4,500
|
|
|
8.10% due June 2036
|
1,500
|
|
|
1,500
|
|
|
8.35% due June 2046
|
2,000
|
|
|
2,000
|
|
|
Unsecured Debt
|
|
|
|
|
Unsecured Notes and Debentures:
|
|
|
|
|
5.65% due April 2018
|
500
|
|
|
500
|
|
|
5.875% due June 2019
|
600
|
|
|
600
|
|
|
4.625% due April 2021
|
400
|
|
|
400
|
|
|
7.10% due April 2028
|
300
|
|
|
300
|
|
|
6.50% due April 2038
|
388
|
|
|
388
|
|
|
5.40% due September 2040
|
265
|
|
|
265
|
|
|
Senior Notes:
|
|
|
|
|
5.875% due June 2021
|
1,625
|
|
|
1,625
|
|
|
7.125% due June 2024
|
1,625
|
|
|
1,625
|
|
|
EMC Notes:
|
|
|
|
|
1.875% due June 2018
|
2,500
|
|
|
2,500
|
|
|
2.650% due June 2020
|
2,000
|
|
|
2,000
|
|
|
3.375% due June 2023
|
1,000
|
|
|
1,000
|
|
|
VMware Notes:
|
|
|
|
|
2.30% due August 2020
|
1,250
|
|
|
—
|
|
|
2.95% due August 2022
|
1,500
|
|
|
—
|
|
|
3.90% due August 2027
|
1,250
|
|
|
—
|
|
|
Other
|
|
|
|
|
3.63% Margin Loan Facility due April 2022
|
2,000
|
|
|
—
|
|
|
Margin Bridge Facility due September 2017
|
—
|
|
|
2,500
|
|
|
VMware Note Bridge Facility due September 2017
|
—
|
|
|
1,500
|
|
|
Other
|
83
|
|
|
51
|
|
|
Total debt, principal amount
|
$
|
52,522
|
|
|
$
|
50,356
|
|
|
Unamortized discount, net of unamortized premium
|
(268
|
)
|
|
(284
|
)
|
|
Debt issuance costs
|
(603
|
)
|
|
(682
|
)
|
|
Total debt, carrying value
|
$
|
51,651
|
|
|
$
|
49,390
|
|
|
Total short-term debt, carrying value
|
$
|
6,235
|
|
|
$
|
6,329
|
|
|
Total long-term debt, carrying value
|
$
|
45,416
|
|
|
$
|
43,061
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During the nine months ended November 3, 2017 the Company completed two refinancing transactions of the Senior Secured Credit Facilities described below. In the first refinancing transaction, which occurred during the three months ended May 5, 2017, the Company refinanced the Term Loan B Facility to reduce the interest rate margin by
0.75%
and to increase the outstanding principal amount by
$500 million
. The Company applied the proceeds from the Term Loan B Facility refinancing to repay
$500 million
principal amount of the Margin Bridge Facility, without premium or penalty, and accrued and unpaid interest thereon. Additionally, during the three months ended May 5, 2017, the Company entered into the Margin Loan Facility in the principal amount of
$2.0 billion
, and used the proceeds of the new facility to repay the Margin Bridge Facility, without premium or penalty.
In the second refinancing transaction, which occurred during the three months ended November 3, 2017, the Company refinanced the Term Loan A-2 Facility, Term Loan A-3 Facility, Term Loan B Facility, and the Revolving Credit Facility. As a result, the interest rate margin decreased
0.50%
for each of the Term Loan A-2 Facility, Term Loan A-3 Facility, Term Loan B Facility, and the Revolving Credit Facility. Additionally, the outstanding principal amount of the Term Loan A-2 Facility increased by
$672 million
which was used to pay
$212 million
of principal outstanding of the Term Loan A-3 Facility and
$460 million
of principal outstanding of the Term Loan B Facility. Further, the Revolving Credit Facility's borrowing capacity increased
$180 million
to
$3.3 billion
.
During the nine months ended November 3, 2017, the Company repaid approximately
$0.9 billion
principal amount of its term loan facilities and
$0.4 billion
under the Revolving Credit Facility and issued an additional
$0.9 billion
, net, in structured financing debt to support the expansion of its financing receivables portfolio.
Further, during the three months ended November 3, 2017, VMware, Inc. completed a public offering of senior notes in the aggregate amount of
$4.0 billion
. VMware, Inc. used a portion of the net proceeds from the offering to repay certain intercompany promissory notes previously issued by it to EMC in the aggregate principal amount of
$1.2 billion
. The Company applied the proceeds of this repayment, and other cash, to repay
$1.5 billion
principal amount of the VMware Note Bridge Facility, without premium or penalty.
Senior Secured Credit Facilities
—
At the closing of the EMC merger transaction on September 7, 2016, the Company entered into a credit agreement that provides for senior secured credit facilities (the "Senior Secured Credit Facilities") in the aggregate principal amount of
$17.8 billion
comprising (a) term loan facilities and (b) a senior secured Revolving Credit Facility, which includes capacity for up to
$0.5 billion
of letters of credit and for borrowings of up to
$0.4 billion
under swing-line loans. As of
November 3, 2017
, available borrowings under the Revolving Credit Facility totaled
$3.3 billion
. The Senior Secured Credit Facilities provide that the borrowers have the right at any time, subject to customary conditions, to request incremental term loans or incremental revolving commitments.
Borrowings under the Senior Secured Credit Facilities bear interest at a rate per annum equal to an applicable margin, plus, at the borrowers' option, either (a) a base rate, which, under the Term Loan B Facility, is subject to an interest rate floor of
1.75%
per annum, and under all other borrowings is subject to an interest rate floor of
0%
per annum, or (b) a London interbank offered rate ("LIBOR"), which, under the Term Loan B Facility, is subject to an interest rate floor of
0.75%
per annum, and under all other borrowings is subject to an interest rate floor of
0%
per annum. Interest is payable, in the case of loans bearing interest based on LIBOR, at the end of each interest period (but at least every three months), in arrears and, in the case of loans bearing interest based on the base rate, quarterly in arrears.
The Term Loan A-2 Facility amortizes in equal quarterly installments in aggregate annual amounts equal to
5%
of the original principal amount in the first year after the closing date of the refinancing transaction on October 20, 2017,
10%
of the original principal amount in each of the second and third years after October 20, 2017, and
70%
of the original principal amount in the fourth year after October 20, 2017. The Term Loan B Facility amortizes in equal quarterly installments in aggregate annual amounts equal to
1%
of the original principal amount. The Term Loan A-3 Facility and the Revolving Credit Facility have no amortization. The Term Loan A-3 Facility requires the borrowers to prepay outstanding borrowings under these facilities with
100%
of the net cash proceeds of certain non-ordinary course asset sales or dispositions. The borrowers may voluntarily repay outstanding loans under the term loan facilities and the Revolving Credit Facility at any time without premium or penalty, other than customary "breakage" costs.
All obligations of the borrowers under the Senior Secured Credit Facilities and certain swap agreements, cash management arrangements, and certain letters of credit provided by any lender or agent party to the Senior Secured Credit Facilities or any of its affiliates and certain other persons are secured by (a) a first-priority security interest in certain tangible and intangible assets
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
of the borrowers and the guarantors and (b) a first-priority pledge of
100%
of the capital stock of the borrowers, Dell Inc., and each wholly-owned material restricted subsidiary of the borrowers and the guarantors, in each case subject to certain thresholds, exceptions, and permitted liens.
China Revolving Credit Facility
— On October 31, 2017, the Company entered into a credit agreement (the "China Revolving Credit Facility") with the Bank of China (Hong Kong) Limited for a secured revolving loan facility in an aggregate principal amount not to exceed
$500 million
. Borrowings under the China Revolving Credit Facility bear interest at a rate per annum of
0.6%
plus LIBOR. The Company may voluntarily repay outstanding loans under the China Revolving Credit Facility at any time without premium or penalty, other than customary "breakage" costs. The facility will expire on October 31, 2018. As of November 3, 2017, there were no outstanding borrowings under the China Revolving Credit Facility.
Pivotal Revolving Credit Facility
— On September 7, 2017,
Pivotal entered into a credit agreement (the "Pivotal Revolving Credit Facility") with Silicon Valley Bank and certain other banks for a senior secured revolving loan facility in an aggregate principal amount not to exceed
$100 million
. The credit facility contains customary representations, warranties, and covenants, including financial covenants that require compliance with minimum earnings attainment and liquidity ratios as well as covenants by Pivotal limiting additional indebtedness, liens, guaranties, mergers and consolidations, asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. The credit agreement will expire on September 8, 2020, unless it is terminated by Pivotal or an event of default has occurred prior to such date
. None of the net proceeds of such borrowings will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of Pivotal and Pivotal's subsidiaries. As of November 3, 2017, there were no outstanding borrowings under the Pivotal Revolving Credit Facility.
First Lien Notes
— The senior secured notes (collectively, the "First Lien Notes") were issued on June 1, 2016 in an aggregate principal amount of
$20.0 billion
. Interest on these borrowings is payable semiannually. The First Lien Notes are secured, on a pari passu basis with the Senior Secured Credit Facilities, on a first-priority basis by substantially all of the tangible and intangible assets of the issuers and guarantors that secure obligations under the Senior Secured Credit Facilities, including pledges of all capital stock of the issuers, of Dell, and of certain wholly-owned material subsidiaries of the issuers and the guarantors, subject to certain exceptions.
The Company has agreed to use commercially reasonable efforts to register with the SEC notes having terms substantially identical to the terms of the First Lien Notes as part of an offer to exchange such registered notes for the First Lien Notes. The Company will be obligated to pay additional interest on the First Lien Notes if it fails to consummate such an exchange offer within
five years
after the closing date of the EMC merger transaction.
Senior Notes
— The senior unsecured notes (collectively, the "Senior Notes") were issued on June 22, 2016 in an aggregate principal amount of
$3.25 billion
. Interest on these borrowings is payable semiannually.
EMC Notes
— On September 7, 2016, EMC had outstanding
$2.5 billion
aggregate principal amount of its
1.875%
Notes due June 2018,
$2.0 billion
aggregate principal amount of its
2.650%
Notes due June 2020, and
$1.0 billion
aggregate principal amount of its
3.375%
Notes due June 2023 (collectively, the "EMC Notes"). Interest on these borrowings is payable semiannually. The EMC Notes remain outstanding following the closing of the EMC merger transaction.
VMware Notes
— On August 21, 2017, VMware, Inc. completed a public offering of senior notes in the aggregate amount of
$4.0 billion
, consisting of outstanding principal due on the following dates:
$1.25 billion
due August 21, 2020,
$1.50 billion
due August 21, 2022, and
$1.25 billion
due August 21, 2027 (collectively, the "VMware Notes"). The VMware Notes bear interest, payable semiannually, at annual rates of
2.30%
,
2.95%
, and
3.90%
, respectively. None of the net proceeds of such borrowings will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc. and VMware, Inc.’s subsidiaries.
VMware Revolving Credit Facility
— On September 12, 2017, VMware, Inc. entered into an unsecured credit agreement, establishing a revolving credit facility (the “VMware Revolving Credit Facility”), with a syndicate of lenders that provides the company with a borrowing capacity of up to
$1.0 billion
which may be used for VMware, Inc. corporate purposes. Commitments under the VMware Revolving Credit Facility are available for a period of
five years
, which may be extended, subject to the satisfaction of certain conditions, by up to
two
one year
periods. As of November 3, 2017, there were no outstanding borrowings under the VMware Revolving Credit Facility. The credit agreement contains certain representations, warranties, and covenants. Commitment fees, interest rates, and other terms of borrowing under the VMware Revolving Credit
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Facility may vary based on VMware, Inc.’s external credit ratings. None of the net proceeds of such borrowings will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc. and VMware, Inc.’s subsidiaries.
Margin Loan Facility
— During the three months ended May 5, 2017, the Company entered into the Margin Loan Facility in an aggregate principal amount of
$2.0 billion
. VMW Holdco LLC, a wholly-owned subsidiary of EMC, is the borrower under the Margin Loan Facility, which is secured by
60 million
shares of Class B common stock of VMware, Inc. and
20 million
shares of Class A common stock of VMware, Inc. Loans under the Margin Loan Facility bear interest at a rate per annum payable, at the borrower's option, either at (a) a base rate plus
1.25%
per annum or (b) a LIBOR-based rate plus
2.25%
per annum. Interest under the Margin Loan Facility is payable quarterly.
The Margin Loan Facility will mature in April 2022. The borrower may voluntarily repay outstanding loans under the Margin Loan Facility at any time without premium or penalty, other than customary "breakage" costs, subject to certain minimum threshold amounts for prepayment.
Margin Bridge Facility
—
On September 7, 2016, Merger Sub and EMC entered into a credit agreement providing for a senior secured margin bridge facility in an aggregate principal amount of
$2.5 billion
(the "Margin Bridge Facility").
During the three months ended May 5, 2017, the Company separately applied the proceeds from the Term Loan B Facility refinancing and the issuance of the Margin Loan Facility to repay the Margin Bridge Facility, without premium or penalty.
VMware Note Bridge Facility
—
On September 7, 2016, Merger Sub and EMC entered into a credit agreement providing for a senior secured note bridge facility in an aggregate principal amount of
$1.5 billion
(the "VMware Note Bridge Facility"). As described above, the Company repaid the VMware Note Bridge Facility during the three months ended November 3, 2017.
Structured Financing Debt
— As of
November 3, 2017
and
February 3, 2017
, the Company had
$4.3 billion
and
$3.5 billion
, respectively, in outstanding structured financing debt, which was primarily related to the fixed-term lease and loan securitization programs and the revolving loan securitization programs. See
Note 6
and
Note 8
of the
Notes to the Condensed Consolidated Financial Statements
for further discussion of the structured financing debt and the interest rate swap agreements that hedge a portion of that debt.
Unsecured Notes and Debentures
— The Company has outstanding unsecured notes and debentures (collectively, the "Unsecured Notes and Debentures") that were issued prior to the acquisition of Dell by Dell Technologies Inc. Interest on these borrowings is payable semiannually.
Aggregate Future Maturities
— As of
November 3, 2017
, aggregate future maturities of the Company's debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities by Fiscal Year
|
|
|
2018 (remaining three months)
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
|
|
(in millions)
|
|
Structured Financing Debt
|
$
|
909
|
|
|
$
|
2,470
|
|
|
$
|
649
|
|
|
$
|
254
|
|
|
$
|
62
|
|
|
$
|
4
|
|
|
$
|
4,348
|
|
|
Senior Secured Credit Facilities and First Lien Notes
|
81
|
|
|
1,765
|
|
|
4,245
|
|
|
371
|
|
|
7,888
|
|
|
16,538
|
|
|
30,888
|
|
|
Unsecured Notes and Debentures
|
—
|
|
|
500
|
|
|
600
|
|
|
—
|
|
|
400
|
|
|
953
|
|
|
2,453
|
|
|
Senior Notes and EMC Notes
|
—
|
|
|
2,500
|
|
|
—
|
|
|
2,000
|
|
|
1,625
|
|
|
2,625
|
|
|
8,750
|
|
|
VMware Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
1,250
|
|
|
—
|
|
|
2,750
|
|
|
4,000
|
|
|
Margin Loan Facility
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
2,000
|
|
|
Other
|
13
|
|
|
10
|
|
|
8
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
83
|
|
|
Total maturities, principal amount
|
1,003
|
|
|
7,245
|
|
|
5,502
|
|
|
3,901
|
|
|
9,975
|
|
|
24,896
|
|
|
52,522
|
|
|
Associated carrying value adjustments
|
(1
|
)
|
|
(24
|
)
|
|
(40
|
)
|
|
(10
|
)
|
|
(206
|
)
|
|
(590
|
)
|
|
(871
|
)
|
|
Total maturities, carrying value amount
|
$
|
1,002
|
|
|
$
|
7,221
|
|
|
$
|
5,462
|
|
|
$
|
3,891
|
|
|
$
|
9,769
|
|
|
$
|
24,306
|
|
|
$
|
51,651
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Covenants and Unrestricted Net Assets
—
The credit agreement for the Senior Secured Credit Facilities contain customary negative covenants that generally limit the ability of Denali Intermediate Inc., a wholly-owned subsidiary of Dell Technologies ("Dell Intermediate"), Dell, and Dell's and Denali Intermediate's other restricted subsidiaries to incur debt, create liens, make fundamental changes, enter into asset sales, make certain investments, pay dividends or distribute or redeem certain equity interests, prepay or redeem certain debt, and enter into certain transactions with affiliates. The indenture governing the Senior Notes contains customary negative covenants that generally limit the ability of Denali Intermediate, Dell, and Dell's and Denali Intermediate's other restricted subsidiaries to incur additional debt or issue certain preferred shares, pay dividends on or make other distributions in respect of capital stock or make other restricted payments, make certain investments, sell or transfer certain assets, create liens on certain assets to secure debt, consolidate, merge, sell, or otherwise dispose of all or substantially all assets, enter into certain transactions with affiliates, and designate subsidiaries as unrestricted subsidiaries. The negative covenants under such credit agreements and indenture are subject to certain exceptions, qualifications, and "baskets." The indentures governing the First Lien Notes, the Unsecured Notes and Debentures, and the EMC Notes variously impose limitations, subject to specified exceptions, on creating certain liens, entering into sale and lease-back transactions, and entering into certain asset sales. As of
November 3, 2017
, the Company had certain consolidated subsidiaries that were designated as unrestricted subsidiaries for all purposes of the applicable credit agreements and the indentures governing the First Lien Notes and the Senior Notes. The foregoing credit agreements and indentures contain customary events of default, including failure to make required payments, failure to comply with covenants, and the occurrence of certain events of bankruptcy and insolvency.
The Term Loan A-2 Facility, the Term Loan A-3 Facility, and the Revolving Credit Facility are subject to a first lien net leverage ratio covenant that is tested at the end of each fiscal quarter of Dell with respect to Dell's preceding four fiscal quarters. The Company was in compliance with all financial covenants as of
November 3, 2017
.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 8
—
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Instruments
As part of its risk management strategy, the Company uses derivative instruments, primarily foreign currency forward and option contracts and interest rate swaps, to hedge certain foreign currency and interest rate exposures, respectively.
The Company's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and protecting the fair values of assets and liabilities. For derivatives designated as cash flow hedges, the Company assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge in earnings as a component of interest and other, net. Hedge ineffectiveness recognized in earnings was not material during the
three and nine months ended November 3, 2017 and October 28, 2016
.
Foreign Exchange Risk
The Company uses foreign currency forward and option contracts 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. Hedge accounting is applied based upon the criteria established by accounting guidance for derivative instruments and hedging activities. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The majority of these contracts typically expire in
twelve months
or less.
During the
three and nine months ended November 3, 2017 and October 28, 2016
, the Company did not discontinue any cash flow hedges related to foreign exchange contracts that had a material impact on the Company's results of operations due to the probability that the forecasted cash flows would not occur.
The Company uses forward contracts to hedge monetary assets and liabilities denominated in a foreign currency. These contracts generally expire in
three months
or less, are considered economic hedges, and are not designated for hedge accounting. 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.
In connection with the expanded offerings of DFS in Europe, forward contracts are used to hedge financing receivables denominated in foreign currencies. These contracts are not designated for hedge accounting and most expire within
three years
or less.
Interest Rate Risk
The Company uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed-term customer leases and loans. These contracts are not designated for hedge accounting and most expire within
three years
or less.
Interest rate swaps are utilized to manage the interest rate risk, at a portfolio level, associated with DFS operations in Europe. The interest rate swaps economically convert the fixed rate on financing receivables to a three-month Euribor floating rate basis in order to match the floating rate nature of the banks' funding pool. These contracts are not designated for hedge accounting and most expire within
three years
or less.
The Company utilizes cross currency amortizing swaps to hedge the currency and interest rate risk exposure associated with the securitization program that was established in Europe in January 2017. The cross currency swaps combine a Euro-based interest rate swap with a British Pound or U.S. Dollar foreign exchange forward contract in which the Company pays a fixed British Pound or U.S. Dollar amount and receives a floating amount in Euro linked to the one-month Euribor. The notional value of the swaps amortizes in line with the expected cash flows and run-off of the securitized assets. The swaps mature within
five years
or less and are not designated for hedge accounting.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Notional Amounts of Outstanding Derivative Instruments
The notional amounts of the Company's outstanding derivative instruments were as follows as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017 (a)
|
|
|
(in millions)
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
Designated as cash flow hedging instruments
|
$
|
4,099
|
|
|
$
|
3,781
|
|
|
Non-designated as hedging instruments
|
5,962
|
|
|
5,146
|
|
|
Total
|
$
|
10,061
|
|
|
$
|
8,927
|
|
|
|
|
|
|
|
Interest rate contracts:
|
|
|
|
|
Non-designated as hedging instruments
|
$
|
1,303
|
|
|
$
|
1,251
|
|
____________________
|
|
|
|
(a)
|
During the three months ended May 5, 2017, the notional amount calculation methodology was enhanced to reflect the sum of the absolute value of derivative instruments netted by currency. Prior period amounts have been updated to conform with the current period presentation.
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Effect of Derivative Instruments on the Condensed Consolidated Statements of Financial Position and the Condensed Consolidated Statements of Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in
Cash Flow
Hedging Relationships
|
|
Gain (Loss)
Recognized
in Accumulated
OCI, Net
of Tax, on
Derivatives
(Effective Portion)
|
|
Location of Gain (Loss)
Reclassified
from Accumulated
OCI into Income
(Effective Portion)
|
|
Gain (Loss)
Reclassified
from Accumulated
OCI into Income
(Effective Portion)
|
|
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
|
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
|
|
(in millions)
|
|
For the three months ended November 3, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
(18
|
)
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
76
|
|
|
Total cost of net revenue
|
|
(13
|
)
|
|
|
|
|
|
Interest rate contracts
|
|
—
|
|
|
Interest and other, net
|
|
—
|
|
|
Interest and other, net
|
|
$
|
—
|
|
|
Total
|
|
$
|
76
|
|
|
|
|
$
|
(31
|
)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended October 28, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
23
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
82
|
|
|
Total cost of net revenue
|
|
(6
|
)
|
|
|
|
|
|
Interest rate contracts
|
|
—
|
|
|
Interest and other, net
|
|
—
|
|
|
Interest and other, net
|
|
$
|
—
|
|
|
Total
|
|
$
|
82
|
|
|
|
|
$
|
17
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended November 3, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
(50
|
)
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(81
|
)
|
|
Total cost of net revenue
|
|
(30
|
)
|
|
|
|
|
|
Interest rate contracts
|
|
—
|
|
|
Interest and other, net
|
|
—
|
|
|
Interest and other, net
|
|
$
|
—
|
|
|
Total
|
|
$
|
(81
|
)
|
|
|
|
$
|
(80
|
)
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended October 28, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
(44
|
)
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(25
|
)
|
|
Total cost of net revenue
|
|
(20
|
)
|
|
|
|
|
|
Interest rate contracts
|
|
—
|
|
|
Interest and other, net
|
|
—
|
|
|
Interest and other, net
|
|
$
|
—
|
|
|
Total
|
|
$
|
(25
|
)
|
|
|
|
$
|
(64
|
)
|
|
|
|
$
|
—
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Fair Value of Derivative Instruments in the Condensed Consolidated Statements of Financial Position
The Company presents its foreign exchange derivative instruments on a net basis in the Condensed Consolidated Statements of Financial Position due to the right of offset by its counterparties under master netting arrangements.
The fair value of those derivative instruments presented on a gross basis as of each date indicated below was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
|
Other Current
Assets
|
|
Other Non-
Current Assets
|
|
Other Current
Liabilities
|
|
Other Non-Current
Liabilities
|
|
Total
Fair Value
|
|
|
|
|
(in millions)
|
|
|
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts in an asset position
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
85
|
|
|
Foreign exchange contracts in a liability position
|
(5
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(6
|
)
|
|
Net asset (liability)
|
60
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
79
|
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts in an asset position
|
98
|
|
|
1
|
|
|
25
|
|
|
—
|
|
|
124
|
|
|
Foreign exchange contracts in a liability position
|
(73
|
)
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
(145
|
)
|
|
Interest rate contracts in an asset position
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
Interest rate contracts in a liability position
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Net asset (liability)
|
25
|
|
|
6
|
|
|
(47
|
)
|
|
(2
|
)
|
|
(18
|
)
|
|
Total derivatives at fair value
|
$
|
85
|
|
|
$
|
6
|
|
|
$
|
(28
|
)
|
|
$
|
(2
|
)
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2017
|
|
|
Other Current
Assets
|
|
Other Non-
Current Assets
|
|
Other Current
Liabilities
|
|
Other Non-Current
Liabilities
|
|
Total
Fair Value
|
|
|
|
|
(in millions)
|
|
|
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts in an asset position
|
$
|
41
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
58
|
|
|
Foreign exchange contracts in a liability position
|
(19
|
)
|
|
—
|
|
|
(6
|
)
|
|
—
|
|
|
(25
|
)
|
|
Net asset (liability)
|
22
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
33
|
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts in an asset position
|
309
|
|
|
2
|
|
|
31
|
|
|
—
|
|
|
342
|
|
|
Foreign exchange contracts in a liability position
|
(131
|
)
|
|
—
|
|
|
(103
|
)
|
|
—
|
|
|
(234
|
)
|
|
Interest rate contracts in an asset position
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Interest rate contracts in a liability position
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Net asset (liability)
|
178
|
|
|
5
|
|
|
(72
|
)
|
|
(3
|
)
|
|
108
|
|
|
Total derivatives at fair value
|
$
|
200
|
|
|
$
|
5
|
|
|
$
|
(61
|
)
|
|
$
|
(3
|
)
|
|
$
|
141
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents the gross amounts of the Company's derivative instruments, amounts offset due to master netting agreements with the Company's counterparties, and the net amounts recognized in the Condensed Consolidated Statements of Financial Position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
|
Gross Amounts of Recognized Assets/ (Liabilities)
|
|
Gross Amounts Offset in the Statement of Financial Position
|
|
Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position
|
|
Gross Amounts not Offset in the Statement of Financial Position
|
|
Net Amount
|
|
|
Financial Instruments
|
|
Cash Collateral Received or Pledged
|
|
|
|
(in millions)
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
$
|
214
|
|
|
$
|
(123
|
)
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
Financial liabilities
|
(153
|
)
|
|
123
|
|
|
(30
|
)
|
|
—
|
|
|
—
|
|
|
(30
|
)
|
|
Total derivative instruments
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2017
|
|
|
Gross Amounts of Recognized Assets/ (Liabilities)
|
|
Gross Amounts Offset in the Statement of Financial Position
|
|
Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position
|
|
Gross Amounts not Offset in the Statement of Financial Position
|
|
Net Amount
|
|
|
Financial Instruments
|
|
Cash Collateral Received or Pledged
|
|
|
|
(in millions)
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets
|
$
|
403
|
|
|
$
|
(198
|
)
|
|
$
|
205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
205
|
|
|
Financial liabilities
|
(262
|
)
|
|
198
|
|
|
(64
|
)
|
|
—
|
|
|
—
|
|
|
(64
|
)
|
|
Total derivative instruments
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
141
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 9
—
GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table presents goodwill allocated to the Company's business segments as of
November 3, 2017
and
February 3, 2017
, and changes in the carrying amount of goodwill for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client Solutions Group
|
|
Infrastructure Solutions Group (a)
|
|
VMware
|
|
Other Businesses (b)
|
|
Total
|
|
|
(in millions)
|
|
Balances as of February 3, 2017
|
$
|
4,237
|
|
|
$
|
15,607
|
|
|
$
|
15,070
|
|
|
$
|
3,996
|
|
|
$
|
38,910
|
|
|
Goodwill acquired during the period
|
—
|
|
|
—
|
|
|
238
|
|
|
9
|
|
|
247
|
|
|
Goodwill divested
|
—
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
Impact of foreign currency translation
|
—
|
|
|
155
|
|
|
—
|
|
|
31
|
|
|
186
|
|
|
Balances as of November 3, 2017
|
$
|
4,237
|
|
|
$
|
15,749
|
|
|
$
|
15,308
|
|
|
$
|
4,036
|
|
|
$
|
39,330
|
|
____________________
|
|
|
|
(a)
|
Infrastructure Solutions Group is composed of Core Storage, Servers, and Networking, and Virtustream.
|
(b) Other Businesses consists of offerings by RSA Information Security, SecureWorks, Pivotal, and Boomi.
Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third fiscal quarter and whenever events or circumstances may indicate that an impairment has occurred. Based on the results of the annual impairment test, which was a quantitative test for certain goodwill reporting units and a qualitative test for others, no impairment of goodwill or indefinite-lived intangible assets existed for any reporting unit as of November 3, 2017. As a result of this analysis, it was determined that the excess of fair value over carrying amount was greater than
20%
for all of the Company's existing goodwill reporting units as of November 3, 2017, with the exception of the Core Storage, Servers and Networking reporting unit within the Infrastructure Solutions Group segment, which had an excess of fair value over carrying amount of
18%
as of such date. Management will continue to monitor the Core Storage, Servers, and Networking goodwill reporting unit and consider potential impacts to the impairment assessment. Further, the Company did not have any accumulated goodwill impairment charges as of
November 3, 2017
.
Management exercised significant judgment related to the above assessment, including the identification of goodwill reporting units, assignment of assets and liabilities to goodwill reporting units, assignment of goodwill to reporting units, and determination of the fair value of each goodwill reporting unit. The fair value of each goodwill reporting unit is generally estimated using a combination of public company multiples and discounted cash flow methodologies. This analysis requires significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, the estimation of the long-term growth rate of the Company's business, and the determination of the Company's weighted average cost of capital. Changes in these estimates and assumptions could materially affect the fair value of the goodwill reporting unit, potentially resulting in a non-cash impairment charge.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Intangible Assets
The Company's intangible assets as of
November 3, 2017
and
February 3, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
|
(in millions)
|
|
Customer relationships
|
$
|
22,714
|
|
|
$
|
(7,865
|
)
|
|
$
|
14,849
|
|
|
$
|
22,708
|
|
|
$
|
(5,552
|
)
|
|
$
|
17,156
|
|
|
Developed technology
|
15,493
|
|
|
(5,287
|
)
|
|
10,206
|
|
|
14,569
|
|
|
(2,510
|
)
|
|
12,059
|
|
|
Trade names
|
1,270
|
|
|
(357
|
)
|
|
913
|
|
|
1,268
|
|
|
(201
|
)
|
|
1,067
|
|
|
Leasehold assets (liabilities)
|
128
|
|
|
(5
|
)
|
|
123
|
|
|
128
|
|
|
(1
|
)
|
|
127
|
|
|
Definite-lived intangible assets
|
39,605
|
|
|
(13,514
|
)
|
|
26,091
|
|
|
38,673
|
|
|
(8,264
|
)
|
|
30,409
|
|
|
In-process research and development
|
—
|
|
|
—
|
|
|
—
|
|
|
890
|
|
|
—
|
|
|
890
|
|
|
Indefinite-lived trade names
|
3,755
|
|
|
—
|
|
|
3,755
|
|
|
3,754
|
|
|
—
|
|
|
3,754
|
|
|
Total intangible assets
|
$
|
43,360
|
|
|
$
|
(13,514
|
)
|
|
$
|
29,846
|
|
|
$
|
43,317
|
|
|
$
|
(8,264
|
)
|
|
$
|
35,053
|
|
Amortization expense related to definite-lived intangible assets was approximately
$1,734 million
and
$1,164 million
during the
three months ended November 3, 2017 and October 28, 2016
, respectively, and
$5,250 million
and
$2,146 million
during the
nine months ended November 3, 2017 and October 28, 2016
, respectively. There were
no
material impairment charges related to intangible assets during the
three and nine months ended November 3, 2017 and October 28, 2016
.
Estimated future annual pre-tax amortization expense of definite-lived intangible assets as of
November 3, 2017
over the next five fiscal years and thereafter is as follows:
|
|
|
|
|
|
|
|
Fiscal Years
|
(in millions)
|
|
2018 (remaining three months)
|
$
|
1,730
|
|
|
2019
|
6,059
|
|
|
2020
|
4,274
|
|
|
2021
|
3,333
|
|
|
2022
|
2,616
|
|
|
Thereafter
|
8,079
|
|
|
Total
|
$
|
26,091
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 10
—
WARRANTY LIABILITY
The Company record
s a liability for its standard limited warranties at the time of sale for the estimated costs that may be incurred. The liability for standard warranties is included in accrued and other current liabilities and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.
Changes in the Company's liability for standard limited warranties are presented in
the following table for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Warranty liability:
|
|
|
|
|
|
|
|
|
Warranty liability at beginning of period
|
$
|
588
|
|
|
$
|
565
|
|
|
$
|
604
|
|
|
$
|
574
|
|
|
Warranty liability assumed through EMC merger transaction
|
—
|
|
|
125
|
|
|
—
|
|
|
125
|
|
|
Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties (a) (b)
|
209
|
|
|
196
|
|
|
672
|
|
|
578
|
|
|
Service obligations honored
|
(239
|
)
|
|
(248
|
)
|
|
(718
|
)
|
|
(639
|
)
|
|
Warranty liability at end of period
|
$
|
558
|
|
|
$
|
638
|
|
|
$
|
558
|
|
|
$
|
638
|
|
|
Current portion
|
$
|
371
|
|
|
$
|
425
|
|
|
$
|
371
|
|
|
$
|
425
|
|
|
Non-current portion
|
$
|
187
|
|
|
$
|
213
|
|
|
$
|
187
|
|
|
$
|
213
|
|
____________________
|
|
|
|
(a)
|
Changes in cost estimates related to pre-existing warranties are aggregated with accruals for new standard warranty contracts. The Company's warranty liability process does not differentiate between estimates made for pre-existing warranties and new warranty obligations.
|
|
|
|
|
(b)
|
Includes the impact of foreign currency exchange rate fluctuations.
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 11
—
SEVERANCE CHARGES
In connection with the transformation of the Company's business model, the Company incurs costs related to employee severance. The Company records a liability for these costs when it is probable that employees will be entitled to termination benefits and the amounts can be reasonably estimated. The liability related to these actions is included in accrued and other current liabilities in the
Condensed Consolidated Statements of Financial Position
.
The following table sets forth the activity related to the Company's severance liability for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Balance at beginning of period
|
$
|
186
|
|
|
$
|
22
|
|
|
$
|
416
|
|
|
$
|
26
|
|
|
Severance liability assumed through EMC merger transaction
|
—
|
|
|
70
|
|
|
—
|
|
|
70
|
|
|
Severance charges to provision
|
41
|
|
|
130
|
|
|
85
|
|
|
156
|
|
|
Cash paid and other
|
(74
|
)
|
|
(47
|
)
|
|
(348
|
)
|
|
(77
|
)
|
|
Balance at end of period
|
$
|
153
|
|
|
$
|
175
|
|
|
$
|
153
|
|
|
$
|
175
|
|
Severance costs are included in cost of net revenue, selling, general, and administrative expenses, and research and development expense in the Condensed Consolidated Statements of Income (Loss) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Severance charges:
|
|
|
|
|
|
|
|
|
Cost of net revenue
|
$
|
10
|
|
|
$
|
49
|
|
|
$
|
14
|
|
|
$
|
54
|
|
|
Selling, general, and administrative
|
7
|
|
|
69
|
|
|
21
|
|
|
82
|
|
|
Research and development
|
24
|
|
|
12
|
|
|
50
|
|
|
20
|
|
|
Total
|
$
|
41
|
|
|
$
|
130
|
|
|
$
|
85
|
|
|
$
|
156
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 12
—
COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business, including those identified below, consisting of matters involving consumer, antitrust, tax, intellectual property, and other issues on a global basis. The Company accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such a determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. The following is a discussion of the Company's significant legal matters and other proceedings:
EMC Merger Litigation
— The Company, Dell, and Universal Acquisition Co. ("Universal") were named as defendants in
fifteen
putative class-action lawsuits brought by purported EMC shareholders and VMware, Inc. stockholders challenging the proposed merger between the Company, Dell, and Universal on the one hand, and EMC on the other (the "EMC merger"). Those suits are captioned as follows:
|
|
|
|
|
|
|
|
Case
|
Court
|
Filing Date
|
|
1.
|
IBEW Local No. 129 Benefit Fund v. Tucci
,
Civ. No. 1584-3130-BLS1
|
Mass. Superior Court, Suffolk County
|
10/15/2015
|
|
2.
|
Barrett v. Tucci
,
Civ. No. 15-6023-A
|
Mass. Superior Court, Middlesex County
|
10/16/2015
|
|
3.
|
Graulich v. Tucci
,
Civ. No. 1584-3169-BLS1
|
Mass. Superior Court, Suffolk County
|
10/19/2015
|
|
4.
|
Vassallo v. EMC Corp.
,
Civ. No. 1584-3173-BLS1
|
Mass. Superior Court, Suffolk County
|
10/19/2015
|
|
5.
|
City of Miami Police Relief & Pension Fund v. Tucci
,
Civ. No. 1584-3174-BLS1
|
Mass. Superior Court, Suffolk County
|
10/19/2015
|
|
6.
|
Lasker v. EMC Corp.
,
Civ. No. 1584-3214-BLS1
|
Mass. Superior Court, Suffolk County
|
10/23/2015
|
|
7.
|
Walsh v. EMC Corp.
,
Civ. No. 15-13654
|
U.S. District Court,
District of Massachusetts
|
10/27/2015
|
|
8.
|
Local Union No. 373 U.A. Pension Plan v. EMC Corp.
,
Civ. No. 1584-3253-BLS1
|
Mass. Superior Court, Suffolk County
|
10/28/2015
|
|
9.
|
City of Lakeland Emps.' Pension & Ret. Fund v. Tucci
,
Civ. No. 1584-3269-BLS1
|
Mass. Superior Court, Suffolk County
|
10/28/2015
|
|
10.
|
Ma v. Tucci
,
Civ. No. 1584-3281-BLS1
|
Mass. Superior Court, Suffolk County
|
10/29/2015
|
|
11.
|
Stull v. EMC Corp.
,
Civ. No. 15-13692
|
U.S. District Court,
District of Massachusetts
|
10/30/2015
|
|
12.
|
Jacobs v. EMC Corp.
,
Civ. No. 15-6318-H
|
Mass. Superior Court, Middlesex County
|
11/12/2015
|
|
13.
|
Ford v. VMware, Inc.
,
C.A. No. 11714-VCL
|
Delaware Chancery Court
|
11/17/2015
|
|
14.
|
Pancake v. EMC Corp.
,
Civ. No. 16-10040
|
U.S. District Court,
District of Massachusetts
|
1/11/2016
|
|
15.
|
Booth Family Trust v. EMC Corp.
,
Civ. No. 16-10114
|
U.S. District Court,
District of Massachusetts
|
1/26/2016
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The
fifteen
lawsuits sought, among other things, injunctive relief enjoining the EMC merger, rescission of the EMC merger if consummated, an award of fees and costs, and/or an award of damages.
The complaints in the IBEW, Barrett, Graulich, Vassallo, City of Miami, Lasker, Local Union No. 373, City of Lakeland, and Ma actions generally allege that the EMC directors breached their fiduciary duties to EMC shareholders in connection with the EMC merger by, among other things, failing to maximize shareholder value and agreeing to provisions in the EMC merger agreement that discouraged competing bids. After consolidating the
fifteen
complaints, by decision dated December 7, 2015, the Business Litigation Session of the Suffolk County Superior Court in Massachusetts dismissed all
nine
complaints for failure to make a demand on the EMC board of directors.
Three
of the
nine
plaintiffs in the consolidated actions appealed the judgment dismissing their complaints. The Massachusetts Supreme Judicial Court granted an application for direct appellate review, and heard oral argument on the appeal on November 7, 2016. On March 6, 2017, the Supreme Judicial Court issued a decision affirming the dismissal. This decision terminated the consolidated actions.
The complaints in the Walsh, Stull, Pancake, and Booth actions allege that the EMC directors breached their fiduciary duties to EMC shareholders in connection with the EMC merger by, among other things, failing to maximize shareholder value and agreeing to provisions in the EMC merger agreement that discouraged competing bids. The complaints generally further allege that the preliminary registration statement on Form S-4 filed by the Company on December 14, 2015, in connection with the transaction contained material misstatements and omissions, in violation of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and SEC Rule 14a-9 promulgated thereunder and that the Company, Dell, and Universal acted as controlling persons of EMC under Section 20(a) of the Exchange Act. On June 6, 2016, the Securities and Exchange Commission declared effective the Company's registration statement on Form S-4 relating to the EMC merger (the "SEC Form S-4"), including the amendments thereto. On June 17, 2016, the parties to the Walsh, Stull, Pancake, and Booth actions submitted to the Court a Stipulation and Proposed Order Dismissing Action and Retaining Jurisdiction to Determine Plaintiffs' Counsel's Application for an Award of Attorneys' Fees and Reimbursement of Expenses. In the stipulation, the plaintiffs represented to the Court that they believe sufficient information had been disclosed to warrant dismissal of the actions as moot in light of the disclosures in the SEC Form S-4, including the amendments thereto. On October 25, 2016, following an agreement between the parties with respect to payment of attorneys' fees and expenses, the Court entered an order terminating the
four
actions for all purposes.
The amended complaints in the Jacobs and Ford actions allege that EMC, as the majority stockholder of VMware, Inc., and the individual defendants, who were directors of EMC, VMware, Inc., or both, breached their fiduciary duties to minority stockholders of VMware, Inc. in connection with the proposed EMC merger by allegedly entering into or approving a merger that favors the interests of EMC and Dell at the expense of the minority stockholders. The plaintiffs in the Jacobs action also brought suit against the Company, Dell, and Universal as alleged aiders and abettors. Effective December 2, 2016, the parties entered into an agreement to resolve the Jacobs action, pursuant to which the plaintiff voluntarily dismissed the action with prejudice. Under the operative amended complaint in the Ford action, the plaintiffs also brought suit against the Company and Dell for alleged breach of fiduciary duties to VMware, Inc. and its stockholders, and against the Company, Dell, and Universal for aiding and abetting the alleged breach of fiduciary duties by EMC's and VMware, Inc.'s directors. Certain defendants filed motions to dismiss the amended complaint on June 21, 2016. A hearing on those motions was held on February 3, 2017. On May 2, 2017, the Court dismissed the amended complaint for failure to state a claim upon which relief could be granted and no appeal was taken. All
fifteen
EMC merger-related lawsuits are now fully and finally resolved.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Appraisal Proceedings
— On October 29, 2013, Dell Technologies acquired Dell in a transaction referred to as the going-private transaction. Holders of shares of Dell common stock who did not vote on September 12, 2013 in favor of the proposal to adopt the amended going-private transaction agreement and who properly demanded appraisal of their shares and who otherwise comply with the requirements of Section 262 of the Delaware General Corporate Law ("DGCL") are entitled to seek appraisal for, and obtain payment in cash for the judicially determined "fair value" (as defined pursuant to Section 262 of the DGCL) of, their shares in lieu of receiving the going-private transaction consideration. Dell initially recorded a liability of
$13.75
for each share with respect to which appraisal has been demanded and as to which the demand has not been withdrawn, together with interest at the statutory rate discussed below. This liability was approximately
$129 million
as of both
November 3, 2017
and
February 3, 2017
. The Court of Chancery ruled that the fair value of the appraisal shares as of October 29, 2013, the date on which the going-private transaction became effective, was
$17.62
per share. This ruling would entitle the holders of the remaining
5,505,730
shares subject to the appraisal proceedings to
$17.62
per share, plus interest at a statutory rate, compounded quarterly. On November 21, 2016, the Court of Chancery entered final judgment in the appraisal action. On November 22, 2016, Dell filed a notice of appeal to the Delaware Supreme Court, and a hearing was held on that appeal on September 27, 2017. A ruling on the appeal is pending. The Company believes it was adequately reserved for the appraisal proceedings as of
November 3, 2017
.
Securities Litigation
— On May 22, 2014, a securities class action seeking compensatory damages was filed in the United States District Court for the Southern District of New York, captioned the City of Pontiac Employee Retirement
System vs. Dell Inc. et. al. (Case No. 1:14-cv-03644). The action names as defendants Dell Inc. and certain current and former executive officers, and alleges that Dell made false and misleading statements about Dell's business operations and products between February 22, 2012 and May 22, 2012, which resulted in artificially inflated stock prices. The case was transferred to the United States District Court for the Western District of Texas, where the defendants filed a motion to dismiss. On September 16, 2016, the Court denied the motion to dismiss and the case is proceeding with discovery. The defendants believe the claims asserted are without merit and the risk of material loss is remote.
Copyright Levies
— The Company's obligation to collect and remit copyright levies in certain European Union ("EU") countries may be affected by the resolution of legal proceedings pending in Germany and other EU member states against various companies, including Dell subsidiaries. The plaintiffs in those proceedings generally seek to impose or modify the levies with respect to sales of such equipment as multifunction devices, phones, personal computers, storage devices, and printers, alleging that such products enable the copying of copyrighted materials. Some of the proceedings also challenge whether the levy schemes in those countries comply with EU law. Certain EU member countries that do not yet impose levies on digital devices are expected to implement legislation to enable them to extend existing levy schemes, while some other EU member countries are expected to limit the scope of levy schemes and their applicability in the digital hardware environment. Dell, other companies, and various industry associations have opposed the extension of levies to the digital environment and have advocated alternative models of compensation to rights holders. The Company continues to collect levies in certain EU countries where it has determined that based on local laws it is probable that it has a payment obligation. The amount of levies is generally based on the number of products sold and the per-product amounts of the levies, which vary. The Company accrues a liability when it believes that it is both probable that a loss has been incurred and when it can reasonably estimate the amount of the loss.
Other Litigation
— The various legal proceedings in which Dell is involved include commercial litigation and a variety of patent suits. In some of these cases, Dell is the sole defendant. More often, particularly in the patent suits, Dell is one of a number of defendants in the electronics and technology industries. Dell is actively defending a number of patent infringement suits, and several pending claims are in various stages of evaluation. While the number of patent cases varies over time, Dell does not currently anticipate that any of these matters will have a material adverse effect on its business, financial condition, results of operations, or cash flows.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
As of
November 3, 2017
, the Company does not believe there is a reasonable possibility that a material loss exceeding the amounts already accrued for these or other proceedings or matters has been incurred. However, since the ultimate resolution of any such proceedings and matters is inherently unpredictable, the Company's business, financial condition, results of operations, or cash flows could be materially affected in any particular period by unfavorable outcomes in one or more of these proceedings or matters. Whether the outcome of any claim, suit, assessment, investigation, or legal proceeding, individually or collectively, could have a material adverse effect on the Company's business, financial condition, results of operations, or cash flows will depend on a number of variables, including the nature, timing, and amount of any associated expenses, amounts paid in settlement, damages, or other remedies or consequences.
Indemnifications
In the ordinary course of business, the Company enters into contractual arrangements under which it may agree to indemnify the third party to such arrangements from any losses incurred relating to the services it performs on behalf of the Company or for losses arising from certain events as defined in the particular contract, such as litigation or claims relating to past performance. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments related to these indemnifications have not been material to the Company.
In connection with the divestitures discussed in
Note 3
of the
Notes to the Condensed Consolidated Financial Statements
, the Company has indemnified the purchasers of businesses for the occurrence of specified events. The Company does not currently believe that contingent obligations to provide indemnification in connection with these divestitures will have a material adverse effect on the Company.
Purchase Obligations
The Company has contractual obligations to purchase goods or services, which specify significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. As of
November 3, 2017
, the Company had
$3,055 million
,
$278 million
, and
$458 million
in purchase obligations for
Fiscal 2018 (remaining three months)
,
Fiscal 2019
, and
Fiscal 2020 and thereafter
, respectively.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 13
—
INCOME AND OTHER TAXES
For the
three and nine months ended November 3, 2017
, the Company's effective income tax rates for continuing operations were
22.6%
and
31.4%
, respectively, on pre-tax losses from continuing operations of
$1.2 billion
and
$4.8 billion
, respectively. For the
three and nine months ended October 28, 2016
, the Company's effective income tax rates for continuing operations were
29.0%
and
21.1%
, respectively, on pre-tax losses from continuing operations of
$2.3 billion
and
$2.9 billion
, respectively. The changes in the Company's effective income tax rates for the three and nine months ended November 3, 2017 were primarily attributable to tax benefits from charges incurred associated with the EMC merger transaction, including purchase accounting adjustments, interest charges, and stock-based compensation expense. For more information regarding the EMC merger transaction, see
Note 2
of the
Notes to the Condensed Consolidated Financial Statements
. The change in the Company's effective income tax rate for the nine months ended November 3, 2017 was also impacted by tax charges recognized in the prior year during the three and six months ended July 29, 2016 related to the divestitures of Dell Services and DSG. The income tax rate for the remaining quarter of
Fiscal 2018
will be impacted by the actual mix of jurisdictions in which income is generated.
The differences between the estimated effective income tax rates and the U.S. federal statutory rate of
35%
principally result from the Company's geographical distribution of income and differences between the book and tax treatment of certain items. A portion of the Company's operations is subject to a reduced tax rate or is free of tax under various tax holidays. A significant portion of these income tax benefits relate to a tax holiday that expires in January 2019. The Company's other tax holidays will expire in whole or in part during fiscal years 2019 through 2023. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met.
The Company's U.S. federal income tax returns for fiscal years 2007 through 2009 are currently under consideration by the Office of Appeals of the Internal Revenue Service (the "IRS"). The IRS issued a Revenue Agent's Report ("RAR") related to those years during the fiscal year ended
February 3, 2017
. The IRS has proposed adjustments primarily relating to transfer pricing matters with which the Company disagrees and will contest through the IRS administrative appeals procedures. In May 2017, the IRS commenced a federal income tax audit for fiscal years 2010 through 2014, which could take several years to complete. Prior to the EMC merger transaction, EMC received a RAR for its tax years 2009 and 2010, and during the three months ended May 5, 2017, EMC received an RAR for its tax year 2011. The Company also disagrees with certain proposed adjustments in these RARs and is currently contesting the proposed adjustments through the IRS administrative appeals process.
The Company is also currently under income tax audits in various state and foreign jurisdictions. The Company is undergoing negotiations, and in some cases contested proceedings, relating to tax matters with the taxing authorities in these jurisdictions. The Company believes that it has provided adequate reserves related to all matters contained in tax periods open to examination. Although the Company believes it has made adequate provisions for the uncertainties surrounding these audits, should the Company experience unfavorable outcomes, such outcomes could have a material impact on its results of operations, financial position, and cash flows. With respect to major U.S. state and foreign taxing jurisdictions, the Company is generally not subject to tax examinations for years prior to fiscal year 2007.
Judgment is required in evaluating the Company's uncertain tax positions and determining the Company's provision for income taxes. The Company's net unrecognized tax benefits were
$3.2 billion
and
$3.1 billion
as of
November 3, 2017
and
February 3, 2017
, respectively, and are included in other non-current liabilities in the Condensed Consolidated Statements of Financial Position. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
The Company takes certain non-income tax positions in the jurisdictions in which it operates and has received certain non-income tax assessments from various jurisdictions. The Company believes that a material loss in these matters is not probable and that it is not reasonably possible that a material loss exceeding amounts already accrued has been incurred. The Company believes its positions in these non-income tax litigation matters are supportable and that it ultimately will prevail in the matters. In the normal course of business, the Company's positions and conclusions related to its non-income taxes could be challenged and assessments may be made. To the extent new information is obtained and the Company's views on its positions, probable outcomes of assessments, or litigation change, changes in estimates to the Company's accrued liabilities would be recorded in the period in which such a determination is made. In the resolution process for income tax and non-income tax audits, in certain situations the Company will be required to provide collateral guarantees or indemnification to regulators and tax authorities until the matter is resolved.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 14
—
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is presented in stockholders' equity in the Condensed Consolidated Statements of Financial Position and consists of amounts related to foreign currency translation adjustments, unrealized net gains (losses) on investments, unrealized net gains (losses) on cash flow hedges, and actuarial net gains (losses) from pension and other postretirement plans.
The following table presents changes in accumulated other comprehensive loss, net of tax, by the following components for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Investments
|
|
Cash Flow Hedges
|
|
Pension and Other Postretirement Plans
|
|
Accumulated Other Comprehensive Loss
|
|
|
(in millions)
|
|
Balances as of February 3, 2017
|
$
|
(612
|
)
|
|
$
|
(13
|
)
|
|
$
|
11
|
|
|
$
|
19
|
|
|
$
|
(595
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
325
|
|
|
44
|
|
|
(81
|
)
|
|
—
|
|
|
288
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
3
|
|
|
80
|
|
|
—
|
|
|
83
|
|
|
Total change for the period
|
325
|
|
|
47
|
|
|
(1
|
)
|
|
—
|
|
|
371
|
|
|
Less: Change in comprehensive income attributable to non-controlling interests
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Balances as of November 3, 2017
|
$
|
(287
|
)
|
|
$
|
32
|
|
|
$
|
10
|
|
|
$
|
19
|
|
|
$
|
(226
|
)
|
Amounts related to investments are reclassified to net income when gains and losses are realized. See
Note 4
and
Note 5
of the
Notes to the Condensed Consolidated Financial Statements
for more information on the Company's investments. Amounts related to the Company's cash flow hedges are reclassified to net income during the same period in which the items being hedged are recognized in earnings. In addition, any hedge ineffectiveness related to cash flow hedges is recognized currently in net income. See
Note 8
of the
Notes to the Condensed Consolidated Financial Statements
for more information on the Company's derivative instruments.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following tables present reclassifications out of accumulated other comprehensive loss, net of tax, to net income (loss) for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
Investments
|
|
Cash Flow Hedges
|
|
Total
|
|
Investments
|
|
Cash Flow Hedges
|
|
Total
|
|
|
(in millions)
|
|
Total reclassifications, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
—
|
|
|
$
|
(18
|
)
|
|
$
|
(18
|
)
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
23
|
|
|
Cost of net revenue
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
Interest and other, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total reclassifications, net of tax
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
(31
|
)
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
Investments
|
|
Cash Flow Hedges
|
|
Total
|
|
Investments
|
|
Cash Flow Hedges
|
|
Total
|
|
|
(in millions)
|
|
Total reclassifications, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
—
|
|
|
$
|
(50
|
)
|
|
$
|
(50
|
)
|
|
$
|
—
|
|
|
$
|
(44
|
)
|
|
$
|
(44
|
)
|
|
Cost of net revenue
|
—
|
|
|
(30
|
)
|
|
(30
|
)
|
|
—
|
|
|
(20
|
)
|
|
(20
|
)
|
|
Interest and other, net
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total reclassifications, net of tax
|
$
|
(3
|
)
|
|
$
|
(80
|
)
|
|
$
|
(83
|
)
|
|
$
|
—
|
|
|
$
|
(64
|
)
|
|
$
|
(64
|
)
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 15
—
NON-CONTROLLING INTERESTS
VMware, Inc.
— The non-controlling interests' share of equity in VMware, Inc. is reflected as a component of the non-controlling interests in the accompanying Condensed Consolidated Statements of Financial Position and was
$5.1 billion
and
$5.2 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. As of
November 3, 2017
and
February 3, 2017
, the Company held approximately
81.9%
and
82.5%
, respectively, of the outstanding equity interest in VMware, Inc.
SecureWorks
— On April 27, 2016, SecureWorks completed a registered underwritten IPO of its Class A common stock. The non-controlling interests' share of equity in SecureWorks is reflected as a component of the non-controlling interests in the accompanying Condensed Consolidated Statements of Financial Position and was
$85 million
and
$86 million
as of
November 3, 2017
and
February 3, 2017
, respectively. As of
November 3, 2017
and
February 3, 2017
, the Company held approximately
87.1%
and
87.5%
, respectively, of the outstanding equity interest in SecureWorks.
Pivotal
— A portion of the non-controlling interests in Pivotal is held by third parties in the form of preferred equity instruments. Due to the terms of such instruments, Pivotal's results of operations and equity activity are not attributable to such interests in Pivotal in the
Condensed Consolidated Statements of Income (Loss)
and
Condensed Consolidated Statements of Financial Position
. The preferred equity instruments are convertible into common shares at the non-controlling owner's election at any time. The remaining portion of the non-controlling interests in Pivotal is held by third parties in the form of common stock. Pivotal's results of operations and equity activity are attributable to such interests in Pivotal in the
Condensed Consolidated Statements of Income (Loss)
and
Condensed Consolidated Statements of Financial Position
. The non-controlling interests' share of equity in Pivotal, including both preferred equity instruments and common stock, is reflected as a component of the non-controlling interests in the accompanying Condensed Consolidated Statements of Financial Position and was
$481 million
and
$472 million
as of
November 3, 2017
and
February 3, 2017
, respectively. As of
November 3, 2017
and
February 3, 2017
, the Company held approximately
77.3%
and
77.8%
, respectively, of the outstanding equity interest in Pivotal.
The effect of changes in the Company's ownership interest in VMware, Inc., SecureWorks, and Pivotal on the Company's equity for the period presented was as follows:
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
|
(in millions)
|
|
Net loss attributable to Dell Technologies Inc.
|
$
|
(3,217
|
)
|
|
Transfers (to) from the non-controlling interests:
|
|
|
Increase in Dell Technologies Inc. additional paid-in-capital for equity issuances and other equity activity
|
482
|
|
|
Decrease in Dell Technologies Inc. additional paid-in-capital for equity issuances and other equity activity
|
(684
|
)
|
|
Net transfers to non-controlling interests
|
(202
|
)
|
|
Change from net loss attributable to Dell Technologies Inc. and transfers to/from the non-controlling interests
|
$
|
(3,419
|
)
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 16
—
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted-average effect of all common shares issued and outstanding and is calculated by dividing net income (loss) by the weighted-average shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares used in the basic earnings (loss) per share calculation plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive instruments. The Company excludes equity instruments from the calculation of diluted earnings (loss) per share if the effect of including such instruments is antidilutive.
The Company has
two
groups of common stock, denoted as the DHI Group Common Stock and the Class V Common Stock. The DHI Group Common Stock consists of
four
classes of common stock, referred to as Class A Common Stock, Class B Common Stock, Class C Common Stock, and Class D Common Stock. The DHI Group generally refers to the direct and indirect interest of Dell Technologies in all of Dell Technologies' business, assets, properties, liabilities, and preferred stock other than those attributable to the Class V Group, as well as its retained interest in the Class V Group equal to approximately
39%
of the Company's economic interest in the Class V Group as of
November 3, 2017
. The Class V Common Stock is intended to track the economic performance of approximately
61%
of the Company's economic interest in the Class V Group as of such date. As of
November 3, 2017
, the Class V Group consisted solely of approximately
331 million
shares of VMware, Inc. common stock held by the Company. See
Note 17
of the
Notes to the Condensed Consolidated Financial Statements
and Exhibit 99.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended
November 3, 2017
for more information regarding the allocation of earnings from Dell Technologies' interest in VMware, Inc. between the DHI Group and the Class V Common Stock.
For purposes of calculating earnings (loss) per share, the Company used the two-class method. As all classes of DHI Group Common Stock share the same rights in dividends, basic and diluted earnings (loss) per share are the same for each class of DHI Group Common Stock.
The following table sets forth basic and diluted earnings (loss) per share for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
Earnings (loss) per share attributable to Dell Technologies Inc. - basic:
|
|
|
|
|
|
Continuing operations - Class V Common Stock - basic
|
$
|
1.10
|
|
|
$
|
0.79
|
|
|
$
|
2.50
|
|
|
$
|
0.79
|
|
|
Continuing operations - DHI Group - basic
|
$
|
(2.05
|
)
|
|
$
|
(3.62
|
)
|
|
$
|
(6.57
|
)
|
|
$
|
(5.70
|
)
|
|
Discontinued operations - DHI Group - basic
|
$
|
—
|
|
|
$
|
(0.88
|
)
|
|
$
|
—
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted:
|
|
|
|
|
|
Continuing operations - Class V Common Stock - diluted
|
$
|
1.09
|
|
|
$
|
0.78
|
|
|
$
|
2.46
|
|
|
$
|
0.78
|
|
|
Continuing operations - DHI Group - diluted
|
$
|
(2.05
|
)
|
|
$
|
(3.63
|
)
|
|
$
|
(6.58
|
)
|
|
$
|
(5.70
|
)
|
|
Discontinued operations - DHI Group - diluted
|
$
|
—
|
|
|
$
|
(0.88
|
)
|
|
$
|
—
|
|
|
$
|
2.01
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table sets forth the computation of basic and diluted earnings (loss) per share for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Numerator: Continuing operations - Class V Common Stock
|
|
|
|
|
|
|
|
|
Net income from continuing operations attributable to Class V Common Stock - basic
|
$
|
223
|
|
|
$
|
175
|
|
|
$
|
509
|
|
|
$
|
175
|
|
|
Incremental dilution from VMware, Inc. attributable to Class V Common Stock (a)
|
(3
|
)
|
|
(2
|
)
|
|
(7
|
)
|
|
(2
|
)
|
|
Net income from continuing operations attributable to Class V Common Stock - diluted
|
$
|
220
|
|
|
$
|
173
|
|
|
$
|
502
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: Continuing operations - DHI Group
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to DHI Group - basic
|
$
|
(1,160
|
)
|
|
$
|
(1,801
|
)
|
|
$
|
(3,726
|
)
|
|
$
|
(2,486
|
)
|
|
Incremental dilution from VMware, Inc. attributable to DHI Group (a)
|
(3
|
)
|
|
(1
|
)
|
|
(5
|
)
|
|
(1
|
)
|
|
Net loss from continuing operations attributable to DHI Group - diluted
|
$
|
(1,163
|
)
|
|
$
|
(1,802
|
)
|
|
$
|
(3,731
|
)
|
|
$
|
(2,487
|
)
|
|
|
|
|
|
|
|
|
|
|
Numerator: Discontinued operations - DHI Group
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes - basic and diluted
|
$
|
—
|
|
|
$
|
(438
|
)
|
|
$
|
—
|
|
|
$
|
875
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: Class V Common Stock weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
202
|
|
|
222
|
|
|
204
|
|
|
222
|
|
|
Dilutive effect of options, restricted stock units, restricted stock, and other (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average shares outstanding - diluted
|
202
|
|
|
222
|
|
|
204
|
|
|
222
|
|
|
Weighted-average shares outstanding - antidilutive (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: DHI Group weighted-average shares outstanding
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
567
|
|
|
497
|
|
|
567
|
|
|
436
|
|
|
Dilutive effect of options, restricted stock units, restricted stock, and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average shares outstanding - diluted
|
567
|
|
|
497
|
|
|
567
|
|
|
436
|
|
|
Weighted-average shares outstanding - antidilutive (c)
|
34
|
|
|
33
|
|
|
36
|
|
|
30
|
|
____________________
|
|
|
|
(a)
|
The incremental dilution from VMware, Inc. represents the impact of VMware, Inc.'s dilutive securities on the diluted earnings (loss) per share of the DHI Group and the Class V Common Stock, respectively, and is calculated by multiplying the difference between VMware, Inc.'s basic and diluted earnings (loss) per share by the number of shares of VMware, Inc. Class A common stock owned by the Company.
|
|
|
|
|
(b)
|
The dilutive effect of Class V Common Stock-based incentive awards was not material to the calculation of the weighted-average Class V Common Stock shares outstanding. The antidilutive effect of these awards was also not material.
|
|
|
|
|
(c)
|
Stock-based incentive awards have been excluded from the calculation of the DHI Group's diluted earnings (loss) per share because their effect would have been antidilutive, as the Company had a net loss from continuing operations attributable to the DHI Group for the periods presented.
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents a reconciliation to the consolidated net income (loss) attributable to Dell Technologies Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Net income from continuing operations attributable to Class V Common Stock
|
$
|
223
|
|
|
$
|
175
|
|
|
$
|
509
|
|
|
$
|
175
|
|
|
Net loss from continuing operations attributable to DHI Group
|
(1,160
|
)
|
|
(1,801
|
)
|
|
(3,726
|
)
|
|
(2,486
|
)
|
|
Net loss from continuing operations attributable to Dell Technologies Inc.
|
(937
|
)
|
|
(1,626
|
)
|
|
(3,217
|
)
|
|
(2,311
|
)
|
|
Income (loss) from discontinued operations, net of income taxes (Note 3)
|
—
|
|
|
(438
|
)
|
|
—
|
|
|
875
|
|
|
Net loss attributable to Dell Technologies Inc.
|
$
|
(937
|
)
|
|
$
|
(2,064
|
)
|
|
$
|
(3,217
|
)
|
|
$
|
(1,436
|
)
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 17
—
CAPITALIZATION
On June 26, 2017, the stockholders of the Company voted at the Company’s 2017 annual meeting of stockholders to adopt an amendment to the Company’s certificate of incorporation to increase (1) the total authorized number of shares of the Company’s capital stock, including preferred stock, from
2,144,025,308
shares to
9,144,025,308
shares, (2) the total authorized number of shares of the Company’s common stock from
2,143,025,308
shares to
9,143,025,308
shares and (3) the total authorized number of shares of the Company’s Class C Common Stock from
900,000,000
shares to
7,900,000,000
shares, in each case representing an increase of
seven billion
shares. A certificate of amendment to the Company’s certificate of incorporation effectuating the amendment was filed with the Secretary of State of the State of Delaware on June 29, 2017 and became effective on that date.
The following table summarizes the Company's authorized, issued, and outstanding common stock as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized
|
|
Issued
|
|
Outstanding
|
|
|
(in millions of shares)
|
|
Common stock as of February 3, 2017
|
|
Class A
|
600
|
|
|
410
|
|
|
410
|
|
|
Class B
|
200
|
|
|
137
|
|
|
137
|
|
|
Class C
|
900
|
|
|
22
|
|
|
22
|
|
|
Class D
|
100
|
|
|
—
|
|
|
—
|
|
|
Class V
|
343
|
|
|
223
|
|
|
209
|
|
|
|
2,143
|
|
|
792
|
|
|
778
|
|
|
|
|
|
|
|
|
|
Common stock as of November 3, 2017
|
|
Class A
|
600
|
|
|
410
|
|
|
410
|
|
|
Class B
|
200
|
|
|
137
|
|
|
137
|
|
|
Class C
|
7,900
|
|
|
24
|
|
|
23
|
|
|
Class D
|
100
|
|
|
—
|
|
|
—
|
|
|
Class V
|
343
|
|
|
223
|
|
|
199
|
|
|
|
9,143
|
|
|
794
|
|
|
769
|
|
Preferred Stock
— The Company is authorized to issue
one million
shares of preferred stock, par value
$.01
per share. As of
November 3, 2017
,
no
shares of preferred stock were issued or outstanding.
Class V Common Stock and Class V Group
— In connection with the EMC merger transaction, the Company authorized
343 million
shares of Class V Common Stock. The Class V Common Stock is a type of common stock commonly referred to as a tracking stock, which is a class of common stock that is intended to track the economic performance of a defined set of assets and liabilities. As of
November 3, 2017
, the
199 million
shares of outstanding Class V Common Stock were intended to track the economic performance of approximately
61%
of Dell Technologies' economic interest in the Class V Group. The Class V Group as of such date consisted solely of approximately
331 million
shares of VMware, Inc. common stock held by the Company. The remaining
39%
economic interest in the Class V Group as of
November 3, 2017
was represented by the approximately
127 million
retained interest shares held by the DHI Group. The DHI Group generally refers, in addition to such retained interest, to the direct and indirect interest of Dell Technologies in all of Dell Technologies' business, assets, properties, liabilities, and preferred stock other than those attributable to the Class V Group.
Repurchases of Common Stock; Treasury Stock
Class V Common Stock Repurchases
— On December 13, 2016, the board of directors approved a stock repurchase program (the "Class V Group Repurchase Program") which authorized the Company to use assets of the Class V Group to repurchase up to
$500 million
of shares of Class V Common Stock over a period of
six months
.
During the three months ended May 5, 2017
, the Company repurchased
1.3 million
shares of Class V Common Stock for
$82 million
pursuant to this initial authorization. The Company repurchased a total of
8.4 million
shares under this program.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
On March 27, 2017 and August 18, 2017, the board of directors approved two amendments of the Class V Group Repurchase Program (the "March 2017 Class V Group Repurchase Program" and the “August 2017 Class V Group Repurchase Program,” respectively) which, when combined, authorized the Company to use assets of the Class V Group to repurchase up to an additional
$600 million
of shares of Class V Common Stock over additional six-month periods from the respective board approval dates. On May 9, 2017, the March 2017 Class V Group Repurchase Program was completed, with the Company having repurchased
4.6 million
shares of Class V Common Stock for
$300 million
. On October 31, 2017, the August 2017 Class V Group Repurchase Program was completed, with the Company having repurchased
3.8 million
shares of Class V Common Stock for
$300 million
.
The following table presents the repurchase activity with respect to the Class V Common Stock for the
nine months ended November 3, 2017
, and the attribution of the Class V Group between the Class V Common Stock and the DHI Group's retained interest as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class V Common Stock
|
|
DHI Group Retained Interest
|
|
|
Shares of Class V Common Stock
|
|
Interest in Class V Group
|
|
Retained Interest Shares
|
|
Interest in Class V Group
|
|
|
(in millions of shares)
|
|
As of February 3, 2017
|
209
|
|
|
62
|
%
|
|
127
|
|
|
38
|
%
|
|
Repurchases of Class V Common Stock
|
(10
|
)
|
|
|
|
—
|
|
|
|
|
As of November 3, 2017
|
199
|
|
|
61
|
%
|
|
127
|
|
|
39
|
%
|
All shares of Class V Common Stock repurchased by the Company pursuant to the repurchase programs are held as treasury stock at cost. The repurchase of shares pursuant to the Class V Common Stock repurchase programs was funded from proceeds received by the Class V Group from the sale by a subsidiary of the Company of shares of Class A common stock of VMware, Inc. owned by such subsidiary, as described below under "VMware, Inc. Class A Common Stock Repurchases." Share repurchases made by VMware, Inc. of its Class A common stock from a subsidiary of the Company do not affect the determination of the respective interests of the Class V Common Stock and the DHI Group in the Class V Group. See Exhibit 99.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended
November 3, 2017
for more information regarding Unaudited Attributed Financial Information for the Class V Group.
VMware, Inc. Class A Common Stock Repurchases
— On December 15, 2016, the Company entered into a stock purchase agreement with VMware, Inc. (the "December 2016 Stock Purchase Agreement"), pursuant to which VMware, Inc. agreed to repurchase for cash
$500 million
of shares of VMware, Inc. Class A common stock from a subsidiary of the Company.
During the three months ended May 5, 2017, VMware, Inc. repurchased
1.4 million
shares pursuant to the December 2016 Stock Purchase Agreement
.
VMware, Inc. repurchased a total of
6.2 million
shares under this agreement. The Company applied the proceeds from the sale to the repurchase of shares of its Class V Common Stock under the Class V Group Repurchase Program described above. All shares repurchased under VMware, Inc.'s stock repurchase programs are retired.
In January 2017 and August 2017, VMware, Inc.'s board of directors authorized the repurchase of up to
$2.2 billion
of shares of VMware, Inc. Class A common sto
ck (the "January 2017 Authorization" for up to
$1.2 billion
through the end of Fiscal 2018, and the "August 2017 Authorization" for up to
$1 billion
through August 31, 2018). On March 29, 2017 and August 23, 2017, the Company entered into two new stock purchase agreements with VMware, Inc. (the "March 2017 Stock Purchase Agreement" and the "August 2017 Stock Purchase Agreement," respectively), pursuant to which VMware, Inc. agreed to repurchase for cash a total of
$600 million
of shares of VMware, Inc. Class A common stock from a subsidiary of the Company. VMware, Inc. repurchased approximately
6.1 million
shares of Class A common stock (consisting of
3.4 million
shares pursuant to the March 2017 Stock Purchase Agreement and
2.7 million
shares pursuant to the August 2017 Stock Purchase Agreement). The proceeds from the sales were applied by the Company to the repurchase of shares of the Class V Common Stock under the March 2017 and August 2017 Class V Group Repurchase Programs described above. As of November 3, 2017, the sale transactions under the March 2017 and August 2017 Stock Purchase Agreements were completed. The purchase prices of the
3.4 million
shares and
2.7 million
shares repurchased by VMware, Inc. were e
ach based on separate volume-weighted average per share prices of the Class A common stock as reported on the New York Stock Exchange during separate specified reference periods, less a discount of
3.5%
from the respective volume-weighted average per share price.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
During the three and nine months ended November 3, 2017, VMware, Inc. repurchased
5.1 million
shares of Class A common stock in the open market for
$555 million
.
As of
November 3, 2017
, the cumulative authorized amount remaining for share repurchases by VMware, Inc. was
$1,045 million
, which represents the
$2.2 billion
authorized since January 2017, less the cumulative Class A common stock repurchases from the Company of
$600 million
, and less the cumulative Class A common stock repurchases in the open market of
$555 million
.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 18
—
REDEEMABLE SHARES
Awards under the Company's stock incentive plans include certain rights that allow the holder to exercise a put feature for the underlying Class A or Class C Common Stock after a
six
-month holding period following the issuance of such common stock that requires the Company to purchase the stock at its fair market value. Accordingly, these awards and common stock are subject to reclassification from equity to temporary equity, and the Company determines the award amounts to be classified as temporary equity as follows:
|
|
|
|
•
|
For stock options to purchase Class C Common Stock subject to service requirements, the intrinsic value of the option is multiplied by the portion of the option for which services have been rendered. Upon exercise of the option, the amount in temporary equity represents the fair value of the Class C Common Stock.
|
|
|
|
|
•
|
For stock appreciation rights, restricted stock units ("RSUs"), or shares of restricted common stock ("RSAs"), any of which stock award types are subject to service requirements, the fair value of the share is multiplied by the portion of the shares for which services have been rendered.
|
|
|
|
|
•
|
For share-based arrangements that are subject to the occurrence of a contingent event, those amounts are not reclassified to temporary equity until the contingency has been satisfied.
|
The amount of redeemable shares classified as temporary equity as of
November 3, 2017
was
$362 million
, which consisted of
2.6 million
issued and outstanding unrestricted common shares,
0.3 million
RSUs,
0.1 million
RSAs, and
15.3 million
outstanding stock options. The amount of redeemable shares classified as temporary equity as of
February 3, 2017
was
$231 million
, which consisted of
1.1 million
issued and outstanding unrestricted common shares,
0.4 million
RSUs,
0.1 million
RSAs, and
13.7 million
outstanding stock options.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 19
—
SEGMENT INFORMATION
The Company has
three
reportable segments that are based on the following business units: Client Solutions Group ("CSG"); Infrastructure Solutions Group ("ISG"); and VMware.
CSG includes sales to commercial and consumer customers of desktops, thin client products, and notebooks, as well as services and third-party software and peripherals that are closely tied to the sale of CSG hardware. ISG includes servers, networking, and storage, as well as services and third-party software and peripherals that are closely tied to the sale of ISG hardware. VMware includes a broad portfolio of virtualization technologies across
three
main product groups: software-defined data center; hybrid cloud computing; and end-user computing.
The reportable segments disclosed herein are based on information reviewed by the Company's management to evaluate the business segment results. The Company's measure of segment operating income for management reporting purposes excludes the impact of other businesses, purchase accounting, amortization of intangible assets, unallocated corporate transactions, severance and facility action costs, and transaction-related expenses. The Company does not allocate assets to the above reportable segments for internal reporting purposes.
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents a reconciliation of net revenue by the Company's reportable segments to the Company's consolidated net revenue as well as a reconciliation of consolidated segment operating income to the Company's consolidated operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Consolidated net revenue:
|
|
|
|
|
|
|
|
|
|
Client Solutions Group
|
$
|
9,959
|
|
|
$
|
9,187
|
|
|
$
|
28,866
|
|
|
$
|
26,978
|
|
|
Infrastructure Solutions Group
|
7,518
|
|
|
5,989
|
|
|
21,840
|
|
|
13,381
|
|
|
VMware
|
1,953
|
|
|
1,289
|
|
|
5,596
|
|
|
1,289
|
|
|
Reportable segment net revenue
|
19,430
|
|
|
16,465
|
|
|
56,302
|
|
|
41,648
|
|
|
Other businesses (a)
|
475
|
|
|
312
|
|
|
1,409
|
|
|
530
|
|
|
Unallocated transactions (b)
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
63
|
|
|
Impact of purchase accounting (c)
|
(295
|
)
|
|
(530
|
)
|
|
(985
|
)
|
|
(673
|
)
|
|
Total net revenue
|
$
|
19,610
|
|
|
$
|
16,247
|
|
|
$
|
56,725
|
|
|
$
|
41,568
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
Client Solutions Group
|
$
|
672
|
|
|
$
|
634
|
|
|
$
|
1,612
|
|
|
$
|
1,503
|
|
|
Infrastructure Solutions Group
|
678
|
|
|
897
|
|
|
1,431
|
|
|
1,389
|
|
|
VMware
|
639
|
|
|
548
|
|
|
1,686
|
|
|
548
|
|
|
Reportable segment operating income
|
1,989
|
|
|
2,079
|
|
|
4,729
|
|
|
3,440
|
|
|
Other businesses (a)
|
6
|
|
|
(13
|
)
|
|
10
|
|
|
(48
|
)
|
|
Unallocated transactions (b)
|
(9
|
)
|
|
(91
|
)
|
|
(4
|
)
|
|
(122
|
)
|
|
Impact of purchase accounting (c)
|
(366
|
)
|
|
(850
|
)
|
|
(1,195
|
)
|
|
(1,054
|
)
|
|
Amortization of intangibles
|
(1,734
|
)
|
|
(1,164
|
)
|
|
(5,250
|
)
|
|
(2,146
|
)
|
|
Transaction-related expenses (d)
|
(86
|
)
|
|
(1,200
|
)
|
|
(415
|
)
|
|
(1,329
|
)
|
|
Other corporate expenses
(e)
|
(333
|
)
|
|
(273
|
)
|
|
(887
|
)
|
|
(325
|
)
|
|
Total operating loss
|
$
|
(533
|
)
|
|
$
|
(1,512
|
)
|
|
$
|
(3,012
|
)
|
|
$
|
(1,584
|
)
|
_________________
|
|
|
|
(a)
|
Other businesses consist of RSA Information Security, SecureWorks, Pivotal, and Boomi, and do not constitute a reportable segment, either individually or collectively, as the results of the businesses are not material to the Company's overall results and the businesses do not meet the criteria for reportable segments.
|
|
|
|
|
(b)
|
Unallocated transactions includes long-term incentives, certain short-term incentive compensation expenses, and other corporate items that are not allocated to Dell Technologies' reportable segments.
|
|
|
|
|
(c)
|
Impact of purchase accounting includes non-cash purchase accounting adjustments that are primarily related to the EMC merger transaction.
|
|
|
|
|
(d)
|
Transaction-related expenses includes acquisition, integration, and divestiture related costs.
|
|
|
|
|
(e)
|
Other corporate expenses includes severance and facility action costs as well as stock-based compensation expense.
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table presents net revenue by
business unit categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
Client Solutions Group:
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
6,907
|
|
|
$
|
6,400
|
|
|
$
|
20,453
|
|
|
$
|
19,343
|
|
|
Consumer
|
3,052
|
|
|
2,787
|
|
|
8,413
|
|
|
7,635
|
|
|
Total CSG net revenue
|
9,959
|
|
|
9,187
|
|
|
28,866
|
|
|
26,978
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions Group:
|
|
|
|
|
|
|
|
|
Servers and networking
|
3,851
|
|
|
2,910
|
|
|
10,822
|
|
|
9,222
|
|
|
Storage
|
3,667
|
|
|
3,079
|
|
|
11,018
|
|
|
4,159
|
|
|
Total ISG net revenue
|
7,518
|
|
|
5,989
|
|
|
21,840
|
|
|
13,381
|
|
|
|
|
|
|
|
|
|
|
|
VMware:
|
|
|
|
|
|
|
|
|
Total VMware net revenue
|
1,953
|
|
|
1,289
|
|
|
5,596
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net revenue
|
$
|
19,430
|
|
|
$
|
16,465
|
|
|
$
|
56,302
|
|
|
$
|
41,648
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 20
—
SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
The following table provides additional information on selected accounts included in the
Condensed Consolidated Statements of Financial Position
as of
November 3, 2017
and
February 3, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
(in millions)
|
|
Inventories, net:
|
|
|
|
|
Production materials
|
$
|
787
|
|
|
$
|
925
|
|
|
Work-in-process
|
607
|
|
|
503
|
|
|
Finished goods
|
1,188
|
|
|
1,110
|
|
|
Total inventories, net
|
2,582
|
|
|
2,538
|
|
|
Other non-current liabilities:
|
|
|
|
|
Warranty liability
|
187
|
|
|
199
|
|
|
Deferred and other tax liabilities
|
6,740
|
|
|
8,607
|
|
|
Other
|
560
|
|
|
533
|
|
|
Total other non-current liabilities
|
$
|
7,487
|
|
|
$
|
9,339
|
|
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 21
—
SUBSEQUENT EVENTS
On November 27, 2017, DFS entered into a credit agreement that provided for borrowings in an aggregate principal amount of
$200 million
. The borrowings will accrue interest at a rate per annum of either
3.67%
, if denominated in U.S. dollars, or
9.43%
, if denominated in Mexican pesos. The note will mature on December 1, 2020.
During November 2017, VMware, Inc. entered into a definitive agreement to acquire VeloCloud Networks, Inc. (“VeloCloud”), a provider of cloud-delivered software-defined wide-area network (SD-WAN) technology for enterprises and service providers. The acquisition of VeloCloud will enable VMware to build on its network virtualization platform, VMware NSX, and expand its networking portfolio. The cash payment upon closing of the transaction is estimated to be approximately
$470 million
; however, the determination of the purchase price is dependent upon several factors at the date of closing and cannot be reasonably estimated until such time. The transaction is expected to close during the fourth quarter of Fiscal 2018 and is subject to regulatory approvals and customary closing conditions.
Other than the matters identified above, there were no known events occurring after the balance sheet date and up until the date of the issuance of this report that would materially affect the information presented herein.
ITEM 2
—
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management's discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company's annual report on Form 10-K for the fiscal year ended February 3, 2017 and the unaudited Condensed Consolidated Financial Statements included in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and that are subject to numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied in any forward-looking statements.
Unless otherwise indicated, all results presented are prepared in a manner that complies, in all material respects, with accounting principles generally accepted in the United States of America ("GAAP"). Additionally, unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.
Unless the context indicates otherwise, references in this report to "we," "us," "our," the "Company," and "Dell Technologies" mean Dell Technologies Inc. and its consolidated subsidiaries, and references to "EMC" mean EMC Corporation and EMC Corporation's consolidated subsidiaries.
Our fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. We refer to our fiscal years ended February 2, 2018 and February 3, 2017 as "Fiscal 2018" and "Fiscal 2017," respectively. Fiscal 2017 included 53 weeks, with the extra week included in the fourth quarter of Fiscal 2017. Fiscal 2018 will include 52 weeks.
On September 7, 2016, we completed our acquisition by merger of EMC. The consolidated results of EMC are included in Dell Technologies' consolidated results for the Fiscal 2018 periods presented. During Fiscal 2017, we closed the Dell Services, Dell Services Group ("DSG"), and Enterprise Content Division ("ECD") divestiture transactions. Accordingly, the results of operations of Dell Services, DSG, and ECD, as well as the related gains or losses on sale, have been excluded from the results of continuing operations in the relevant periods, except as otherwise indicated.
INTRODUCTION
Dell Technologies is a strategically aligned family of businesses that brings together the entire infrastructure from hardware to software to services — from the edge to the core to the cloud. The core of IT is evolving in our hyper-connected world, containing both centralized data centers and geographically distributed hyper-converged infrastructure. Dell Technologies is a leader in the traditional technology of today and a leader in the cloud-native infrastructure of tomorrow. We are a leading provider of scalable IT solutions enabling customers to be more efficient, mobile, informed, and secure. Through our recent combination with EMC, Dell Technologies now primarily encompasses our Client Solutions Group, Infrastructure Solutions Group, VMware, Inc., RSA Information Security, SecureWorks Corp. ("SecureWorks"), Pivotal Software, Inc. ("Pivotal"), and Boomi, Inc ("Boomi"). We are focused on providing technology solutions and services that accelerate digital transformation. We believe technology exists to drive human progress on a global scale — to create new markets, reshape industries, and improve lives. We are positioned to help customers of any size build the essential infrastructure to modernize IT and enable digital business, and are differentiated by our practical innovation and efficient, simple, and affordable solutions.
Dell Technologies is committed to our customers. We believe our products, solutions, and services will help power digital transformation. As we innovate to make our customers' existing IT increasingly productive, we help them reinvest their savings into the next generation of technologies that they need to succeed in the digital economy. Our next-generation solutions which enable digital transformation include software-defined data centers, all flash arrays, hybrid cloud, converged and hyper-converged infrastructure, mobile, and security solutions. In addition, our extended warranty and delivery offerings, and software and peripherals, which are closely tied to the sale of our hardware products, are important value differentiators that we are able to offer our customers.
We celebrated the one year anniversary of our historic merger with EMC in September 2017, and recognize the many accomplishments we have made over that year. These accomplishments include the broad expansion of our product portfolio, integration of our supply chain, and achievement of revenue synergies across the business. We continue to work on the integration of EMC acquired businesses and on strengthening our combined go-to-market initiatives. During this period of transition and integration, we remain focused on supporting our customers with outstanding solutions, products, and services. We will continue our focus on building superior customer relationships through our direct model and our network of channel
partners, which includes value-added resellers, system integrators, distributors, and retailers. We also will continue investing in strategic solutions and enhancing our go-to-market sales and marketing capabilities as we seek to strengthen our position as leading global technology company poised for long-term sustainable growth and innovation.
As we stay focused on our customers, we will pursue the following strategic initiatives:
|
|
|
|
•
|
Extend our market leading position through our Client Solutions Group and Infrastructure Solutions Group offerings
|
|
|
|
|
•
|
Grow our strong position in IT infrastructure for traditional and cloud-native workloads, both on- and off-premises
|
|
|
|
|
•
|
Innovate with winning technology that spans and unites on- and off-premises applications and infrastructure and that enables IT, security, and workforce transformation required by our customers
|
As part of this strategy, we will continue to evaluate opportunities for strategic investments through our venture capital investment arm, Dell Technologies Capital, with a focus on emerging technology areas that are relevant to the Dell Technologies' unique family of businesses and that will complement our existing portfolio of solutions. Our investment areas include storage, software-defined networking, management and orchestration, security, machine learning and artificial intelligence, Big Data and analytics, cloud, Internet of Things, and software development operations. In addition to these investments, we also may make disciplined acquisitions targeting businesses that advance our strategic objectives.
We operate a diversified business model with the majority of our net revenue and operating income derived from commercial clients that consist of large enterprises, small and medium-sized businesses, and public sector customers.
Products and Services
We design, develop, manufacture, market, sell, and support a wide range of products and services. We are organized into the following business units, which are our reportable segments: Client Solutions Group; Infrastructure Solutions Group; and VMware. Due to our divestitures of Dell Services, Dell Software Group, and Dell EMC Enterprise Content Division, the results of these businesses, as well as the related gains or losses on sale, have been excluded from the relevant periods, except as otherwise indicated.
|
|
|
|
•
|
Client Solutions Group (CSG)
— Offerings by CSG include branded hardware, such as desktop PCs, notebooks, and workstations, and branded peripherals, such as monitors, printers, and projectors. CSG also offers attached software, peripherals, and services, including support and deployment, configuration, and extended warranty services.
|
Approximately half of CSG revenue is generated by sales to customers in the Americas, with the remaining portion derived from sales to customers in the Europe, Middle East and Africa region ("EMEA") and the Asia-Pacific and Japan region ("APJ").
|
|
|
|
•
|
Infrastructure Solutions Group (ISG)
— EMC's Information Storage segment and our former Enterprise Solutions Group were merged to create the Infrastructure Solutions Group, or ISG, which contains storage, server, and networking offerings. The comprehensive portfolio of advanced storage solutions includes traditional storage solutions as well as next-generation storage solutions (including all flash arrays and scale-out file, and object platforms). The server portfolio includes high-performance rack, blade, tower, and hyperscale servers. The networking portfolio enables our business customers to transform and modernize their infrastructure, mobilize and enrich end-user experiences, and accelerate business applications and processes. Similar to CSG, ISG also offers attached software, peripherals, and services, including support and deployment, configuration, and extended warranty services.
|
Approximately half of ISG revenue is generated by sales to customers in the Americas, with the remaining portion derived from sales to customers in EMEA and APJ.
|
|
|
|
•
|
VMware
— The VMware reportable segment ("VMware") reflects the operations of VMware, Inc. (NYSE: VMW) within Dell Technologies. See Exhibit 99.1 filed with this report for further details on the differences between VMware reportable segment results and VMware, Inc. results.
|
VMware is a leader in virtualization and cloud infrastructure and business mobility solutions that enable organizations to manage IT resources across private clouds and complex multi-cloud, multi-device environments. VMware offers a
broad portfolio of virtualization technologies across three main product groups: software-defined data center; hybrid cloud computing; and end-user computing.
Approximately half of VMware revenue is generated by sales to customers in the United States.
Our other businesses, described below, consist of product and service offerings of RSA Information Security, SecureWorks, Pivotal, and Boomi. These businesses are not classified as reportable segments, either individually or collectively, as the results of the businesses are not material to our overall results and the businesses do not meet the criteria for reportable segments.
|
|
|
|
•
|
RSA Information Security
provides essential cybersecurity solutions engineered to enable organizations to detect, investigate, and respond to advanced attacks, confirm and manage identities, and, ultimately, help reduce IP theft, fraud, and cybercrime.
|
|
|
|
|
•
|
SecureWorks
(NASDAQ: SCWX) is a leading global provider of intelligence-driven information security solutions singularly focused on protecting its clients from cyber attacks.
|
|
|
|
|
•
|
Pivotal
is a leading provider of application and data infrastructure software, agile development services, and data science consulting. Pivotal's cloud-native platform enables leading companies to transform their operations with an approach that is focused on building software, rather than buying it.
|
|
|
|
|
•
|
Boomi
specializes in cloud-based integration, connecting information between existing on-premise and cloud-based applications to ensure business processes are optimized, data is accurate and workflow is reliable.
|
See
Note 19
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information about our other businesses.
For further discussion regarding our current reportable segments, see "Results of Operations — Business Unit Results."
Dell Financial Services
We also offer or arrange various financing options and services for our commercial and consumer customers in North America, Europe, Australia, and New Zealand through Dell Financial Services ("DFS") and its affiliates. DFS services include originating, collecting, and servicing customer receivables primarily related to the purchase of Dell Technologies products. The results of these operations are allocated to our segments based on the underlying product or service financed. For additional information about our financing arrangements, see
Note 6
of the Notes to the Condensed Consolidated Financial Statements included in this report.
Business Trends and Challenges
We are seeing an unprecedented rate of change in the IT industry. Organizations of all kinds are embracing digital technology to achieve their business objectives. Our vision is to be the essential infrastructure company and leader in end-user computing, data center infrastructure solutions, virtualization, Internet of Things ("IoT"), and cloud software that our customers continue to trust and rely on for their IT solutions and transformations. To further advance this vision, we recently unveiled a new IoT strategy, division, and an array of solutions to support IoT adoption for our customers. We accelerate results for our customers by enabling them to be more efficient, mobile, informed, and secure. We continue to invest in research and development, sales, and other key areas of our business to deliver superior products and solutions capabilities and to drive execution of long-term sustainable growth. We believe that our results will benefit from an integrated go-to-market strategy, including enhanced coordination among the family of Dell Technologies companies, and from our differentiated products and solutions capabilities. We intend to continue to execute on our business model and seek to balance liquidity, profitability, and growth to position our company for long-term success.
We are able to leverage our traditional strength in the PC market to offer solutions and services that provide higher-value, recurring revenue streams. Given current market trends, we expect that the demand environment will continue to be cyclical and that competitive dynamics will continue to pressure our CSG business. However, we are committed to a long-term growth strategy that we believe will benefit from the consolidation trends that are occurring in our markets. Our CSG offerings remain an important element of our strategy, generating strong cash flow and opportunities for cross-selling of complementary solutions.
We expect that ISG will continue to be impacted by the changing nature of the IT infrastructure market and competitive environment. Cloud-native applications are expected to continue as a primary growth driver in the infrastructure market as IT organizations increasingly become multi-cloud environments. We believe the complementary cloud solutions across our business, created through our combination with EMC, strongly position us to meet these demands for our customers who are increasingly looking to leverage cloud-based computing. Further, we will provide new and more robust storage and data center solutions to meet the evolving needs of our customers. We also continue to be impacted by the emerging trends of enterprises deploying software-defined storage, hyper-converged, and modular solutions based on server-centric architectures. These trends have put pressure on our traditional storage offerings, and we are focused on rapidly developing new capabilities and solutions to reposition our storage portfolio. We have leading solutions through our ISG and VMware data center offerings. In addition, through our research and development efforts, we expect to develop new solutions in this rapidly changing industry that we believe will enable us to continue to provide superior solutions to our customers.
In ISG, we are also seeing increased interest in "as a service" flexible consumption models by our customers as they seek to build greater flexibility into their cost structures. We have introduced various financing and consumption models to meet our customers' needs.
During the first nine months of Fiscal 2018, we have experienced higher component costs which primarily impacted CSG and ISG. We expect this trend to moderate but continue into Fiscal 2019.
We manage our business on a U.S. dollar basis. However, we have a large global presence, generating approximately half of our revenue by sales to customers outside of the United States during the third quarter and first nine months of Fiscal 2018 and the third quarter and first nine months of Fiscal 2017. Our revenues, therefore, can be impacted by fluctuations in foreign currency exchange rates. We utilize a comprehensive hedging strategy intended to mitigate the impact of foreign currency volatility over time, and we adjust pricing when possible to further minimize foreign currency impacts. The percentage of our revenues generated in regions outside of the United States did not change substantially as a result of the EMC merger transaction.
EMC Merger Transaction
As described in
Note 2
of the
Notes to the Condensed Consolidated Financial Statements
included in this report, on September 7, 2016, a merger subsidiary of Dell Technologies merged with and into EMC Corporation, with EMC Corporation surviving the merger as a wholly-owned subsidiary of Dell Technologies.
Pursuant to the terms of the merger agreement, upon the completion of the EMC merger transaction, each issued and outstanding share of common stock, par value
$0.01
per share, of EMC Corporation (approximately
2.0 billion
as of September 7, 2016) was converted into the right to receive (1)
$24.05
in cash, without interest, and (2)
0.11146
validly issued, fully paid and non-assessable shares of common stock of the Company designated as Class V Common Stock, par value
$0.01
per share, plus cash in lieu of any fractional shares. Shares of the Class V Common Stock were approved for listing on the New York Stock Exchange (the "NYSE") under the ticker symbol "DVMT" and began trading on September 7, 2016.
In connection with the EMC merger transaction, all principal, accrued but unpaid interest, fees, and other amounts (other than certain contingent obligations) outstanding at the effective time of the EMC merger transaction under EMC's unsecured revolving credit facility, Dell's asset-based revolving credit facility, and Dell's term facilities were substantially repaid concurrently with the closing. Further, all commitments to lend and guarantees and security interests, as applicable, in connection therewith were terminated or released. The aggregate amounts of principal, interest, and premium necessary to redeem in full the outstanding $1.4 billion in aggregate principal amount of 5.625% Senior First Lien Notes due 2020 co-issued by Dell International and Denali Finance Corp. were deposited with the trustee for such notes, and such notes were thereby satisfied and discharged, concurrently with the effective time of the EMC merger transaction. All of Dell's other outstanding senior notes and all of EMC's outstanding senior notes remained outstanding after the effective time of the EMC merger transaction in accordance with their respective terms.
Dell Technologies financed the EMC merger transaction, the repayment of the foregoing indebtedness of EMC and Dell outstanding as of the closing of the EMC merger transaction, and the payment of related fees and expenses, with debt financing arrangements in an aggregate principal amount of approximately
$45.9 billion
, equity financing arrangements of approximately
$4.4 billion
, and cash on hand of approximately
$7.8 billion
.
See
Note 2
and
Note 7
to the Condensed Consolidated Financial Statements included in this report for additional information regarding the EMC merger transaction and the related financing transactions.
NON-GAAP FINANCIAL MEASURES
In management's discussion and analysis, we use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. These non-GAAP financial measures include non-GAAP product net revenue; non-GAAP services net revenue; non-GAAP net revenue; non-GAAP product gross margin; non-GAAP services gross margin; non-GAAP gross margin; non-GAAP operating expenses; non-GAAP operating income; non-GAAP net income from continuing operations; earnings before interest and other, net, taxes, depreciation and amortization, referred to as EBITDA; and adjusted EBITDA.
We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons.
There are limitations to the use of the non-GAAP financial measures presented in this report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, and non-GAAP net income from continuing operations, as defined by us, exclude the impact of purchase accounting, amortization of intangible assets, transaction-related expenses, other corporate expenses and, for non-GAAP net income, an aggregate adjustment for income taxes. As the excluded items have a material impact on our financial results, our management compensates for this limitation by relying primarily on our GAAP results and using non-GAAP financial measures supplementally or for projections when comparable GAAP financial measures are not available. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net revenue, gross margin, operating expenses, operating income, or net income prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.
Reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. See the discussion below for more information on each of the excluded items as well as our reasons for excluding them from our non-GAAP results. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.
The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:
|
|
|
|
•
|
Impact of Purchase Accounting
—
The impact of purchase accounting includes purchase accounting adjustments, related to the EMC merger transaction and the acquisition of Dell Inc. by Dell Technologies Inc. on October 29, 2013, referred to as the going-private transaction, recorded under the acquisition method of accounting in accordance with the accounting guidance for business combinations. This guidance prescribes that the purchase price be allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities on the date of the transaction. Accordingly, all of the assets and liabilities acquired in the EMC merger transaction and the going-private transaction were accounted for and recognized at fair value as of the respective transaction dates, and the fair value adjustments are being amortized over the estimated useful lives in the periods following the transactions. The fair value adjustments primarily relate to deferred revenue, inventory, and property, plant, and equipment. The purchase accounting adjustments and related amortization of those adjustments are reflected in our GAAP results; however, we evaluate the operating results of the underlying businesses on a non-GAAP basis, after removing such adjustments. We believe that excluding the impact of purchase accounting provides results that are useful in understanding our current operating performance and provides more meaningful comparisons to our past operating performance.
|
|
|
|
|
•
|
Amortization of Intangible Assets
—
Amortization of intangible assets primarily consists of amortization of customer relationships, developed technology, and trade names. In connection with the EMC merger transaction and the going-private transaction, all of the tangible and intangible assets and liabilities of EMC and Dell, respectively, were accounted for and recognized at fair value on the transaction dates. Accordingly, for the periods presented, amortization of intangible assets represents amortization associated with intangible assets recognized in connection with the EMC merger transaction and the going-private transaction. Amortization charges for purchased intangible assets are significantly impacted by the timing and magnitude of our acquisitions, and these charges may vary in amount from period to period. We exclude these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
|
|
|
|
|
•
|
Transaction-related Expenses
—
Transaction-related expenses consist of acquisition, integration, and divestiture related costs, and are expensed as incurred. These expenses primarily represent costs for legal, banking, consulting, and advisory services, as well as certain compensatory retention awards directly related to the EMC merger transaction and related integration. During the third quarter and first nine months of Fiscal 2017, transaction-related expenses includes $807 million in day one stock-based compensation charges primarily related to the acceleration of vesting of EMC stock options and related taxes incurred in connection with the EMC merger transaction.
|
|
|
|
|
•
|
Other Corporate Expenses
— Other corporate expenses consists of severance, facility action costs, and stock-based compensation expense associated with equity awards. Severance costs are primarily related to severance and benefits for employees terminated pursuant to cost savings initiatives. Facility action costs included in the third quarter and first nine months of Fiscal 2018 were $67 million and $175 million, respectively. We expect to incur these costs over the remainder of the year as we continue to integrate owned and leased facilities and as we seek opportunities for operational efficiencies and cost savings. Other corporate expenses vary from period to period and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these charges for purposes of calculating the non-GAAP financial measures presented below facilitates a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
|
|
|
|
|
•
|
Aggregate Adjustment for Income Taxes
— The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments described above. During the first nine months of Fiscal 2017, this amount also includes tax charges of approximately $201 million, recorded during the first six months of Fiscal 2017, on previously untaxed earnings of a foreign subsidiary that will no longer be permanently reinvested as a result of the Dell Services and DSG divestitures. The tax effects are determined based on the tax jurisdictions where the above items were incurred.
|
The table below presents a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP measure for each of
the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
|
(in millions, except percentages)
|
|
Product net revenue
|
$
|
14,680
|
|
|
19
|
%
|
|
$
|
12,366
|
|
|
$
|
42,003
|
|
|
25
|
%
|
|
$
|
33,510
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
33
|
|
|
|
|
261
|
|
|
138
|
|
|
|
|
260
|
|
|
Non-GAAP product net revenue
|
$
|
14,713
|
|
|
17
|
%
|
|
$
|
12,627
|
|
|
$
|
42,141
|
|
|
25
|
%
|
|
$
|
33,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services net revenue
|
$
|
4,930
|
|
|
27
|
%
|
|
$
|
3,881
|
|
|
$
|
14,722
|
|
|
83
|
%
|
|
$
|
8,058
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
262
|
|
|
|
|
269
|
|
|
847
|
|
|
|
|
413
|
|
|
Non-GAAP services net revenue
|
$
|
5,192
|
|
|
25
|
%
|
|
$
|
4,150
|
|
|
$
|
15,569
|
|
|
84
|
%
|
|
$
|
8,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
19,610
|
|
|
21
|
%
|
|
$
|
16,247
|
|
|
$
|
56,725
|
|
|
36
|
%
|
|
$
|
41,568
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
295
|
|
|
|
|
530
|
|
|
985
|
|
|
|
|
673
|
|
|
Non-GAAP net revenue
|
$
|
19,905
|
|
|
19
|
%
|
|
$
|
16,777
|
|
|
$
|
57,710
|
|
|
37
|
%
|
|
$
|
42,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
$
|
2,311
|
|
|
28
|
%
|
|
$
|
1,804
|
|
|
$
|
5,797
|
|
|
25
|
%
|
|
$
|
4,654
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
45
|
|
|
|
|
437
|
|
|
173
|
|
|
|
|
461
|
|
|
Amortization of intangibles
|
914
|
|
|
|
|
604
|
|
|
2,784
|
|
|
|
|
806
|
|
|
Transaction-related expenses
|
1
|
|
|
|
|
18
|
|
|
9
|
|
|
|
|
16
|
|
|
Other corporate expenses
|
2
|
|
|
|
|
10
|
|
|
8
|
|
|
|
|
14
|
|
|
Non-GAAP product gross margin
|
$
|
3,273
|
|
|
14
|
%
|
|
$
|
2,873
|
|
|
$
|
8,771
|
|
|
47
|
%
|
|
$
|
5,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services gross margin
|
$
|
2,852
|
|
|
36
|
%
|
|
$
|
2,095
|
|
|
$
|
8,477
|
|
|
125
|
%
|
|
$
|
3,774
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
262
|
|
|
|
|
292
|
|
|
847
|
|
|
|
|
436
|
|
|
Amortization of intangibles
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Transaction-related expenses
|
4
|
|
|
|
|
12
|
|
|
13
|
|
|
|
|
9
|
|
|
Other corporate expenses
|
26
|
|
|
|
|
52
|
|
|
55
|
|
|
|
|
54
|
|
|
Non-GAAP services gross margin
|
$
|
3,144
|
|
|
28
|
%
|
|
$
|
2,451
|
|
|
$
|
9,392
|
|
|
120
|
%
|
|
$
|
4,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
$
|
5,163
|
|
|
32
|
%
|
|
$
|
3,899
|
|
|
$
|
14,274
|
|
|
69
|
%
|
|
$
|
8,428
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
307
|
|
|
|
|
729
|
|
|
1,020
|
|
|
|
|
897
|
|
|
Amortization of intangibles
|
914
|
|
|
|
|
604
|
|
|
2,784
|
|
|
|
|
806
|
|
|
Transaction-related expenses
|
5
|
|
|
|
|
30
|
|
|
22
|
|
|
|
|
25
|
|
|
Other corporate expenses
|
28
|
|
|
|
|
62
|
|
|
63
|
|
|
|
|
68
|
|
|
Non-GAAP gross margin
|
$
|
6,417
|
|
|
21
|
%
|
|
$
|
5,324
|
|
|
$
|
18,163
|
|
|
78
|
%
|
|
$
|
10,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
|
(in millions, except percentages)
|
|
Operating expenses
|
$
|
5,696
|
|
|
5
|
%
|
|
$
|
5,411
|
|
|
$
|
17,286
|
|
|
73
|
%
|
|
$
|
10,012
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
(59
|
)
|
|
|
|
(121
|
)
|
|
(175
|
)
|
|
|
|
(157
|
)
|
|
Amortization of intangibles
|
(820
|
)
|
|
|
|
(560
|
)
|
|
(2,466
|
)
|
|
|
|
(1,340
|
)
|
|
Transaction-related expenses
|
(81
|
)
|
|
|
|
(1,170
|
)
|
|
(393
|
)
|
|
|
|
(1,304
|
)
|
|
Other corporate expenses
|
(305
|
)
|
|
|
|
(211
|
)
|
|
(824
|
)
|
|
|
|
(257
|
)
|
|
Non-GAAP operating expenses
|
$
|
4,431
|
|
|
32
|
%
|
|
$
|
3,349
|
|
|
$
|
13,428
|
|
|
93
|
%
|
|
$
|
6,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
(533
|
)
|
|
65
|
%
|
|
$
|
(1,512
|
)
|
|
$
|
(3,012
|
)
|
|
(90
|
)%
|
|
$
|
(1,584
|
)
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
366
|
|
|
|
|
850
|
|
|
1,195
|
|
|
|
|
1,054
|
|
|
Amortization of intangibles
|
1,734
|
|
|
|
|
1,164
|
|
|
5,250
|
|
|
|
|
2,146
|
|
|
Transaction-related expenses
|
86
|
|
|
|
|
1,200
|
|
|
415
|
|
|
|
|
1,329
|
|
|
Other corporate expenses
|
333
|
|
|
|
|
273
|
|
|
887
|
|
|
|
|
325
|
|
|
Non-GAAP operating income
|
$
|
1,986
|
|
|
1
|
%
|
|
$
|
1,975
|
|
|
$
|
4,735
|
|
|
45
|
%
|
|
$
|
3,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
$
|
(941
|
)
|
|
43
|
%
|
|
$
|
(1,637
|
)
|
|
$
|
(3,302
|
)
|
|
(42
|
)%
|
|
$
|
(2,323
|
)
|
|
Non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of purchase accounting
|
366
|
|
|
|
|
850
|
|
|
1,195
|
|
|
|
|
1,054
|
|
|
Amortization of intangibles
|
1,734
|
|
|
|
|
1,164
|
|
|
5,250
|
|
|
|
|
2,146
|
|
|
Transaction-related expenses
|
86
|
|
|
|
|
1,200
|
|
|
415
|
|
|
|
|
1,326
|
|
|
Other corporate expenses
|
333
|
|
|
|
|
273
|
|
|
887
|
|
|
|
|
325
|
|
|
Aggregate adjustment for income taxes
|
(469
|
)
|
|
|
|
(880
|
)
|
|
(1,882
|
)
|
|
|
|
(932
|
)
|
|
Non-GAAP net income from continuing operations
|
$
|
1,109
|
|
|
14
|
%
|
|
$
|
970
|
|
|
$
|
2,563
|
|
|
61
|
%
|
|
$
|
1,596
|
|
In addition to the above measures, we also use EBITDA and adjusted EBITDA to provide additional information for evaluation of our operating performance. Adjusted EBITDA excludes purchase accounting adjustments related to the EMC merger transaction and the going-private transaction, acquisition, integration, and divestiture related costs, severance and facility actions, and stock-based compensation expense. We believe that, due to the non-operational nature of the purchase accounting entries, it is appropriate to exclude these adjustments.
As is the case with the non-GAAP measures presented above, users should consider the limitations of using EBITDA and adjusted EBITDA, including the fact that those measures do not provide a complete measure of our operating performance. EBITDA and adjusted EBITDA do not purport to be alternatives to net income (loss) as measures of operating performance or to cash flows from operating activities as a measure of liquidity. In particular, EBITDA and adjusted EBITDA are not intended to be a measure of free cash flow available for management's discretionary use, as these measures do not consider certain cash requirements, such as working capital needs, capital expenditures, contractual commitments, interest payments, tax payments, and other debt service requirements.
The table below presents a reconciliation of EBITDA and adjusted EBITDA to net loss from continuing operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
|
(in millions, except percentages)
|
|
Net loss from continuing operations
|
$
|
(941
|
)
|
|
43
|
%
|
|
$
|
(1,637
|
)
|
|
$
|
(3,302
|
)
|
|
(42
|
)%
|
|
$
|
(2,323
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other, net (a)
|
682
|
|
|
|
|
794
|
|
|
1,800
|
|
|
|
|
1,362
|
|
|
Income tax provision (benefit)
|
(274
|
)
|
|
|
|
(669
|
)
|
|
(1,510
|
)
|
|
|
|
(623
|
)
|
|
Depreciation and amortization
|
2,137
|
|
|
|
|
1,576
|
|
|
6,491
|
|
|
|
|
2,799
|
|
|
EBITDA
|
$
|
1,604
|
|
|
NM
|
|
|
$
|
64
|
|
|
$
|
3,479
|
|
|
186
|
%
|
|
$
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
$
|
1,604
|
|
|
NM
|
|
|
$
|
64
|
|
|
$
|
3,479
|
|
|
186
|
%
|
|
$
|
1,215
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
221
|
|
|
|
|
144
|
|
|
630
|
|
|
|
|
177
|
|
|
Impact of purchase accounting (b)
|
298
|
|
|
|
|
693
|
|
|
990
|
|
|
|
|
851
|
|
|
Transaction-related expenses (c)
|
86
|
|
|
|
|
1,200
|
|
|
415
|
|
|
|
|
1,366
|
|
|
Other corporate expenses (d)
|
109
|
|
|
|
|
129
|
|
|
237
|
|
|
|
|
148
|
|
|
Adjusted EBITDA
|
$
|
2,318
|
|
|
4
|
%
|
|
$
|
2,230
|
|
|
$
|
5,751
|
|
|
53
|
%
|
|
$
|
3,757
|
|
________________
|
|
|
|
(a)
|
See "Results of Operations — Interest and Other, Net" for more information on the components of interest and other, net.
|
|
|
|
|
(b)
|
This amount includes the non-cash purchase accounting adjustments related to the EMC merger transaction and the going-private transaction.
|
|
|
|
|
(c)
|
Transaction-related expenses consist of acquisition, integration, and divestiture related costs.
|
|
|
|
|
(d)
|
Consists of severance and facility action costs.
|
RESULTS OF OPERATIONS
Consolidated Results
The following table summarizes our consolidated results from continuing operations for each of the periods presented. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
|
|
October 28, 2016
|
|
November 3, 2017
|
|
|
|
October 28, 2016
|
|
|
Dollars
|
|
% of
Net Revenue
|
|
%
Change
|
|
Dollars
|
|
% of
Net Revenue
|
|
Dollars
|
|
% of
Net Revenue
|
|
%
Change
|
|
Dollars
|
|
% of
Net Revenue
|
|
|
(in millions, except percentages)
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
14,680
|
|
|
74.9
|
%
|
|
19
|
%
|
|
$
|
12,366
|
|
|
76.1
|
%
|
|
$
|
42,003
|
|
|
74.0
|
%
|
|
25
|
%
|
|
$
|
33,510
|
|
|
80.6
|
%
|
|
Services
|
4,930
|
|
|
25.1
|
%
|
|
27
|
%
|
|
3,881
|
|
|
23.9
|
%
|
|
14,722
|
|
|
26.0
|
%
|
|
83
|
%
|
|
8,058
|
|
|
19.4
|
%
|
|
Total net revenue
|
$
|
19,610
|
|
|
100.0
|
%
|
|
21
|
%
|
|
$
|
16,247
|
|
|
100.0
|
%
|
|
$
|
56,725
|
|
|
100.0
|
%
|
|
36
|
%
|
|
$
|
41,568
|
|
|
100.0
|
%
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product (a)
|
$
|
2,311
|
|
|
15.7
|
%
|
|
28
|
%
|
|
$
|
1,804
|
|
|
14.6
|
%
|
|
$
|
5,797
|
|
|
13.8
|
%
|
|
25
|
%
|
|
$
|
4,654
|
|
|
13.9
|
%
|
|
Services (b)
|
2,852
|
|
|
57.8
|
%
|
|
36
|
%
|
|
2,095
|
|
|
54.0
|
%
|
|
8,477
|
|
|
57.6
|
%
|
|
125
|
%
|
|
3,774
|
|
|
46.8
|
%
|
|
Total gross margin
|
$
|
5,163
|
|
|
26.3
|
%
|
|
32
|
%
|
|
$
|
3,899
|
|
|
24.0
|
%
|
|
$
|
14,274
|
|
|
25.2
|
%
|
|
69
|
%
|
|
$
|
8,428
|
|
|
20.3
|
%
|
|
Operating expenses
|
$
|
5,696
|
|
|
29.0
|
%
|
|
5
|
%
|
|
$
|
5,411
|
|
|
33.3
|
%
|
|
$
|
17,286
|
|
|
30.5
|
%
|
|
73
|
%
|
|
$
|
10,012
|
|
|
24.1
|
%
|
|
Operating loss
|
$
|
(533
|
)
|
|
(2.7
|
)%
|
|
65
|
%
|
|
$
|
(1,512
|
)
|
|
(9.3
|
)%
|
|
$
|
(3,012
|
)
|
|
(5.3
|
)%
|
|
(90
|
)%
|
|
$
|
(1,584
|
)
|
|
(3.8
|
)%
|
|
Net loss from continuing operations
|
$
|
(941
|
)
|
|
(4.8
|
)%
|
|
43
|
%
|
|
$
|
(1,637
|
)
|
|
(10.1
|
)%
|
|
$
|
(3,302
|
)
|
|
(5.8
|
)%
|
|
(42
|
)%
|
|
$
|
(2,323
|
)
|
|
(5.6
|
)%
|
|
Net loss attributable to Dell Technologies Inc.
|
$
|
(937
|
)
|
|
(4.8
|
)%
|
|
55
|
%
|
|
$
|
(2,064
|
)
|
|
(12.7
|
)%
|
|
$
|
(3,217
|
)
|
|
(5.7
|
)%
|
|
(124
|
)%
|
|
$
|
(1,436
|
)
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
14,713
|
|
|
73.9
|
%
|
|
17
|
%
|
|
$
|
12,627
|
|
|
75.3
|
%
|
|
$
|
42,141
|
|
|
73.0
|
%
|
|
25
|
%
|
|
$
|
33,770
|
|
|
79.9
|
%
|
|
Services
|
5,192
|
|
|
26.1
|
%
|
|
25
|
%
|
|
4,150
|
|
|
24.7
|
%
|
|
15,569
|
|
|
27.0
|
%
|
|
84
|
%
|
|
8,471
|
|
|
20.1
|
%
|
|
Total non-GAAP net revenue
|
$
|
19,905
|
|
|
100.0
|
%
|
|
19
|
%
|
|
$
|
16,777
|
|
|
100.0
|
%
|
|
$
|
57,710
|
|
|
100.0
|
%
|
|
37
|
%
|
|
$
|
42,241
|
|
|
100.0
|
%
|
|
Non-GAAP gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product (a)
|
$
|
3,273
|
|
|
22.2
|
%
|
|
14
|
%
|
|
$
|
2,873
|
|
|
22.8
|
%
|
|
$
|
8,771
|
|
|
20.8
|
%
|
|
47
|
%
|
|
$
|
5,951
|
|
|
17.6
|
%
|
|
Services (b)
|
3,144
|
|
|
60.6
|
%
|
|
28
|
%
|
|
2,451
|
|
|
59.1
|
%
|
|
9,392
|
|
|
60.3
|
%
|
|
120
|
%
|
|
4,273
|
|
|
50.4
|
%
|
|
Total non-GAAP gross margin
|
$
|
6,417
|
|
|
32.2
|
%
|
|
21
|
%
|
|
$
|
5,324
|
|
|
31.7
|
%
|
|
$
|
18,163
|
|
|
31.5
|
%
|
|
78
|
%
|
|
$
|
10,224
|
|
|
24.2
|
%
|
|
Non-GAAP operating expenses
|
$
|
4,431
|
|
|
22.3
|
%
|
|
32
|
%
|
|
$
|
3,349
|
|
|
20.0
|
%
|
|
$
|
13,428
|
|
|
23.3
|
%
|
|
93
|
%
|
|
$
|
6,954
|
|
|
16.5
|
%
|
|
Non-GAAP operating income
|
$
|
1,986
|
|
|
10.0
|
%
|
|
1
|
%
|
|
$
|
1,975
|
|
|
11.8
|
%
|
|
$
|
4,735
|
|
|
8.2
|
%
|
|
45
|
%
|
|
$
|
3,270
|
|
|
7.7
|
%
|
|
Non-GAAP net income from continuing operations
|
$
|
1,109
|
|
|
5.6
|
%
|
|
14
|
%
|
|
$
|
970
|
|
|
5.8
|
%
|
|
$
|
2,563
|
|
|
4.4
|
%
|
|
61
|
%
|
|
$
|
1,596
|
|
|
3.8
|
%
|
|
EBITDA
|
$
|
1,604
|
|
|
8.1
|
%
|
|
NM
|
|
|
$
|
64
|
|
|
0.4
|
%
|
|
$
|
3,479
|
|
|
6.0
|
%
|
|
186
|
%
|
|
$
|
1,215
|
|
|
2.9
|
%
|
|
Adjusted EBITDA
|
$
|
2,318
|
|
|
11.6
|
%
|
|
4
|
%
|
|
$
|
2,230
|
|
|
13.3
|
%
|
|
$
|
5,751
|
|
|
10.0
|
%
|
|
53
|
%
|
|
$
|
3,757
|
|
|
8.9
|
%
|
____________________
|
|
|
|
(a)
|
Product gross margin percentages represent product gross margin as a percentage of product net revenue, and non-GAAP product gross margin as a percentage of non-GAAP product net revenue.
|
|
|
|
|
(b)
|
Services gross margin percentages represent services gross margin as a percentage of services net revenue, and non-GAAP services gross margin as a percentage of non-GAAP services net revenue.
|
Non-GAAP product net revenue, non-GAAP services net revenue, non-GAAP net revenue, non-GAAP product gross margin, non-GAAP services gross margin, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income from continuing operations, EBITDA, and adjusted EBITDA are not measurements of financial performance prepared in accordance with GAAP. Non-GAAP financial measures as a percentage of revenue are calculated based on non-GAAP net revenue. See "Non-GAAP Financial Measures" for information about these non-GAAP financial measures, including our reasons for including these measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.
As a result of the EMC merger transaction completed on September 7, 2016 and its impact on the third quarter and first nine months of Fiscal 2018, our results for the fiscal periods discussed below are not directly comparable.
Overview
During the third quarter and first nine months of Fiscal 2018, our net revenue increased
21%
and
36%
, respectively. During the third quarter and first nine months of Fiscal 2018, our non-GAAP net revenue increased
19%
and
37%
, respectively. The increase in net revenue and non-GAAP net revenue was attributable to an increase in revenue across all three business units. The EMC merger transaction had an impact on the mix of revenue contributed by our business units. CSG net revenue represented approximately 50% of our net revenue during the third quarter and first nine months of Fiscal 2018. In comparison, CSG net revenue comprised a higher proportion of our net revenue during the third quarter and first nine months of Fiscal 2017, representing approximately 60% and 65% of our net revenue, respectively.
During the third quarter of Fiscal 2018 and Fiscal 2017, our operating loss was
$0.5 billion
and
$1.5 billion
, respectively. The decrease in our operating loss for the third quarter of Fiscal 2018 was attributable to an increase in revenue and gross margin, offset partially by an increase in operating expenses, all of which were driven by the timing of the EMC merger transaction. During the first nine months of Fiscal 2018 and Fiscal 2017, our operating loss was
$3.0 billion
and
$1.6 billion
, respectively. The increase in our operating loss for the first nine months of Fiscal 2018 was primarily attributable to an increase in amortization of intangible assets and purchase accounting adjustments related to the EMC merger transaction, partially offset by the incremental operating income from the EMC acquired businesses.
Our operating loss was impacted by purchase accounting adjustments associated with the EMC merger transaction and, to a lesser extent, the going-private transaction, amortization of intangible assets, transaction-related expenses, and other corporate expenses. In aggregate, these items totaled
$2.5 billion
and
$7.7 billion
for the third quarter and first nine months of Fiscal 2018, respectively. In comparison, these items totaled
$3.5 billion
and
$4.9 billion
for the third quarter and first nine months of Fiscal 2017, respectively. Excluding these adjustments, non-GAAP operating income was relatively unchanged during the third quarter of Fiscal 2018 and increased
45%
to
$4.7 billion
during the first nine months of Fiscal 2018. Non-GAAP operating income during the third quarter of Fiscal 2018 was relatively flat due to an increase in operating income for CSG and VMware, which was largely offset by a decrease in ISG operating income. The increase in non-GAAP operating income for the first nine months of Fiscal 2018 was attributable to an increase in non-GAAP operating income across all three business units, but most significantly by VMware.
Cash provided by operating activities was
$3.7 billion
and
$1.6 billion
during the first nine months of Fiscal 2018 and Fiscal 2017, respectively. The increase in operating cash flows during the first nine months of Fiscal 2018 was driven by improved profitability, including the incremental profitability from the EMC acquired businesses, and ongoing working capital initiatives. See "Market Conditions, Liquidity, and Capital Commitments" for further information on our cash flow metrics.
Net Revenue
During the third quarter and first nine months of Fiscal 2018, our net revenue increased
21%
and
36%
, respectively, primarily due to an increase in revenue across all three business units. During the first nine months of Fiscal 2018, these increases were offset partially by an increase in purchase accounting adjustments as a result of the EMC merger transaction. Our non-GAAP net revenue increased
19%
and
37%
during the third quarter and first nine months of Fiscal 2018, respectively, primarily due to an increase in revenue across all three business units. See "Business Unit Results" for further information.
|
|
|
|
•
|
Product Net Revenue
— Product net revenue includes revenue from the sale of hardware products and Dell Technologies-owned software licenses. During the third quarter of Fiscal 2018, product net revenue and non-GAAP product net revenue increased
19%
and
17%
, respectively, due to an increase in product revenue across all three business units, driven by strength in sales of notebooks, workstations, and servers. The increases in product net revenue and non-GAAP product net revenue during the third quarter of Fiscal 2018 were also partially due to the incremental product net revenue from the EMC acquired businesses. During the first nine months of Fiscal 2018, product net revenue and non-GAAP product net revenue both increased
25%
, primarily due to incremental product net revenue from the EMC acquired businesses.
|
|
|
|
|
•
|
Services Net Revenue
— Services net revenue includes revenue from our services offerings, third-party software license sales, and support services related to Dell Technologies-owned software and hardware. During the third quarter of Fiscal 2018, services net revenue and non-GAAP services net revenue increased
27%
and
25%
, respectively. During the first nine months of Fiscal 2018, services net revenue and non-GAAP services net revenue increased
83%
and
84%
, respectively. These increases were primarily due to the incremental services net revenue from the EMC acquired businesses.
|
See "Business Unit Results" for further information regarding revenue from our products, services, and software offerings.
From a geographical perspective, net revenue generated by sales to customers in all regions increased during the third quarter and first nine months of Fiscal 2018 primarily as a result of the incremental net revenue from the EMC acquired businesses. Our mix of revenues generated in the Americas, EMEA, and APJ did not change substantially as a result of the EMC merger transaction.
Gross Margin
During the third quarter and first nine months of Fiscal 2018, our gross margin increased
32%
to
$5.2 billion
, and
69%
to
$14.3 billion
, respectively. During the third quarter and first nine months of Fiscal 2018 our gross margin percentage increased
230
basis points to
26.3%
, and
490
basis points to
25.2%
, respectively. The increases in our gross margin and gross margin percentage were primarily attributable to incremental gross margin from the EMC acquired businesses, which have higher gross margin percentages. During the third quarter of Fiscal 2018, gross margin also benefited from a lower combined impact of purchase accounting adjustments and amortization of intangibles as a result of the EMC merger transaction. During the first nine months of Fiscal 2018, the incremental gross margins from the EMC acquired businesses were partially offset by the impact of purchase accounting adjustments and amortization of intangibles as a result of the EMC merger transaction.
Our gross margin for the third quarter and first nine months of Fiscal 2018 included the effect of
$1.2 billion
and
$3.8 billion
, respectively, of amortization of intangibles and purchase accounting adjustments related to the EMC merger transaction and, to a lesser extent, the going-private transaction. In comparison, the impact of purchase accounting and amortization of intangibles totaled
$1.3 billion
and
$1.7 billion
in the third quarter and first nine months of Fiscal 2017, respectively. Excluding these costs, transaction-related expenses, and other corporate expenses, non-GAAP gross margin for the third quarter increased
21%
to
$6.4 billion
and non-GAAP gross margin percentage increased
50
basis points to
32.2%
. For the first nine months of Fiscal 2018, non-GAAP gross margin increased
78%
to
$18.2 billion
and non-GAAP gross margin percentage increased
730
basis points to
31.5%
. The increase in non-GAAP gross margin and non-GAAP gross margin percentage was primarily attributable to incremental gross margin from the EMC acquired businesses, which have higher gross margin percentages.
|
|
|
|
•
|
Products
— During the third quarter of Fiscal 2018, product gross margin increased
28%
to
$2.3 billion
and product gross margin percentage increased
110
basis points to
15.7%
. The increase in product gross margin and product gross margin percentage was driven primarily by incremental product gross margin from VMware.
|
During the first nine months of Fiscal 2018, product gross margin increased
25%
to
$5.8 billion
and product gross margin percentage remained relatively unchanged at
13.8%
. The increase in product gross margin was driven primarily by additional product gross margin from the EMC acquired businesses, which was partially offset by an increase in amortization of intangibles related to the EMC merger transaction, and to a lesser extent, an increase in component costs during the period.
During the third quarter of Fiscal 2018, non-GAAP product gross margin increased
14%
to
$3.3 billion
and non-GAAP product gross margin percentage decreased
60
basis points to
22.2%
. During the third quarter of Fiscal 2018, non-GAAP gross margin benefited from increases in revenue across all three business units, but non-GAAP product gross margin percentage decreased due to component cost pressures in CSG and ISG and mix shift in ISG. During the first nine months of Fiscal 2018, non-GAAP product gross margin increased
47%
to
$8.8 billion
and non-GAAP product gross margin percentage increased
320
basis points to
20.8%
. The increases in non-GAAP product gross margin and non-GAAP product
gross margin percentage were primarily attributable to the incremental product gross margin from the EMC acquired businesses, which have higher gross margin percentages, partially offset by component cost pressures in CSG and ISG.
In the third quarter of Fiscal 2017, we entered into a settlement agreement with a vendor to resolve a dispute regarding past pricing practices. Our gross margin for the third quarter of Fiscal 2017 included a benefit of $80 million related to receipt of this settlement. Vendor settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment. The $80 million settlement benefit was entirely allocated to CSG. While this settlement does materially impact comparability of product gross margins for the third quarter, there is minimal impact to comparability for the first nine months due to the offsetting impact of a settlement recorded in the second quarter of Fiscal 2018 as discussed below in
Vendor Programs and Settlements
.
|
|
|
|
•
|
Services
— During the third quarter of Fiscal 2018, services gross margin increased
36%
to
$2.9 billion
and services gross margin percentage increased
380
basis points to
57.8%
. The increase in services gross margin and services gross margin percentage was primarily attributable to the incremental services gross margin from the EMC acquired businesses, which have higher gross margin percentages. Purchase accounting adjustments totaled
$0.3 billion
both during the third quarter of Fiscal 2018 and the third quarter of Fiscal 2017. Excluding these costs, transaction-related expenses, and other corporate expenses, non-GAAP services gross margin increased
28%
to
$3.1 billion
and non-GAAP services gross margin percentage increased
150
basis points to
60.6%
.
|
During the first nine months of Fiscal 2018, services gross margin increased
125%
to
$8.5 billion
and services gross margin percentage increased
1,080
basis points to
57.6%
. The increase in services gross margin and gross margin percentage was primarily attributable to the incremental services gross margin from the EMC acquired businesses, which have higher gross margin percentages. Purchase accounting adjustments totaled
$0.8 billion
during the first nine months of Fiscal 2018, compared to
$0.4 billion
during the first nine months of Fiscal 2017. Excluding these costs, transaction-related expenses, and other corporate expenses, non-GAAP services gross margin increased
120%
to
$9.4 billion
and non-GAAP services gross margin percentage increased
990
basis points to
60.3%
.
Vendor Programs and Settlements
Our gross margin is affected by our ability to achieve competitive pricing with our vendors and contract manufacturers, including through our negotiation of a variety of vendor rebate programs to achieve lower net costs for the various components we include in our products. Under these programs, vendors provide us with rebates or other discounts from the list prices for the components, which are generally elements of their pricing strategy. We account for vendor rebates and other discounts as a reduction in cost of net revenue. We manage our costs on a total net cost basis, which includes supplier list prices reduced by vendor rebates and other discounts.
The terms and conditions of our vendor rebate programs are largely based on product volumes and are generally negotiated either at the beginning of the annual or quarterly period, depending on the program. The timing and amount of vendor rebates and other discounts we receive under the programs may vary from period to period, reflecting changes in the competitive environment. We monitor our component costs and seek to address the effects of any changes to terms that might arise under our vendor rebate programs. Our gross margins for the third quarter and first nine months of Fiscal 2018 and Fiscal 2017 were not materially affected by any changes to the terms of our vendor rebate programs, as the amounts we received under these programs were generally stable relative to our total net cost. We are not aware of any significant changes to vendor pricing or rebate programs that may impact our results in the near term.
In addition, we have pursued legal action against certain vendors and are currently involved in negotiations with other vendors regarding their past pricing practices. We have negotiated settlements with some of these vendors and may have additional settlements in future periods. These settlements are allocated to our segments based on the relative amount of affected vendor products sold by each segment. A pricing settlement was recorded in the second quarter of Fiscal 2018 that benefited product gross margins by $68 million, and it was entirely allocated to CSG. Additionally, a pricing settlement was recorded in the third quarter of Fiscal 2017 that benefited product gross margins by $80 million, and was entirely allocated to CSG. During the third quarter of Fiscal 2018, no such settlements were recorded that would have a material impact on product gross margins in the current quarter or affect comparability with other periods.
Operating Expenses
The following table presents information regarding our operating expenses during each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
|
|
October 28, 2016
|
|
November 3, 2017
|
|
|
|
October 28, 2016
|
|
|
Dollars
|
|
% of
Net Revenue
|
|
%
Change
|
|
Dollars
|
|
% of
Net Revenue
|
|
Dollars
|
|
% of
Net Revenue
|
|
%
Change
|
|
Dollars
|
|
% of
Net Revenue
|
|
|
(in millions, except percentages)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
$
|
4,625
|
|
|
23.5
|
%
|
|
2
|
%
|
|
$
|
4,556
|
|
|
28.0
|
%
|
|
$
|
13,989
|
|
|
24.7
|
%
|
|
62
|
%
|
|
$
|
8,647
|
|
|
20.8
|
%
|
|
Research and development
|
1,071
|
|
|
5.5
|
%
|
|
25
|
%
|
|
855
|
|
|
5.3
|
%
|
|
3,297
|
|
|
5.8
|
%
|
|
142
|
%
|
|
1,365
|
|
|
3.3
|
%
|
|
Total operating expenses
|
$
|
5,696
|
|
|
29.0
|
%
|
|
5
|
%
|
|
$
|
5,411
|
|
|
33.3
|
%
|
|
$
|
17,286
|
|
|
30.5
|
%
|
|
73
|
%
|
|
$
|
10,012
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating expenses
|
$
|
4,431
|
|
|
22.3
|
%
|
|
32
|
%
|
|
$
|
3,349
|
|
|
20.0
|
%
|
|
$
|
13,428
|
|
|
23.3
|
%
|
|
93
|
%
|
|
$
|
6,954
|
|
|
16.5
|
%
|
During the third quarter and first nine months of Fiscal 2018, total operating expenses increased
5%
and
73%
, respectively. These increases were primarily due to incremental operating costs of the EMC acquired businesses. In the third quarter of Fiscal 2018, this increase was partially offset by a reduction in operating expenses due to
$1.2 billion
of transaction-related expenses incurred in the third quarter of Fiscal 2017, which did not recur in Fiscal 2018. Our operating expenses include the impact of purchase accounting associated with the EMC merger transaction and, to a lesser extent, the going-private transaction, amortization of intangible assets, transaction-related expenses, and other corporate expenses. In aggregate, these items totaled
$1.3 billion
and
$2.1 billion
for the third quarter of Fiscal 2018 and Fiscal 2017, respectively, and
$3.9 billion
and
$3.1 billion
for the first nine months of Fiscal 2018 and Fiscal 2017, respectively. Excluding these costs, total non-GAAP operating expenses for the third quarter and first nine months of Fiscal 2018 increased
32%
and
93%
, respectively, primarily due to the incremental operating costs from the EMC acquired businesses.
|
|
|
|
•
|
Selling, General, and Administrative
— Selling, general, and administrative ("SG&A") expenses increased
2%
and
62%
, respectively, during the third quarter and first nine months of Fiscal 2018. The increases in SG&A expenses were primarily driven by incremental operating costs of the EMC acquired businesses. The increase during the third quarter of Fiscal 2018 was mostly offset by the reduction in operating expenses attributable to transaction costs incurred in the third quarter of Fiscal 2017 that did not recur in Fiscal 2018.
|
|
|
|
|
•
|
Research and Development
—
Research and development ("R&D") expenses are primarily composed of personnel-related expenses related to product development. R&D expenses as a percentage of net revenue for the third quarter and first nine months of Fiscal 2018 were approximately
5.5%
and
5.8%
, respectively. In comparison, R&D expenses as a percentage of net revenue for the third quarter and first nine months of Fiscal 2017 were
5.3%
and
3.3%
, respectively. The increase in R&D expenses during the first nine months of Fiscal 2018 was attributable to the expansion of our R&D capability through the EMC merger transaction. As our industry continues to change and as the needs of our customers evolve, we intend to support R&D initiatives to innovate and introduce new and enhanced solutions into the market.
|
We will continue to balance our efforts to drive cost efficiencies in the business with strategic investments in areas that will enable growth, such as our sales force, marketing, and R&D.
Operating Income/Loss
Our operating loss was
$0.5 billion
during the third quarter of Fiscal 2018, compared to
$1.5 billion
during the third quarter of Fiscal 2017. Operating loss was
$3.0 billion
during the first nine months of Fiscal 2018 compared to
$1.6 billion
during the first nine months of Fiscal 2017. The decrease in operating loss during the third quarter of Fiscal 2018 was primarily attributable to an increase in gross margin. The increase in operating loss during the first nine months of Fiscal 2018 was primarily attributable to amortization of intangible assets and purchase accounting adjustments related to the EMC merger transaction, partially offset by an increase in gross margin from the EMC acquired businesses.
Our operating loss includes the impact of purchase accounting associated with the EMC merger transaction and, to a lesser extent, the going-private transaction, amortization of intangible assets, transaction-related expenses, and other corporate expenses. In aggregate, these items totaled
$2.5 billion
and
$3.5 billion
for the third quarter of Fiscal 2018 and Fiscal 2017, respectively, and
$7.7 billion
and
$4.9 billion
for the first nine months of Fiscal 2018 and Fiscal 2017, respectively. Excluding these costs, non-GAAP operating income for the third quarter of Fiscal 2018 was relatively unchanged, and non-GAAP operating income for the first nine months of Fiscal 2018 increased
45%
to
$4.7 billion
. Non-GAAP operating income during the third quarter of Fiscal 2018 was relatively flat due to the offsetting impacts of an increase in operating income for CSG and VMware and a decrease in ISG operating income. The increase in non-GAAP operating income for the first nine months of Fiscal 2018 was attributable to an increase in non-GAAP operating income across all three business units, but most significantly by VMware.
Interest and Other, Net
The following table provides
information regarding
interest and other, net for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Interest and other, net:
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, primarily interest
|
$
|
57
|
|
|
$
|
38
|
|
|
$
|
142
|
|
|
$
|
62
|
|
|
Gain (loss) on investments, net
|
(3
|
)
|
|
(6
|
)
|
|
22
|
|
|
(4
|
)
|
|
Interest expense
|
(607
|
)
|
|
(585
|
)
|
|
(1,802
|
)
|
|
(1,100
|
)
|
|
Foreign exchange
|
(35
|
)
|
|
4
|
|
|
(77
|
)
|
|
(51
|
)
|
|
Other
|
(94
|
)
|
|
(245
|
)
|
|
(85
|
)
|
|
(269
|
)
|
|
Total interest and other, net
|
$
|
(682
|
)
|
|
$
|
(794
|
)
|
|
$
|
(1,800
|
)
|
|
$
|
(1,362
|
)
|
During the third quarter of Fiscal 2018, changes in interest and other, net were favorable by
$112 million
primarily due to other non-recurring expenses of approximately $245 million incurred in the third quarter of Fiscal 2017 related to debt extinguishment and new borrowings associated with the EMC merger transaction. During the first nine months of Fiscal 2018, changes in interest and other, net were unfavorable by
$438 million
primarily due to an increase in interest expense from higher average debt balances from debt issued in connection with the EMC merger transaction, partially offset by the decrease in other non-recurring expenses referred to above. See
Note 7
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for further information regarding our debt.
Income and Other Taxes
For the third quarter and first nine months of Fiscal 2018 our effective income tax rates for continuing operations were
22.6%
and
31.4%
, respectively, on pre-tax losses from continuing operations of
$1.2 billion
and
$4.8 billion
, respectively. For the third quarter and first nine months of Fiscal 2017, our effective income tax rates for continuing operations were
29.0%
and
21.1%
, respectively, on pre-tax losses from continuing operations of
$2.3 billion
and
$2.9 billion
, respectively. The changes in our effective income tax rates for the third quarter and first nine months of Fiscal 2018 were primarily attributable to tax benefits from charges incurred associated with the EMC merger transaction, including purchase accounting adjustments, interest charges, and stock-based compensation expense. See
Note 2
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information on the EMC merger transaction. The change in our effective income tax rate for the first nine months of Fiscal 2018 was also impacted by tax charges recognized in the prior year during the three and six months ended July 29, 2016 related to the divestiture of Dell Services and DSG. The income tax rate for future quarters of
Fiscal 2018
will be impacted by the actual mix of jurisdictions in which income is generated.
Our effective tax rate can fluctuate depending on the geographic distribution of our world-wide earnings, as our foreign earnings are generally taxed at lower rates than in the United States. In certain jurisdictions, our tax rate is significantly less than the applicable statutory rate as a result of tax holidays. The majority of our foreign income that is subject to these tax holidays and lower tax rates is attributable to Singapore, China, and Malaysia. A significant portion of these income tax benefits relate to a tax holiday that expires in January 2019. Our other tax holidays will expire in whole or in part during Fiscal
2019 through Fiscal 2023. Many of these tax holidays and reduced tax rates may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The differences between our effective tax rate and the U.S. federal statutory rate of 35% principally resulted from the geographical distribution of taxable income discussed above and permanent differences between the book and tax treatment of certain items. We continue to assess our business model and its impact in various taxing jurisdictions.
As noted in "Part I — Item 1A — Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
February 3, 2017
, changes in tax law (including laws relating to U.S. taxes on foreign operations) could adversely affect our operations and profitability. Pending U.S. tax reform legislation would result in certain changes to U.S. tax laws, specifically U.S. taxation on earnings from international business operations and new restrictions on the deductibility of interest expense, which may materially impact our effective tax rate and the amount of taxes we pay. The ultimate impact of any proposed tax reform legislation will not be known until such legislation is finalized.
For further discussion regarding tax matters, including the status of income tax audits, see
Note 13
of the
Notes to the Condensed Consolidated Financial Statements
included in this report.
Net Income/Loss from Continuing Operations
During the third quarter of Fiscal 2018, net loss from continuing operations decreased
43%
to a net loss of
$0.9 billion
, and during the first nine months of Fiscal 2018 net loss from continuing operations increased
42%
to a net loss of
$3.3 billion
. The decrease in net loss from continuing operations during the third quarter of Fiscal 2018 was attributable to a decrease in operating loss and a decrease in interest and other, net expense, offset partially by a decrease in tax benefit. The increase in net loss from continuing operations during the first nine months of Fiscal 2018 was primarily attributable to an increase in operating loss and to an increase in interest and other, net expense, which was partially offset by an increase in tax benefit. See
Note 13
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information regarding our effective tax rate.
Net loss from continuing operations for the third quarter and first nine months of Fiscal 2018 included amortization of intangible assets, the impact of purchase accounting, transaction-related expenses, and other corporate expenses. Excluding these costs, non-GAAP net income from continuing operations increased
14%
to
$1.1 billion
and
61%
to
$2.6 billion
during the third quarter and first nine months of Fiscal 2018, respectively. The increase in non-GAAP net income from continuing operations during the third quarter of Fiscal 2018 was primarily attributable to a decrease in interest and other, net expense. The increase in non-GAAP net income from continuing operations during the first nine months of Fiscal 2018 was primarily attributable to increases in operating income, the effects of which were partially offset by increases in interest and other, net expense.
Non-controlling Interests
During the third quarter and first nine months of Fiscal 2018, net loss attributable to non-controlling interests was
$4 million
and
$85 million
, respectively. During the third quarter and first nine months of Fiscal 2017, net loss attributable to non-controlling interest was
$11 million
and
$12 million
, respectively. Non-controlling interests primarily consisted of net loss attributable to non-controlling interest in VMware, Inc. For more information about our non-controlling interests, see
Note 15
of the
Notes to the Condensed Consolidated Financial Statements
included in this report.
Net Income/Loss Attributable to Dell Technologies Inc.
Net loss attributable to Dell Technologies Inc. represents net income/loss from continuing operations, an adjustment for non-controlling interests, and, in Fiscal 2017, an adjustment for discontinued operations. During the third quarter and first nine months of Fiscal 2018, net loss attributable to Dell Technologies Inc. was
$0.9 billion
and
$3.2 billion
, respectively, compared to
$2.1 billion
and
$1.4 billion
during the third quarter and first nine months of Fiscal 2017, respectively. The decrease in net loss attributable to Dell Technologies Inc. during the third quarter of Fiscal 2018 was primarily attributable to a decrease in net loss from continuing operations and the absence of loss from our discontinued operations in Fiscal 2018, due to completion of the divestiture transactions in Fiscal 2017. The increase in net loss attributable to Dell Technologies Inc. during the first nine months of Fiscal 2018 was primarily attributable to an increase in net loss from continuing operations and the absence of income from our discontinued operations in Fiscal 2018, due to the completion of the divestiture transactions in Fiscal 2017. For more information regarding our discontinued operations, see
Note 3
of the
Notes to the Condensed Consolidated Financial Statements
included in this report.
Business Unit Results
Our reportable segments are based on the following business units: Client Solutions Group ("CSG"); Infrastructure Solutions Group ("ISG"); and VMware. A description of our three business units is provided under "Introduction." See
Note 19
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for a reconciliation of net revenue and operating income by reportable segment to consolidated net revenue and consolidated operating income, respectively.
Client Solutions Group:
The following table presents net revenue and operating income attributable to CSG for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
|
(in millions, except percentages)
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
6,907
|
|
|
8%
|
|
$
|
6,400
|
|
|
$
|
20,453
|
|
|
6%
|
|
$
|
19,343
|
|
|
Consumer
|
3,052
|
|
|
10%
|
|
2,787
|
|
|
8,413
|
|
|
10%
|
|
7,635
|
|
|
Total CSG net revenue
|
$
|
9,959
|
|
|
8%
|
|
$
|
9,187
|
|
|
$
|
28,866
|
|
|
7%
|
|
$
|
26,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
CSG operating income
|
$
|
672
|
|
|
6%
|
|
$
|
634
|
|
|
$
|
1,612
|
|
|
7%
|
|
$
|
1,503
|
|
|
% of segment net revenue
|
6.7
|
%
|
|
|
|
6.9
|
%
|
|
5.6
|
%
|
|
|
|
5.6
|
%
|
Net Revenue
—
During the third quarter and first nine months of Fiscal 2018, CSG net revenue increased
8%
and
7%
, respectively, driven by an increase in overall average selling price, as we managed our pricing in response to the cost environment during the periods, in both the commercial and consumer product categories. While demand was relatively flat during the third quarter of Fiscal 2018, during the first nine months of Fiscal 2018, the increases in CSG net revenue benefited from increases in units sold as we experienced a general improvement in customer demand for our products, which favored premium notebooks and workstations.
From a geographical perspective, net revenue attributable to CSG increased across all regions during the third quarter and first nine months of Fiscal 2018.
Operating Income
—
During the third quarter of Fiscal 2018, CSG operating income as a percentage of net revenue decreased
20
basis points to
6.7%
. The decline in our operating income was attributable to an $80 million vendor settlement recorded in the third quarter of Fiscal 2017, which resulted in an incremental 90 basis points to our operating income percentage during the that period which did not recur. Removing the effect of this vendor settlement, CSG operating income increased 70 basis points during the third quarter of Fiscal 2018 due to increases in average selling prices as discussed above as well as favorability in our operating expense percentage as we continue to manage our cost position. Despite this increase, our operating income percentage was negatively impacted by increasing component costs. We expect that component cost increases will moderate but continue to be challenging into Fiscal 2019. We will continue to adjust our pricing practices as needed based upon a multitude of factors including the competitive environment and component costs.
During the first nine months of Fiscal 2018, CSG operating income remained unchanged at
5.6%
. The increase in component costs was offset by favorability in our operating expense percentage as we continue to manage our cost position. The impact of the vendor settlements recorded in first nine months of Fiscal 2018 and Fiscal 2017 did not affect comparability for these periods.
Infrastructure Solutions Group:
The following table presents net revenue and operating income attributable to ISG for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
|
(in millions, except percentages)
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servers and networking
|
$
|
3,851
|
|
|
32%
|
|
$
|
2,910
|
|
|
$
|
10,822
|
|
|
17%
|
|
$
|
9,222
|
|
|
Storage
|
3,667
|
|
|
19%
|
|
3,079
|
|
|
11,018
|
|
|
165%
|
|
4,159
|
|
|
Total ISG net revenue
|
$
|
7,518
|
|
|
26%
|
|
$
|
5,989
|
|
|
$
|
21,840
|
|
|
63%
|
|
$
|
13,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
ISG operating income
|
$
|
678
|
|
|
(24)%
|
|
$
|
897
|
|
|
$
|
1,431
|
|
|
3%
|
|
$
|
1,389
|
|
|
% of segment net revenue
|
9.0
|
%
|
|
|
|
15.0
|
%
|
|
6.6
|
%
|
|
|
|
10.4
|
%
|
Net Revenue
—
During the third quarter of Fiscal 2018,
ISG
net revenue increased
26%
driven by revenue growth in both product categories. Servers and networking revenue increased
32%
during the third quarter of Fiscal 2018, primarily resulting from an increase in sale of PowerEdge units, and an increase in average selling prices of PowerEdge. Average selling prices increased as we managed our pricing in response to the current component cost environment, and also reflected the sale of servers with higher memory and storage content. Storage revenue increased
19%
during the third quarter of Fiscal 2018 due to the incremental revenue from the EMC acquired business, although we are experiencing reduced demand in ISG for certain elements of our storage portfolio, including high-end and traditional midrange storage offerings which are priced greater than $25,000. We are addressing this dynamic through investments in our go-to-market capability and product enhancements.
During the first nine months of Fiscal 2018, ISG net revenue increased
63%
primarily due to incremental storage net revenue associated with the acquired EMC storage business, and to a lesser extent, increases in servers and networking. Revenue from servers and networking increased
17%
during the first nine months of Fiscal 2018, primarily resulting from an increase in sale of PowerEdge units, and an increase in average selling prices of PowerEdge due to the dynamics mentioned above.
This year we introduced "as-a-service" flexible consumption models that are generally multi-year contracts which typically result in recognition of revenue over the term of the arrangement. We are seeing increased interest in these new models, which will further strengthen our customer relationships. We expect that the impact of these arrangements will vary from quarter to quarter and build over time, but overall the impact to revenue was not significant during the first nine months of Fiscal 2018.
From a geographical perspective, during the third quarter and first nine months of Fiscal 2018, ISG net revenue increased in all regions due to the incremental revenue from the EMC acquired storage business. The EMC acquired storage business operates on a world-wide basis with a geographic mix similar to that of the legacy Dell ISG business.
Operating Income
—
During the third quarter of Fiscal 2018, ISG operating income as a percentage of net revenue decreased
600
basis points to
9.0%
. During the third quarter of Fiscal 2018 we experienced gross margin pressure due to component cost inflation, which we expect to continue into Fiscal 2019. ISG operating income was also affected by increased operating expenses reflecting larger investments in go-to-market capabilities and research and development.
During the first nine months of Fiscal 2018, ISG operating income decreased
380
basis points to
6.6%
primarily due to increased operating expenses from the EMC acquired businesses and larger investments in go-to-market capabilities and research and development. While the acquired EMC storage business contributed higher gross margin overall, we experienced gross margin pressure due to changing product mix within ISG as well as component cost inflation, which we expect to continue in the near term.
VMware:
The following table presents net revenue and operating income attributable to VMware for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
November 3, 2017
|
|
% Change
|
|
October 28, 2016
|
|
|
(in millions, except percentages)
|
|
Net Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware net revenue
|
$
|
1,953
|
|
|
52%
|
|
$
|
1,289
|
|
|
$
|
5,596
|
|
|
334%
|
|
$
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
VMware operating income
|
$
|
639
|
|
|
17%
|
|
$
|
548
|
|
|
$
|
1,686
|
|
|
208%
|
|
$
|
548
|
|
|
% of segment net revenue
|
32.7
|
%
|
|
|
|
42.5
|
%
|
|
30.1
|
%
|
|
|
|
42.5
|
%
|
Net Revenue
—
VMware net revenue during the third quarter and first nine months of Fiscal 2018 primarily consisted of revenue from the sale of software licenses under perpetual licenses, related software maintenance and support, training, consulting services, and hosted services. VMware net revenue for the third quarter of Fiscal 2018 grew 2% relative to the second quarter of Fiscal 2018, benefiting from balanced performance in all major geographies and broad strength across the product portfolio, particularly in our emerging product offerings.
From a geographical perspective, approximately half of VMware net revenue during the third quarter and first nine months of Fiscal 2018 was generated from sales to customers in the United States.
Operating Income
—
During the third quarter and first nine months of Fiscal 2018, VMware operating income as a percentage of net revenue was
32.7%
and
30.1%
, respectively. VMware operating income as of percentage of net revenue for the third quarter of Fiscal 2018 increased 330 basis points relative to the second quarter of Fiscal 2018 as we effectively managed our cost position.
OTHER BALANCE SHEET ITEMS
Accounts Receivable
We sell products and services directly to customers and through a variety of sales channels, including retail distribution. Our accounts receivable, net, was
$9.2 billion
and
$9.4 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. We maintain an allowance for doubtful accounts to cover receivables that may be deemed uncollectible. The allowance for losses is based on a provision for accounts that are collectively evaluated based on historical bad debt experience as well as specific identifiable customer accounts that are deemed at risk. As of
November 3, 2017
and
February 3, 2017
, the allowance for doubtful accounts was
$80 million
and
$57 million
, respectively. Based on our assessment, we believe that we are adequately reserved for expected credit losses. We monitor the aging of our accounts receivable and continue to take actions to reduce our exposure to credit losses.
Dell Financial Services and Financing Receivables
Dell Financial Services, referred to as DFS, offers a wide range of financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of Dell products. Following the closing of the EMC merger transaction, DFS began offering similar financial services related to the purchase of Dell EMC and VMware products. In some cases, we originate financing activities for our commercial customers related to the purchase of third-party technology products that complement our portfolio of products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including originations of third-party technology products, were
$1.6 billion
and
$1.1 billion
for the third quarter of Fiscal 2018 and Fiscal 2017, respectively, and
$4.3 billion
and
$3.0 billion
for the first nine months of Fiscal 2018 and Fiscal 2017, respectively. As of
November 3, 2017
and
February 3, 2017
, our financing receivables, net were
$7.0 billion
and
$5.9 billion
, respectively.
We have securitization programs to fund revolving loans and fixed-term leases and loans through consolidated special purpose entities, referred to as SPEs, which we account for as secured borrowings. We transfer certain U.S. and European customer financing receivables to these SPEs, whose purpose is to facilitate the funding of customer receivables through financing arrangements with multi-seller conduits that issue asset-backed debt securities in the capital markets and to private investors. During the third quarter of Fiscal 2018 and Fiscal 2017, we transferred
$1.0 billion
and
$0.6 billion
, respectively, to these SPEs, and during the first nine months of Fiscal 2018 and Fiscal 2017, we transferred
$2.9 billion
and
$2.0 billion
, respectively, to the SPEs. The structured financing debt related to all of our securitization programs included as secured borrowing was
$3.9 billion
and
$3.1 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. In addition, the carrying amount of the corresponding financing receivables was
$4.4 billion
and
$3.6 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. As a result of the EMC merger transaction, we are expanding our existing securitization programs to allow for additional funding of customer receivables in the capital markets.
We maintain an allowance to cover expected financing receivable credit losses and evaluate credit loss expectations based on our total portfolio. For the third quarter of Fiscal 2018 and Fiscal 2017, the principal charge-off rate for our total portfolio was
1.5%
and
2.1%
, respectively. For the first nine months of Fiscal 2018 and Fiscal 2017, the principal charge-off rate for our total portfolio was
1.6%
and
2.1%
, respectively. The decreases in our total portfolio charge-off rates were attributable to growth in our fixed-term, high quality commercial accounts, which generally have lower charge-off rates. This growth in the portfolio resulted from the expansion of commercial originations, subsequent to the EMC merger transaction. We expect that principal charge-off rates will continue to trend favorably over the coming year as DFS expands its volume of commercial originations. The allowance for losses is determined based on several factors, including historical and anticipated experience, past due receivables, receivable type, and customer risk profile. At
November 3, 2017
and
February 3, 2017
, the allowance for financing receivable losses was
$131 million
and
$143 million
, respectively. In general, the loss rates on our financing receivables have improved over the periods presented. We expect relatively stable loss rates in future periods, with movements in these rates being primarily driven by seasonality and a continued shift in portfolio composition to lower risk commercial assets. We continue to monitor broader economic indicators and their potential impact on future loss performance. We have an extensive process to manage our exposure to customer credit risk, including active management of credit lines and our collection activities. We also sell selected fixed-term financing receivables to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. Based on our assessment of the customer financing receivables, we believe that we are adequately reserved.
See
Note 6
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for additional information about our financing receivables and the associated allowance.
Deferred Revenue
Deferred revenue is recorded when billings have been generated or payments have been received for undelivered products or services, or in situations where revenue recognition criteria have not been met. Deferred revenue represents amounts received in advance for extended warranty services, software maintenance, unearned license fees, and deferred profit on third-party software offerings. Deferred revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. We also have deferred revenue related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as our obligations under the contract are completed.
Our total deferred revenue was
$20.1 billion
and
$18.7 billion
as of
November 3, 2017
and
February 3, 2017
, respectively. A majority of our deferred revenue as of
November 3, 2017
is expected to be recognized over the next two years.
Off-Balance Sheet Arrangements
As of
November 3, 2017
, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition or results of operations.
MARKET CONDITIONS, LIQUIDITY, AND CAPITAL COMMITMENTS
Market Conditions
We regularly monitor economic conditions and associated impacts on the financial markets and our business. We consistently evaluate the financial health of our supplier base, carefully manage customer credit, diversify counterparty risk, and monitor the concentration risk of our cash and cash equivalents balances globally. We routinely monitor our financial exposure to borrowers and counterparties.
We monitor credit risk associated with our financial counterparties using various market credit risk indicators such as credit ratings issued by nationally recognized rating agencies and changes in market credit default swap levels. We perform periodic evaluations of our positions with these counterparties and may limit exposure to any one counterparty in accordance with our policies. We monitor and manage these activities depending on current and expected market developments.
We use derivative instruments to hedge certain foreign currency exposures. We use forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted transactions denominated in currencies other than the U.S. dollar. In addition, we primarily use forward contracts and may use purchased options to hedge monetary assets and liabilities denominated in a foreign currency. See
Note 8
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information about our use of derivative instruments.
We are exposed to interest rate risk related to our variable-rate debt and investment portfolio. In the normal course of business, we follow established policies and procedures to manage this risk, including monitoring of our asset and liability mix. As a result, we do not anticipate any material losses from interest rate risk.
The impact of any credit adjustments related to our use of counterparties on our Condensed Consolidated Financial Statements included in this report has been immaterial.
Liquidity and Capital Resources
To support our ongoing business operations, we rely on operating cash flows as our primary source of liquidity. We monitor the efficiency of our balance sheet to ensure that we have adequate liquidity to support our strategic initiatives. In addition to internally generated cash, we have access to other capital sources to finance our strategic initiatives and fund growth in our financing operations. As of
November 3, 2017
, we had
$11.7 billion
of total cash and cash equivalents, the majority of which was held outside of the United States. Our strategy is to deploy capital from any potential source, whether internally generated cash or debt, depending on the adequacy and availability of that source of capital and whether it can be accessed in a cost-effective manner.
A significant portion of our income is earned in non-U.S. jurisdictions. Under current law, earnings available to be repatriated to the United States would be subject to U.S. federal income tax, less applicable foreign tax credits. We have provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the United States. We utilize a variety of tax planning and financing strategies with the objective of having our worldwide cash available in the locations where it is needed.
The following table summarizes our cash and cash equivalents as well as our available borrowings as of
November 3, 2017
and
February 3, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
(in millions)
|
|
Cash and cash equivalents, and available borrowings:
|
|
|
|
|
Cash and cash equivalents (a)
|
$
|
11,706
|
|
|
$
|
9,474
|
|
|
Remaining available borrowings under revolving credit facilities (b)
|
4,895
|
|
|
2,678
|
|
|
Total cash, cash equivalents, and available borrowings
|
$
|
16,601
|
|
|
$
|
12,152
|
|
__________________
(a) Of the
$11.7 billion
of cash and cash equivalents as of
November 3, 2017
, $6.0 billion was held by VMware, Inc.
(b) Of the
$4.9 billion
in remaining available borrowings as of November 3, 2017, $1.0 billion was available under the VMware Revolving Credit Facility and $100 million was available under the Pivotal Revolving Credit Facility.
The Revolving Credit Facility and China Revolving Credit Facility have combined maximum aggregate borrowings of approximately
$3.8 billion
. Available borrowings under these facilities are reduced by draws on the facility and, under the Revolving Credit Facility, outstanding letters of credit. As of
November 3, 2017
, there were no borrowings outstanding under either facility and remaining available borrowings totaled approximately
$3.8 billion
. These available borrowings may be used periodically for general corporate purposes.
The VMware Revolving Credit Facility and Pivotal Revolving Credit Facility have maximum aggregate borrowings of
$1.0 billion
and
$100 million
, respectively. None of the net proceeds of such borrowings will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc., Pivotal, and their respective subsidiaries.
We believe that our current cash and cash equivalents, along with cash that will be provided by future operations and borrowings expected to be available under the Revolving Credit Facility and China Revolving Credit Facility, will be sufficient over at least the next twelve months to fund our operations, capital expenditures, share repurchases, debt service requirements, and other corporate needs. We expect that our cash balance will increase in the near term as we prepare for upcoming debt maturities in the first half of Fiscal 2019.
Debt
The following table summarizes our outstanding debt as of
November 3, 2017
and
February 3, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
February 3, 2017
|
|
|
(in millions)
|
|
Outstanding Debt:
|
|
|
|
|
Structured financing debt
|
$
|
4,348
|
|
|
$
|
3,464
|
|
|
Senior Secured Credit Facilities and First Lien Notes
|
30,888
|
|
|
31,638
|
|
|
Unsecured Notes and Debentures
|
2,453
|
|
|
2,453
|
|
|
Senior Notes
|
3,250
|
|
|
3,250
|
|
|
EMC Notes
|
5,500
|
|
|
5,500
|
|
|
VMware Notes
|
4,000
|
|
|
—
|
|
|
Margin Loan Facility
|
2,000
|
|
|
—
|
|
|
Bridge Facilities
|
—
|
|
|
4,000
|
|
|
Other
|
83
|
|
|
51
|
|
|
Total debt, principal amount
|
52,522
|
|
|
50,356
|
|
|
Carrying value adjustments
|
(871
|
)
|
|
(966
|
)
|
|
Total debt, carrying value
|
$
|
51,651
|
|
|
$
|
49,390
|
|
To finance the EMC merger transaction, we issued an aggregate principal amount of
$45.9 billion
in new debt, which included proceeds from the sale of the First Lien Notes and Senior Notes, as well as borrowings under the Senior Secured Credit Facilities (including the Revolving Credit Facility), the Asset Sale Bridge Facility, the Margin Bridge Facility, and the VMware Bridge Facility at the closing of the transaction. Additionally, on September 7, 2016, EMC had outstanding senior notes (the "EMC Notes") consisting of
$2.5 billion
aggregate principal amount of its
1.875%
Notes due June 2018,
$2.0 billion
aggregate principal amount of its
2.650%
Notes due June 2020 and
$1.0 billion
aggregate principal amount of its
3.375%
Notes due June 2023. The EMC Notes remain outstanding following the closing of the EMC merger transaction.
During the nine months ended November 3, 2017, we completed two refinancing transactions of the Senior Secured Credit Facilities. In the first refinancing transaction, which occurred during the first quarter of Fiscal 2018, we refinanced the Term Loan B Facility to reduce the interest rate margin by
0.75%
and to increase the outstanding principal amount by
$0.5 billion
. We applied the proceeds from the Term Loan B Facility refinancing to repay
$0.5 billion
principal amount of the Margin Bridge Facility. Additionally, during the first quarter of Fiscal 2018, we entered into the Margin Loan Facility in the principal amount of
$2.0 billion
, and used the proceeds of the new facility to repay the Margin Bridge Facility.
In the second refinancing transaction, which occurred during the third quarter of Fiscal 2018, we refinanced the Term Loan A-2 Facility, Term Loan A-3 Facility, Term Loan B Facility, and the Revolving Credit Facility. As a result of the refinancing, the interest rate margin under each of these facilities decreased
0.50%
and the outstanding principal amount of the Term Loan A-2 Facility increased by $672 million, which was used to pay
$212 million
principal amount of the Term Loan A-3 Facility and
$460 million
of principal amount of the Term Loan B Facility, as well as related fees and expenses. Further, the Revolving Credit Facility's borrowing capacity increased by
$180 million
to $3.3 billion.
During the first nine months of Fiscal 2018, the Company repaid approximately $0.9 billion principal amount of its term loan facilities and $0.4 billion under the Revolving Credit Facility and issued an additional $0.9 billion, net, in structured financing debt to support the expansion of its financing receivables portfolio.
Further, during the third quarter of Fiscal 2018, VMware, Inc. completed a public offering of senior notes in the aggregate principal amount of $4.0 billion (the "VMware Notes"). VMware, Inc. used a portion of the net proceeds from the offering to repay certain intercompany promissory notes previously issued by it to EMC in the aggregate principal amount of $1.2 billion. We applied the proceeds of this repayment, and other cash, to repay $1.5 billion principal amount of the VMware Note Bridge Facility, without premium or penalty. VMware, Inc. has disclosed that it intends to use the remaining net proceeds of the debt issuance to fund additional repurchases of up to $1.0 billion of its Class A common stock over the next 12 months, and for general VMware, Inc. corporate purposes, including mergers and acquisitions and repaying other indebtedness.
VMware, Inc. and its subsidiaries are unrestricted subsidiaries for purposes of the existing debt of Dell Technologies. Neither Dell Technologies nor any of its subsidiaries, other than VMware, Inc., is obligated to make payment on the VMware Notes. None of the net proceeds of the VMware Notes will be made available to support the operations or satisfy any corporate purposes of Dell Technologies, other than the operations and corporate purposes of VMware, Inc. and VMware, Inc.’s subsidiaries.
We balance the use of our securitization programs with working capital and other sources of liquidity to fund growth in DFS. Of the $
52.5 billion
in outstanding principal debt as of
November 3, 2017
, $6.1 billion, which includes
$4.3 billion
in structured financing debt, is used to fund this business.
Our requirements for cash to pay principal and interest have increased significantly due to the borrowings that were required to finance the EMC merger transaction. We or our affiliates, at our or their sole discretion, may purchase, redeem, prepay, refinance, or otherwise retire our outstanding indebtedness under the terms of such indebtedness at any time and from time to time, in open market or negotiated transactions with the holders of such indebtedness, as appropriate market conditions exist.
See
Note 7
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information about our debt and our unrestricted subsidiaries. See
Note 21
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information about subsequent events.
Cash Flows
The following table contains a summary of our Condensed Consolidated Statements of Cash Flows for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Net change in cash from:
|
|
|
|
|
Operating activities
|
$
|
3,679
|
|
|
$
|
1,569
|
|
|
Investing activities
|
(1,990
|
)
|
|
(38,059
|
)
|
|
Financing activities
|
496
|
|
|
38,787
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
47
|
|
|
31
|
|
|
Change in cash and cash equivalents
|
$
|
2,232
|
|
|
$
|
2,328
|
|
Operating Activities
— Cash provided by operating activities was
$3.7 billion
and
$1.6 billion
during the first nine months of Fiscal 2018 and Fiscal 2017, respectively. The increase in operating cash flows during the first nine months of Fiscal 2018 was driven by improved profitability, including the incremental profitability from the EMC acquired businesses, and ongoing working capital initiatives. Further, cash paid for transaction costs during the first nine months of Fiscal 2017 did not recur in Fiscal 2018. The increase in operating cash flows was partially offset by the growth in our financing receivables portfolio and cash paid for interest and taxes.
Investing Activities
—
Investing activities primarily consist of cash used to fund strategic investments, the maturities, sales, and purchases of investments, capital expenditures for property, plant, and equipment, and capitalized software development costs. Cash used by investing activities was
$2.0 billion
and
$38.1 billion
during the first nine months of Fiscal 2018 and Fiscal 2017, respectively. The decrease in cash used in investing activities was primarily driven by
$37.6 billion
, net cash used to fund our acquisition of EMC during the first nine months of Fiscal 2017 that did not recur during Fiscal 2018.
Financing Activities
— Financing activities primarily consist of the proceeds and repayments of debt and cash used to repurchase common stock. Cash provided by financing activities was
$0.5 billion
during the first nine months of Fiscal 2018 driven by net proceeds from debt, primarily due to the issuance of the VMware Notes, partially offset by cash used for share repurchases. In comparison, cash provided by financing activities was $
38.8 billion
during the first nine months of Fiscal 2017 and primarily consisted of
$46.0 billion
in cash proceeds from debt,
$43.2 billion
of which was issued in connection with the EMC merger transaction, and
$4.4 billion
in proceeds from the sale and issuance of our Class A, Class B, and Class C Common Stock for financing of that transaction. These issuances were partially offset by
$9.6 billion
in repayments of debt,
$0.8 billion
in payments for debt issuance costs,
$0.8 billion
in payments to repurchase common stock, and
$0.4 billion
in payments related to the appraisal litigation from the going-private transaction. See
Note 7
and
Note 17
of the
Notes to the Condensed Consolidated Financial Statements
included in this report for more information about our debt and share repurchase programs, respectively.
Key Performance Metrics
Our key performance metrics are net revenue, operating income, adjusted EBITDA, cash flows from operations, and cash conversion cycle. Net revenue, operating income, adjusted EBITDA, and cash flows from operations are discussed elsewhere in this report. Our cash conversion cycle is presented below.
Cash Conversion Cycle
The following table presents the components of our cash conversion cycle
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
Days of sales outstanding (a)
|
46
|
|
|
52
|
|
|
Days of supply in inventory (b)
|
17
|
|
|
23
|
|
|
Days in accounts payable (c)
|
(112
|
)
|
|
(115
|
)
|
|
Cash conversion cycle (d)
|
(49
|
)
|
|
(40
|
)
|
__________________
|
|
|
|
(a)
|
Days of sales outstanding, referred to as DSO, calculates the average collection period of our receivables. DSO is based on the ending net trade receivables and the most recent quarterly non-GAAP net 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, as we believe this provides a more relevant metric that aligns with actual sales activity in the quarter, regardless of revenue recognition under GAAP. DSO is calculated by adding accounts receivable, net of allowance for doubtful accounts, and customer shipments in transit and dividing that sum by average non-GAAP net revenue per day for the current quarter (90 days for the three months ended
November 3, 2017
and
October 28, 2016
). As of
November 3, 2017
, DSO and days of customer shipments not yet recognized were 42 and 4 days, respectively. As of
October 28, 2016
, DSO and days of customer shipments not yet recognized were 47 and 5 days, respectively.
|
|
|
|
|
(b)
|
Days of supply in inventory, referred to as DSI, measures the average number of days from procurement to sale of our products. DSI is based on ending inventory adjusted to exclude purchase accounting adjustments and non-GAAP cost of goods sold for each period. DSI is calculated by dividing ending inventory by average non-GAAP cost of goods sold per day for the current quarter (90 days for the three months ended
November 3, 2017
and
October 28, 2016
).
|
|
|
|
|
(c)
|
Days in accounts payable, referred to as DPO, calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and non-GAAP cost of goods sold for each period. DPO is calculated by dividing accounts payable by average non-GAAP cost of goods sold per day for the current quarter (90 days for the three months ended
November 3, 2017
and
October 28, 2016
).
|
|
|
|
|
(d)
|
We calculate our cash conversion cycle using non-GAAP net revenue and non-GAAP cost of goods sold because we believe that excluding certain items from the GAAP results facilitates management's understanding of this key performance metric.
|
The table below provides reconciliations of each non-GAAP financial measure used in calculating the DSO, DSI and DPO metrics to its most directly comparable GAAP financial measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Cost of goods sold
|
$
|
14,447
|
|
|
$
|
12,348
|
|
|
Non-GAAP adjustments:
|
|
|
|
|
Impact of purchase accounting
|
(12
|
)
|
|
(199
|
)
|
|
Amortization of intangibles
|
(914
|
)
|
|
(604
|
)
|
|
Transaction-related expenses
|
(5
|
)
|
|
(30
|
)
|
|
Other corporate expenses
|
(28
|
)
|
|
(62
|
)
|
|
Non-GAAP cost of goods sold
|
$
|
13,488
|
|
|
$
|
11,453
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2017
|
|
October 28, 2016
|
|
|
(in millions)
|
|
Inventory
|
2,582
|
|
|
3,504
|
|
|
Less: Impact of purchase accounting
|
—
|
|
|
(565
|
)
|
|
Inventory adjusted to exclude purchase accounting adjustments
|
2,582
|
|
|
2,939
|
|
For the three months ended
November 3, 2017
, the change in our cash conversion cycle was favorable by
9
days when compared to the three months ended
October 28, 2016
. DSO and DSI both improved 6 days in part due to continued integration of our operations with EMC. Also, the comparison to the prior period was affected by the timing of the EMC merger transaction. DSO and DSI for the three months ended October 28, 2016 were both negatively impacted by the timing of that transaction as we assumed all of EMC's accounts receivable and inventory, but only included the portion of EMC's revenue and cost of goods sold for the period from September 7, 2016 to October 28, 2016.
The improvement in DSO and DSI was partially offset by an unfavorable change in DPO. The unfavorable change in DPO was primarily attributable to a benefit in the prior year driven by the timing dynamic discussed above, as we assumed all of EMC's accounts payable, but only included the portion of EMC's cost of goods sold for the period from September 7, 2016 to October 28, 2016. This unfavorable change in DPO for the three months ended
November 3, 2017
was offset partially by alignment of supplier payment terms as part of ongoing integration efforts.
We believe our business model allows us to maintain an efficient cash conversion cycle, which compares favorably with that of others in our industry.
Capital Commitments
Capital Expenditures
— During the first nine months of Fiscal 2018 and Fiscal 2017, we spent
$902 million
and
$417 million
, respectively, on property, plant, and equipment. These expenditures were primarily incurred in connection with our global expansion efforts and infrastructure investments made to support future growth. Product demand, product mix, and the use of contract manufacturers, as well as ongoing investments in operating and information technology infrastructure, influence the level and prioritization of our capital expenditures. Aggregate capital expenditures for Fiscal 2018, which will be primarily related to infrastructure investments and strategic initiatives, are currently expected to total approximately $1.2 billion.
Repurchases of Common Stock
Class V Common Stock Repurchases
— On December 13, 2016, the board of directors approved a stock repurchase program under which we were authorized to use assets of the Class V Group to repurchase up to
$500 million
of shares of Class V Common Stock over a period of
six months
.
During the first quarter of Fiscal 2018
, we repurchased
1.3 million
shares of Class V Common Stock for
$82 million
pursuant to this initial authorization. A total of 8.4 million shares have been repurchased under this program.
On March 27, 2017 and August 18, 2017, the board of directors approved two amendments of the Class V Group Repurchase Program (the "March 2017 Class V Group Repurchase Program" and the “August 2017 Class V Group Repurchase Program,” respectively) which, when combined, authorized us to use assets of the Class V Group to repurchase up to an additional
$600 million
of shares of Class V Common Stock over additional six month periods from the respective board approval dates. On May 9, 2017, the March 2017 Class V Group Repurchase Program was completed, with us having repurchased
4.6 million
shares of Class V Common Stock for
$300 million
. On October 31, 2017, the August 2017 Class V Group Repurchase Program was completed, with us having repurchased
3.8 million
shares of Class V Common Stock for
$300 million
.
VMware, Inc. Class A Common Stock Repurchases
— On December 15, 2016, we entered into a stock purchase agreement with VMware, Inc. (the "December 2016 Stock Purchase Agreement"), pursuant to which VMware, Inc. agreed to repurchase for cash
$500 million
of shares of VMware, Inc. Class A common stock from a subsidiary of Dell Technologies. During the first quarter of Fiscal 2018, VMware, Inc. repurchased
1.4 million
shares pursuant to the December 2016 Stock Purchase Agreement. VMware, Inc. repurchased a total of 6.2 million shares under this agreement. We applied the proceeds from the sale to the repurchase of shares of our Class V Common Stock under the Class V Group Repurchase Program described above. All shares repurchased under VMware, Inc.'s stock repurchase programs are retired.
In January 2017 and August 2017, VMware, Inc.'s board of directors authorized the repurchase of up to
$2.2 billion
of shares of VMware, Inc. Class A common sto
ck (the "January 2017 Authorization" for up to
$1.2 billion
through the end of Fiscal 2018, and the "August 2017 Authorization" for up to
$1 billion
through August 31, 2018). On March 29, 2017 and August 23, 2017, we entered into two new stock purchase agreements with VMware, Inc. (the "March 2017 Stock Purchase Agreement" and the "August 2017 Stock Purchase Agreement," respectively), pursuant to which VMware, Inc. agreed to repurchase for cash a total of
$600 million
of shares of VMware, Inc. Class A common stock from a subsidiary of Dell Technologies. VMware, Inc. repurchased approximately
6.1 million
shares of Class A common stock (consisting of
3.4 million
shares pursuant to the March 2017 Stock Purchase Agreement and
2.7 million
shares pursuant to the August 2017 Stock Purchase Agreement). We applied the proceeds of the sales to the repurchase of shares of the Class V Common Stock under the March 2017 and August 2017 Class V Group Repurchase Programs described above. As of November 3, 2017, the sale transactions under the March 2017 and August 2017 Stock Purchase Agreements were completed. The purchase prices of the
3.4 million
shares and
2.7 million
shares repurchased by VMware, Inc. were e
ach based on separate volume-weighted average per share prices of the Class A common stock as reported on the New York Stock Exchange during separate specified reference periods, less a discount of
3.5%
from the respective volume-weighted average per share price.
During the three and nine months ended November 3, 2017, VMware, Inc. repurchased 5.1 million shares of Class A common stock in the open market for
$555 million
.
As of
November 3, 2017
, the cumulative authorized amount remaining for share repurchases by VMware, Inc. was
$1,045 million
, which represents the $2.2 billion authorized since January 2017, less the cumulative Class A common stock repurchases from a subsidiary of Dell Technologies of $600 million, and less the cumulative Class A common stock repurchases in the open market of
$555 million
.
For more information regarding share repurchase programs, see
Note 17
and
Note 21
of the
Notes to the Condensed Consolidated Financial Statements
included in this report, and "Part II — Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds."
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 canceled 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 purchase obligations as they typically represent our authorization to purchase rather than binding purchase obligations.
As of
November 3, 2017
, we had
$3.1 billion
,
$0.3 billion
, and
$0.5 billion
in purchase obligations for
Fiscal 2018 (remaining three months)
,
Fiscal 2019
, and
Fiscal 2020 and thereafter
, respectively.