Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2018
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from            to           
 
Commission File Number: 001-37867
 
Dell Technologies Inc.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
80-0890963
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Dell Way, Round Rock, Texas 78682
(Address of principal executive offices) (Zip Code)

1-800-289-3355 
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ 
 
Accelerated filer ¨
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

As of September 5, 2018, there were 768,064,601 shares of the registrant's common stock outstanding, consisting of 199,356,591 outstanding shares of Class V Common Stock, 409,538,423 outstanding shares of Class A Common Stock, 136,986,858 outstanding shares of Class B Common Stock, and 22,182,729 outstanding shares of Class C Common Stock.



Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "may," "will," "anticipate," "estimate," "expect," "intend," "plan," "aim," "seek," and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings, and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in "Part I — Item 1A — Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 2, 2018 and in our other periodic and current reports filed with the Securities and Exchange Commission ("SEC"). Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement after the date as of which such statement was made, whether to reflect changes in circumstances or our expectations, the occurrence of unanticipated events, or otherwise.



2


Table of Contents

DELL TECHNOLOGIES INC.

TABLE OF CONTENTS
 
 
Page
 



3


Table of Contents


PART I — FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS
Index
 
Page
 



4


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions; unaudited)
 
August 3, 2018
 
February 2, 2018
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
15,312

 
$
13,942

Short-term investments
2,504

 
2,187

Accounts receivable, net
11,201

 
11,721

Short-term financing receivables, net
4,140

 
3,919

Inventories, net
3,642

 
2,678

Other current assets
6,326

 
5,881

Total current assets
43,125

 
40,328

Property, plant, and equipment, net
5,240

 
5,390

Long-term investments
3,649

 
4,163

Long-term financing receivables, net
4,030

 
3,724

Goodwill
39,504

 
39,920

Intangible assets, net
25,208

 
28,265

Other non-current assets
2,625

 
2,403

Total assets
$
123,381

 
$
124,193

LIABILITIES, REDEEMABLE SHARES, AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Short-term debt
$
9,144

 
$
7,873

Accounts payable
20,853

 
18,334

Accrued and other
7,216

 
8,026

Short-term deferred revenue
11,965

 
11,606

Total current liabilities
49,178

 
45,839

Long-term debt
40,414

 
43,998

Long-term deferred revenue
9,735

 
9,210

Other non-current liabilities
6,787

 
7,277

Total liabilities
106,114

 
106,324

Commitments and contingencies (Note 11)


 


Redeemable shares
2,056

 
384

Stockholders' equity:
 
 
 
Common stock and capital in excess of $.01 par value (Note 16)
18,321

 
19,889

Treasury stock at cost
(1,487
)
 
(1,440
)
Accumulated deficit
(7,937
)
 
(6,860
)
Accumulated other comprehensive income (loss)
(334
)
 
130

Total Dell Technologies Inc. stockholders’ equity
8,563

 
11,719

Non-controlling interests
6,648

 
5,766

Total stockholders' equity
15,211

 
17,485

Total liabilities, redeemable shares, and stockholders' equity
$
123,381

 
$
124,193


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


5


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per share amounts; unaudited)
 
Three Months Ended
 
Six Months Ended
 
August 3, 2018
 
August 4, 2017
 
August 3, 2018
 
August 4, 2017
Net revenue:
 
 
 
 
 

 
 
Products
$
18,149

 
$
15,102

 
$
34,820

 
$
28,736

Services
4,793

 
4,419

 
9,478

 
8,785

Total net revenue
22,942

 
19,521

 
44,298

 
37,521

Cost of net revenue:
 
 
 
 
 
 
 
Products
14,943

 
12,775

 
28,549

 
24,598

Services
1,876

 
1,778

 
3,748

 
3,498

Total cost of net revenue
16,819

 
14,553

 
32,297

 
28,096

Gross margin
6,123

 
4,968

 
12,001

 
9,425

Operating expenses:
 
 
 
 
 
 
 
Selling, general, and administrative
4,961

 
4,540

 
9,905

 
9,136

Research and development
1,175

 
1,093

 
2,262

 
2,226

Total operating expenses
6,136

 
5,633

 
12,167

 
11,362

Operating loss
(13
)
 
(665
)
 
(166
)
 
(1,937
)
Interest and other, net
(455
)
 
(545
)
 
(925
)
 
(1,117
)
Loss before income taxes
(468
)
 
(1,210
)
 
(1,091
)
 
(3,054
)
Income tax benefit
(7
)
 
(471
)
 
(92
)
 
(1,112
)
Net loss
(461
)
 
(739
)
 
(999
)
 
(1,942
)
Less: Net income (loss) attributable to non-controlling interests
38

 
(7
)
 
136

 
(39
)
Net loss attributable to Dell Technologies Inc.
$
(499
)
 
$
(732
)
 
$
(1,135
)
 
$
(1,903
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - basic:
 
 
 
 
Class V Common Stock - basic
$
1.61

 
$
1.00

 
$
3.97

 
$
1.60

DHI Group - basic
$
(1.44
)
 
$
(1.65
)
 
$
(3.39
)
 
$
(3.94
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted:
 
 
 
 
Class V Common Stock - diluted
$
1.58

 
$
1.00

 
$
3.91

 
$
1.59

DHI Group - diluted
$
(1.45
)
 
$
(1.66
)
 
$
(3.40
)
 
$
(3.95
)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


6


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions; unaudited)
 
Three Months Ended
 
Six Months Ended
 
August 3, 2018
 
August 4, 2017
 
August 3, 2018
 
August 4, 2017
Net loss
$
(461
)
 
$
(739
)
 
$
(999
)
 
$
(1,942
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(261
)
 
397

 
(603
)
 
450

Available-for-sale investments:
 
 
 
 
 
 
 
Change in unrealized gains (losses)
6

 
19

 
(1
)
 
47

Reclassification adjustment for net (gains) losses realized in net loss

 
2

 
(1
)
 
3

Net change in market value of investments
6

 
21

 
(2
)
 
50

Cash flow hedges:
 
 
 
 
 
 
 
Change in unrealized gains (losses)
120

 
(141
)
 
241

 
(157
)
Reclassification adjustment for net (gains) losses included in net loss
(77
)
 
70

 
(46
)
 
49

Net change in cash flow hedges
43

 
(71
)
 
195

 
(108
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss), net of tax expense of $5 and $0, respectively, and $7 and $15, respectively
(212
)
 
347

 
(410
)
 
392

Comprehensive loss, net of tax
(673
)
 
(392
)
 
(1,409
)
 
(1,550
)
Less: Net income (loss) attributable to non-controlling interests
38

 
(7
)
 
136

 
(39
)
Less: Other comprehensive income (loss) attributable to non-controlling interests
1

 
1

 
(4
)
 
4

Comprehensive loss attributable to Dell Technologies Inc.
$
(712
)
 
$
(386
)
 
$
(1,541
)
 
$
(1,515
)

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


7


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; continued on next page; unaudited)

 
Six Months Ended
 
August 3, 2018
 
August 4, 2017
Cash flows from operating activities:
 
 
 

Net loss
$
(999
)
 
$
(1,942
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
  Depreciation and amortization
3,845

 
4,354

  Amortization of debt issuance costs
72

 
90

  Stock-based compensation expense
415

 
409

  Deferred income taxes
(679
)
 
(1,432
)
  Net gain on sale of businesses
(27
)
 
(26
)
  Provision for doubtful accounts — including financing receivables
81

 
77

  Other
53

 
247

Changes in assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Accounts receivable
76

 
(313
)
Financing receivables
(748
)
 
(657
)
Inventories
(1,136
)
 
(171
)
Other assets
(520
)
 
(1,385
)
Accounts payable
2,630

 
2,444

Deferred revenue
1,117

 
662

Accrued and other liabilities
(388
)
 
(252
)
Change in cash from operating activities
3,792

 
2,105

Cash flows from investing activities:
 
 
 
Investments:
 
 
 
Purchases
(888
)
 
(2,260
)
Maturities and sales
1,322

 
2,058

Capital expenditures
(561
)
 
(561
)
Proceeds from sale of facilities, land, and other assets
10

 

Capitalized software development costs
(160
)
 
(187
)
Collections on purchased financing receivables
17

 
10

Acquisition of businesses, net

 
(223
)
Divestitures of businesses, net
142

 

Asset acquisitions, net
(38
)
 
(86
)
Asset dispositions, net
(6
)
 
(41
)
Change in cash from investing activities
(162
)
 
(1,290
)

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



8


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued; in millions; unaudited)

 
Six Months Ended
 
August 3, 2018
 
August 4, 2017
Cash flows from financing activities:
 
 
 
Payment of dissenting shares obligation
(76
)
 

Share repurchases for tax withholdings of equity awards
(199
)
 
(194
)
Proceeds from the issuance of common stock of subsidiaries
653

 
80

Repurchases of DHI Group Common Stock
(47
)
 
(2
)
Repurchases of Class V Common Stock

 
(422
)
Payments for debt issuance costs
(8
)
 
(5
)
Proceeds from debt
4,637

 
4,756

Repayments of debt
(6,948
)
 
(5,291
)
Other
1

 
1

Change in cash from financing activities
(1,987
)
 
(1,077
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(216
)
 
48

Change in cash, cash equivalents, and restricted cash
1,427

 
(214
)
Cash, cash equivalents, and restricted cash at beginning of the period
14,378

 
9,832

Cash, cash equivalents, and restricted cash at end of the period
$
15,805

 
$
9,618


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



9


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions; continued on next page; unaudited)

 
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 2, 2018
571

 
$
9,848

 
223

 
$
10,041

 
1

 
$
(16
)
 
24

 
$
(1,424
)
 
$
(6,860
)
 
$
130

 
$
11,719

 
$
5,766

 
$
17,485

Adjustment for adoption of accounting standards (Note 1)

 

 

 

 

 

 

 

 
58

 
(58
)
 

 
(5
)
 
(5
)
Net income (loss)

 

 

 

 

 

 

 

 
(1,135
)
 

 
(1,135
)
 
136

 
(999
)
Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 
(603
)
 
(603
)
 

 
(603
)
Investments, net change

 

 

 

 

 

 

 

 

 

 

 
(2
)
 
(2
)
Cash flow hedges, net change

 

 

 

 

 

 

 

 

 
197

 
197

 
(2
)
 
195

Issuance of common stock

 
(4
)
 

 

 

 

 

 

 

 

 
(4
)
 

 
(4
)
Stock-based compensation expense

 
37

 

 

 

 

 

 

 

 

 
37

 
378

 
415

Treasury stock repurchases

 

 

 

 
1

 
(47
)
 

 

 

 

 
(47
)
 

 
(47
)
Revaluation of redeemable shares

 
(1,672
)
 

 

 

 

 

 

 

 

 
(1,672
)
 

 
(1,672
)
Impact from equity transactions of non-controlling interests

 
71

 

 

 

 

 

 

 

 

 
71

 
377

 
448

Balances as of August 3, 2018
571

 
$
8,280

 
223

 
$
10,041

 
2

 
$
(63
)
 
24

 
$
(1,424
)
 
$
(7,937
)
 
$
(334
)
 
$
8,563

 
$
6,648

 
$
15,211


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


10


Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(continued; in millions; unaudited)

 
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
)
 
$
(4,095
)
 
$
(595
)
 
$
14,757

 
$
5,821

 
$
20,578

Adjustment for adoption of accounting standard (Note 1)

 

 

 

 

 

 

 

 
84

 

 
84

 

 
84

Net loss

 

 

 

 

 

 

 

 
(1,903
)
 

 
(1,903
)
 
(39
)
 
(1,942
)
Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 
450

 
450

 

 
450

Investments, net change

 

 

 

 

 

 

 

 

 
46

 
46

 
4

 
50

Cash flow hedges, net change

 

 

 

 

 

 

 

 

 
(108
)
 
(108
)
 

 
(108
)
Issuance of common stock
1

 
(14
)
 

 

 

 

 

 

 

 

 
(14
)
 

 
(14
)
Stock-based compensation expense

 
58

 

 

 

 

 

 

 

 

 
58

 
353

 
411

Treasury stock repurchases

 

 

 

 

 
(2
)
 
6

 
(382
)
 

 

 
(384
)
 

 
(384
)
Revaluation of redeemable shares

 
(102
)
 

 

 

 

 

 

 

 

 
(102
)
 

 
(102
)
Impact from equity transactions of non-controlling interests

 
(46
)
 

 

 

 

 

 

 

 

 
(46
)
 
(53
)
 
(99
)
Balances as of August 4, 2017
570

 
$
10,054

 
223

 
$
10,041

 

 
$
(12
)
 
20

 
$
(1,124
)
 
$
(5,914
)
 
$
(207
)
 
$
12,838

 
$
6,086

 
$
18,924


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



11


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




NOTE 1 — BASIS OF PRESENTATION

References in these Notes to the Condensed Consolidated Financial Statements to the "Company" or "Dell Technologies" mean Dell Technologies Inc. individually and together with its consolidated subsidiaries.

Basis of Presentation — The accompanying unaudited Condensed Consolidated Financial Statements 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 2, 2018, and the recast audited Consolidated Financial Statements and accompanying Notes for the fiscal years ended February 2, 2018 and February 3, 2017 (the "Recast Financial Statements")
and other financial information included in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on August 6, 2018.  The Recast Financial Statements were recast from and supersede the audited Consolidated Financial Statements for the fiscal years ended February 2, 2018 and February 3, 2017 included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2018. Such audited Consolidated Financial Statements were recast to present certain previously reported financial statements and other related financial information on a basis consistent with the new accounting standards adopted during the three months ended May 4, 2018. Further, segment information was recast to conform with certain segment reporting changes the Company made during the three months ended May 4, 2018. See below for additional information regarding recently adopted accounting pronouncements.

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. as of August 3, 2018, the results of its operations and corresponding comprehensive income (loss) for the three and six months ended August 3, 2018 and August 4, 2017, and its cash flows for the six months ended August 3, 2018 and August 4, 2017. The February 2, 2018 condensed consolidated balance sheet included herein was derived from the Recast Financial Statements.

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 six months ended August 3, 2018 and August 4, 2017 and the cash flows for the six months ended August 3, 2018 and August 4, 2017 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 2, 2018 ("Fiscal 2018") was a 52-week period, and the fiscal year ending February 1, 2019 ("Fiscal 2019") will be a 52-week period.

Principles of Consolidation — These Condensed Consolidated Financial Statements include the accounts of Dell Technologies and its wholly-owned subsidiaries, as well as the accounts of SecureWorks Corp. ("SecureWorks"), VMware, Inc., and Pivotal Software, Inc. ("Pivotal"), each of which is majority-owned by Dell Technologies. All intercompany transactions have been eliminated.

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 quarterly report on Form 10-Q for the quarterly period ended August 3, 2018 for information on the differences between VMware reportable segment results and VMware, Inc. results.

EMC Merger Transaction — On September 7, 2016, the Company completed its acquisition by merger of EMC Corporation ("EMC"), referred to as the EMC merger transaction. The consolidated results of EMC are included in Dell Technologies' consolidated results presented in these financial statements.

Pivotal Initial Public Offering — On April 24, 2018, Pivotal completed a registered underwritten initial public offering ("IPO") of its Class A common stock. The results of Pivotal's operations are included in other businesses. For more information regarding the Company's ownership of Pivotal, see Note 14 of the Notes to the Condensed Consolidated Financial Statements.



12


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


Recently Issued Accounting Pronouncements

Leases In February 2016, the Financial Accounting Standards Board ("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 a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The guidance also makes some changes to lessor accounting and requires additional disclosures about all leasing arrangements.  Companies are required to use a modified retrospective approach, with the option of applying the requirements of the standard either (1) retrospectively to each prior comparative reporting period presented, or (2) retrospectively at the beginning of the period of adoption. The Company will adopt this standard for the fiscal year beginning February 2, 2019, and will apply it at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. In the area of lessee accounting, the Company anticipates that the most significant change will be recognition of right-of-use assets and lease liabilities on the Consolidated Statements of Financial Position. In the area of lessor accounting, the Company anticipates that the most significant change will be an increase to future originations of operating leases due to elimination of the third-party residual value guarantee insurance in the sales-type lease test.

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 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.

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.

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers In May 2014, 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. 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. Concurrently, the FASB issued guidance on the accounting for costs to fulfill or obtain a customer contract. The Company adopted these standards during the three months ended May 4, 2018 using the full retrospective method, which requires the Company to recast each prior period presented consistent with the new guidance. The Company recorded a credit of approximately $1 billion to retained earnings as of January 29, 2016 to reflect the cumulative effect of the adoption. See tables provided below which present the impact of the new accounting standards to the Company's previously reported financial results. See also Note 2 of the Notes to the Condensed Consolidated Financial Statements for a summary of significant policies related to the new accounting standards.

Recognition and Measurement of Financial Assets and Financial Liabilities — In January 2016, the FASB issued amended guidance that generally requires changes in the fair value of equity investments, other than those accounted for under the equity method, to be recognized through net income, rather than other comprehensive income. For equity investments without readily determinable fair values, the Company is no longer permitted to use the cost method of accounting. The Company has elected to apply the measurement alternative for those investments. Under the alternative, the Company measures investments without readily determinable fair values at cost, less impairment, adjusted by observable price changes on a prospective basis. The


13


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


Company must make a separate election to use the alternative for each eligible investment, and is required to reassess at each reporting period whether an investment qualifies for the alternative. The Company adopted this standard during the three months ended May 4, 2018. Adoption of the standard was applied through a cumulative one-time adjustment to accumulated deficit of $56 million for the accumulated unrealized gain previously recorded in other comprehensive income. The impact of the standard on the Condensed Consolidated Statements of Income (Loss) during the three and six months ended August 3, 2018 was a gain of approximately $123 million and $223 million, respectively, recognized in interest and other, net, and the impact in future periods will depend on the relative changes in market price of the equity investments.

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. 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 adopted this standard during the three months ended May 4, 2018. Prior period amounts on the Condensed Consolidated Statements of Cash Flows have been recast to conform with current period presentation as shown in the reconciliation provided below.

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 was applied on a modified-retrospective basis with the cumulative-effect adjustment to accumulated deficit as of the beginning of the period of adoption. The Company early adopted this guidance during the three months ended May 5, 2017.  At adoption, approximately $84 million was reclassified from other non-current liabilities to accumulated deficit, resulting in a net credit to accumulated deficit.

Statement of Cash Flows, Restricted Cash — In November 2016, the FASB issued amended guidance requiring entities to include restricted cash and restricted cash equivalents in cash balances 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 adopted this standard during the three months ended May 4, 2018. See Note 19 of the Notes to the Condensed Consolidated Financial Statements for supplemental cash flow information. Prior period amounts on the Condensed Consolidated Statements of Cash Flows have been recast to conform with current period presentation as shown in the reconciliation provided below.

Clarifying the Definition of a Business — In January 2017, the FASB issued amended guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Public entities must adopt the new guidance for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The new guidance did not have a material impact on the Company's conclusions regarding transactions that were assessed in the current period.

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 elected to early adopt this standard during the three months ended May 4, 2018. The impact of the adoption of the standard was immaterial to the Condensed Consolidated Financial Statements.

Income Statement - Reporting Comprehensive Income In February 2018, the FASB issued guidance that will permit entities to reclassify the tax effects stranded in accumulated other comprehensive income to accumulated deficit as a result of U.S. Tax Reform, discussed in Note 12 of the Notes to the Condensed Consolidated Financial Statements. The guidance gives entities the option to reclassify these amounts, but requires new disclosures regardless of whether they elect to do so. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt this standard during the three months ended May 4, 2018, and recorded the impact of the adoption as a cumulative adjustment to accumulated deficit. The impact of the adoption was immaterial to the Condensed Consolidated Financial Statements.


14


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


Impacts to Previously Reported Periods

The following tables present the impact of the new accounting standards to the Company's previously reported financial results.

Selected Captions from the Condensed Consolidated Statement of Financial Position
 
February 2, 2018
 
As Reported (a)
 
Revenue from Contracts with Customers
 
As Recast
 
(in millions)
Assets
 
 
 
 
 
Accounts receivable, net
$
11,177

 
$
544

 
$
11,721

Other current assets
$
5,054

 
$
827

 
$
5,881

Other non-current assets
$
1,862

 
$
541

 
$
2,403

Liabilities and Stockholders' Equity
 
 
 
 
 
Accrued and other
$
7,661

 
$
365

 
$
8,026

Short-term deferred revenue
$
12,024

 
$
(418
)
 
$
11,606

Long-term deferred revenue
$
10,223

 
$
(1,013
)
 
$
9,210

Other non-current liabilities
$
6,797

 
$
480

 
$
7,277

Accumulated deficit
$
(9,253
)
 
$
2,393

 
$
(6,860
)
Non-controlling interests
$
5,661

 
$
105

 
$
5,766

____________________
(a)
Amounts as reported in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2018.

The above impacts are summarized as follows:

Accounts receivable, net. The adoption of the new revenue standard resulted in an increase to accounts receivable, net primarily due to the following two factors:

First, the return rights provision, which represents an estimate of expected customer returns, which was previously presented as a reduction of accounts receivable, net, is now being presented outside of accounts receivable, net in two separate balance sheet line items. A liability is recorded in accrued and other for the estimated value of the sales amounts to be returned to the customer, and an asset is recorded in other current assets representing the recoverable cost of the inventory estimated to be returned.

Second, the standard provides new guidance regarding transfer of control of goods to the customer. Under these new guidelines, the Company has determined that for certain hardware contracts in the United States, transfer of control and recognition of revenue can occur earlier. This resulted in an increase in accounts receivable, net and a decrease in the in-transit deferral recorded in other current assets.

Other assets. The adoption of the new revenue standard resulted in an increase in other assets due to capitalization of the costs to obtain a contract, as well as the accounts receivable, net of impacts discussed above.

Deferred revenue. The adoption of the new revenue standard resulted in a decline in deferred revenue due to earlier recognition of revenue for software licenses, and less of the aggregate transaction price being allocated to extended warranty. Deferred revenue was also reduced by the impact of variable consideration (i.e., price concessions, rebates, and refunds). The reduction in deferred revenue was partially offset by an increase resulting from the change in presentation of deferred costs on third-party software offerings, which are reported in other assets, and are either sold on a standalone basis or as an attached component of the Company's hardware offering. The Company previously reported the associated deferred revenue net of these deferred costs in deferred revenue.



15


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


Condensed Consolidated Statements of Income (Loss)
 
Three Months Ended
 
Six Months Ended
 
August 4, 2017
 
August 4, 2017
 
As Reported (a)
 
Revenue from Contracts with Customers
 
As Recast
 
As Reported (a)
 
Revenue from Contracts with Customers
 
As Recast
 
(in millions, except per share amounts)
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
Products
$
14,355

 
$
747

 
$
15,102

 
$
27,323

 
$
1,413

 
$
28,736

Services
4,944

 
(525
)
 
4,419

 
9,792

 
(1,007
)
 
8,785

Total net revenue
19,299

 
222

 
19,521

 
37,115

 
406

 
37,521

Cost of net revenue:
 
 
 
 
 
 
 
 
 
 
 
Products
12,378

 
397

 
12,775

 
23,837

 
761

 
24,598

Services
2,112

 
(334
)
 
1,778

 
4,167

 
(669
)
 
3,498

Total cost of net revenue
14,490

 
63

 
14,553

 
28,004

 
92

 
28,096

Gross margin
4,809

 
159

 
4,968

 
9,111

 
314

 
9,425

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Selling, general, and administrative
4,695

 
(155
)
 
4,540

 
9,364

 
(228
)
 
9,136

Research and development
1,093

 

 
1,093

 
2,226

 

 
2,226

Total operating expenses
5,788

 
(155
)
 
5,633

 
11,590

 
(228
)
 
11,362

Operating loss
(979
)
 
314

 
(665
)
 
(2,479
)
 
542

 
(1,937
)
Interest and other, net
(545
)
 

 
(545
)
 
(1,118
)
 
1

 
(1,117
)
Income (loss) before income taxes
(1,524
)
 
314

 
(1,210
)
 
(3,597
)
 
543

 
(3,054
)
Income tax provision (benefit)
(546
)
 
75

 
(471
)
 
(1,236
)
 
124

 
(1,112
)
Net income (loss)
(978
)
 
239

 
(739
)
 
(2,361
)
 
419

 
(1,942
)
Less: Net income (loss) attributable to non-controlling interests
(32
)
 
25

 
(7
)
 
(81
)
 
42

 
(39
)
Net income (loss) attributable to Dell Technologies Inc.
$
(946
)
 
$
214

 
$
(732
)
 
$
(2,280
)
 
$
377

 
$
(1,903
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - basic:
 
 
 
 
 
 
Class V Common Stock - basic
$
0.83

 
$
0.17

 
$
1.00

 
$
1.40

 
$
0.20

 
$
1.60

DHI Group - basic
$
(1.97
)
 
$
0.32

 
$
(1.65
)
 
$
(4.53
)
 
$
0.59

 
$
(3.94
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted:
 
 
 
 
 
 
Class V Common Stock - diluted
$
0.82

 
$
0.18

 
$
1.00

 
$
1.38

 
$
0.21

 
$
1.59

DHI Group - diluted
$
(1.97
)
 
$
0.31

 
$
(1.66
)
 
$
(4.54
)
 
$
0.59

 
$
(3.95
)
____________________
(a)
Amounts as reported in the Company's Quarterly Report on Form 10-Q for the quarterly period ended August 4, 2017.

The above impacts are summarized as follows:

Net revenue. The adoption of the new revenue standard resulted in an increase to net revenue due to earlier revenue recognition than permitted under the previous standard.



16


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


Products revenue vs. services revenue. The adoption of the new revenue standard resulted in a change to the classification of products revenue vs. services revenue, due to the following factors:

Under the new revenue standard, amounts within a contract are now allocated to the product and services performance obligations based on their respective standalone selling prices, which generally increases product revenue and decreases services revenue relative to previously reported results.
Further, third-party software licenses were previously recognized in services revenue as the Company could not separate the value of the software license from the associated maintenance agreement. Under the new revenue standard, the license value requires separation and will be recognized in product revenue and the value of the software maintenance will continue to be recognized in services revenue.

Operating expenses. The adoption of the new revenue standard resulted in a decrease to operating expenses due to the deferral of the incremental direct costs of obtaining a contract.

Selected Captions from the Condensed Consolidated Statement of Cash Flows
 
Six Months Ended
 
August 4, 2017
 
As Reported (a)
 
Classification of Certain Cash Receipts and Cash Payments
 
Statement of Cash Flows, Restricted Cash
 
As Recast
 
(in millions)
Change in cash from operating activities
$
2,056

 
$
32

 
$
17

 
$
2,105

Change in cash from investing activities
$
(1,290
)
 
$

 
$

 
$
(1,290
)
Change in cash from financing activities
$
(1,075
)
 
$
(32
)
 
$
30

 
$
(1,077
)
 
 
 
 
 
 
 
 
Change in cash, cash equivalents, and restricted cash
$
(261
)
 
$

 
$
47

 
$
(214
)
Cash, cash equivalents, and restricted cash at beginning of the period
9,474

 

 
358

 
9,832

Cash, cash equivalents, and restricted cash at end of the period
$
9,213

 
$

 
$
405

 
$
9,618

____________________
(a)
Amounts as reported in the Company's Quarterly Report on Form 10-Q for the quarterly period ended August 4, 2017.



17


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


NOTE 2 INTERIM UPDATE TO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As mentioned previously in Note 1 of the Notes to the Condensed Consolidated Financial Statements, the Company adopted amended guidance on the recognition of revenue from contracts with customers during the three months ended May 4, 2018, using the full retrospective method. The following accounting policies have been updated as part of the adoption of the new standard.

Revenue Recognition — The Company enters into a variety of agreements to provide a wide portfolio of products and services offerings to its customers. These agreements have varying requirements depending on the goods and services being sold, the rights and obligations conveyed, and the legal jurisdiction of the arrangement.

Revenue is recognized either over time or at a point in time, depending on when the underlying goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for delivering those goods or services. The following five steps are applied to recognize revenue:

(1)
Identify the contract with a customer. The term "contract" refers to the enforceable rights and obligations provided in an agreement between the Company and one or more other parties in exchange for payment. The Company evaluates facts and circumstances regarding sales transactions in order to identify contracts with its customers. An agreement must meet all of the following criteria to qualify as a contract eligible for revenue recognition under the model: (i) the contract must be approved by all parties; (ii) each party's rights regarding the goods and services to be transferred to the customer can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the customer has the ability and intent to pay and it is probable that the Company will collect substantially all of the consideration to which it will be entitled; and (v) the contract must have commercial substance. Judgment is used in determining the customer's ability and intent to pay, which is based upon various factors including the customer's historical payment experience or customer credit and financial information.
    
(2)
Identify the performance obligations in the contract.  Distinct promises within a contract are referred to as "performance obligations" and are accounted for as separate units of account. The Company assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such goods or services are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct); and (ii) the Company's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). The Company's performance obligations consist of a variety of products and services offerings which include: hardware, such as servers, storage, networking, personal computers, workstations, and peripherals; third-party software; proprietary software licenses; support and deployment services, which include hardware support that extends beyond the Company's standard warranties, software maintenance, and installation; professional services; training; software as a service ("SaaS"); and infrastructure as a service ("IaaS").

(3)
Determine the transaction price.  Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to the customer. If the consideration promised in a contract includes a variable amount, the Company estimates the amount to which it expects to be entitled using either the expected value or most likely amount method. The Company’s contracts may include terms that could cause variability in the transaction price, including, for example, rebates, sales returns, and volume discounts. In determining the transaction price, any variable consideration would be considered, to the extent applicable, if it is probable that a significant future reversal of cumulative revenue under the contract will not occur when the uncertainty associated with the variable consideration is resolved.

(4)
Allocate the transaction price to performance obligations in the contract. Many of the Company’s contracts include promises to transfer multiple products and services to a customer, and the transaction price must be allocated to each performance obligation in an amount that depicts the consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services. For these contracts with multiple performance obligations, the transaction price is allocated in proportion to the standalone selling price ("SSP") of each performance obligation.


18


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


If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation.

The best evidence of SSP is the observable price of a good or service when the Company sells that good or service separately in similar circumstances to similar customers. If a directly observable price is available, it must be utilized for the SSP. If a directly observable price is not available, the SSP must be estimated. The Company estimates SSP by considering multiple factors including, but not limited to, pricing practices, internal costs, and profit objectives as well as overall market conditions which include geographic or regional specific factors, competitive positioning, and competitor actions. SSP can include fixed and variable components. Variable components are estimated based on the most likely outcome or expected value of the variable components.

(5)
Recognize revenue when (or as) the performance obligation is satisfied. Revenue is recognized when obligations under the terms of the contract with the Company's customer are satisfied. Revenue is recognized either over time or at a point in time, depending on when the underlying products or services are transferred to the customer. Revenue is recognized at a point in time for products upon transfer of control. Revenue is recognized over time for support and deployment services, professional services, training, software support, SaaS, and IaaS.

The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrently with specific revenue-producing transactions.

The Company has elected the following practical expedients with the adoption of the new revenue standard:

The Company does not account for significant financing components if the period between revenue recognition and when the customer pays for the product or service will be one year or less.
The Company recognizes revenue equal to the amount it has a right to invoice when the amount corresponds directly with the value to the customer of the Company's performance to date.
The Company does not account for shipping and handling activities as a separate performance obligation, but rather as an activity performed to transfer the promised good.

The following summarizes the nature of revenue recognized and the manner in which the Company accounts for sales transactions.

Products

Product revenue consists of hardware and software license sales that are delivered, sold as a subscription or sold on a consumption basis. Hardware includes notebooks and desktop PCs, servers, storage hardware, and other hardware-related devices. Software license sales include non-essential, stand-alone software applications. Software applications provide customers with resource management, backup and archiving, information security, information management and intelligence, data analytics, and server virtualization capabilities.

Revenue from the sale of hardware products is recognized when control has transferred to the customer, which typically occurs when the hardware has been shipped to the customer, risk of loss has transferred to the customer, the Company has a present right to payment, and customer acceptance has been satisfied. Customer acceptance is satisfied if acceptance is obtained from the customer, if all acceptance provisions lapse, or if the Company has evidence that all acceptance provisions will be, or have been, satisfied. Revenue from software license sales is generally recognized when control has transferred to the customer, which is typically upon shipment, electronic delivery, or when the software is available for download by the customer. For certain arrangements, including software subscriptions and certain software license agreements which provide customers control to certain product performance obligations over time, revenue is recognized based on usage or ratably over the term of the arrangement based on the pattern of delivery of the product to the customer. 

Invoices for products are generally issued as control transfers, which is typically upon shipment or electronic delivery. There was no significant revenue in any period presented related to performance obligations satisfied or partially satisfied in prior periods.



19


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


Services

Services revenue consists of revenue from sales of support services, including hardware support that extends beyond the Company's standard warranties, software maintenance, and installation; professional services; training; SaaS; and IaaS. Revenue associated with undelivered performance obligations is deferred and recorded as control is transferred to the customer over time. Revenue from fixed-price support or maintenance contracts sold for both hardware and software is recognized on a straight-line basis over the period of performance because the Company is required to provide services at any given time. Other services revenue is recognized when the Company performs the services and the customers receive and consume the benefits.

Invoices for services may be issued at the start of a service term, which is typically the case for support and deployment services, or as services are rendered, which is typically the case for professional services, training, SaaS, and IaaS.

Other

Revenue from leasing arrangements is not subject to the revenue standard for contracts with customers, and remains separately accounted for under existing lease accounting guidance. The Company records revenue from the sale of equipment under sales-type leases as product revenue in an amount equal to the present value of minimum lease payments at the inception of the lease. Sales-type leases also produce financing income, which is included in products net revenue in the Consolidated Statements of Income (Loss) and is recognized at consistent rates of return over the lease term. The Company also offers qualified customers fixed-term loans and revolving credit lines for the purchase of products and services offered by the Company. Financing income attributable to these loans is recognized in products net revenue on an accrual basis.

Disaggregation of Revenue — The Company's revenue is presented on a disaggregated basis on the Condensed Consolidated Statements of Income (Loss) and in Note 18 of the Notes to the Condensed Consolidated Financial Statements based on an evaluation of disclosures outside of the financial statements, information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments, and other information that is used to evaluate the Company's financial performance or make resource allocations. This information includes revenue from products and services, revenue from reportable segments, and revenue by major product categories within the segments.

Contract Assets — Contract assets are rights to consideration in exchange for goods or services that the Company has transferred to a customer when such a right is conditional on something other than the passage of time. Such amounts have been insignificant to date.

Contract Liabilities — Contract liabilities primarily consist of deferred revenue. Deferred revenue is recorded when the Company has a right to invoice or payments have been received for undelivered products or services, or in situations where revenue recognition criteria have not been met. Deferred revenue also represents amounts received in advance for extended warranty services and software maintenance. Revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. The Company also has deferred revenue related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as the Company's performance obligations under the contract are completed. See Note 9 of the Notes to the Condensed Consolidated Financial Statements for additional information about deferred revenue.

Costs to Obtain a Contract The incremental direct costs of obtaining a contract primarily consist of sales commissions and employer taxes related to commission payments. The Company has elected, as a practical expedient, to expense as incurred costs to obtain a contract equal to or less than one year in duration. For contracts greater than one year in duration, the associated costs to obtain a contract are deferred and amortized over the period of contract performance or a longer period, generally the estimated life of the customer relationship, if renewals are expected and the renewal commission is not commensurate with the initial commission. Deferred costs to obtain a contract are typically amortized over a period of three to seven years, depending on the contract term and expectation of the period of benefit for the costs, which may exceed the contract term. Amortization expense is recognized on a straight-line basis and included in selling, general, and administrative expenses in the Condensed Consolidated Statements of Income (Loss). The Company periodically reviews these deferred costs to determine whether events or changes in circumstances have occurred that could impact the carrying value or period of


20


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


benefit of the deferred sales commissions. There were no material impairment losses for deferred sales commissions during the six months ended August 3, 2018 and August 4, 2017.

Deferred costs to obtain a contract as of August 3, 2018 and February 2, 2018 were $1.0 billion and $0.8 billion, respectively. Deferred costs to obtain a contract are classified as current assets and other non-current assets on the Condensed Consolidated Statements of Financial Position, based on when the expense is expected to be recognized. Amortization of costs to obtain a contract during the three months ended August 3, 2018 and August 4, 2017 was $113 million and $62 million, respectively. Amortization of costs to obtain a contract during the six months ended August 3, 2018 and August 4, 2017 was $219 million and $115 million, respectively.



21


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


NOTE 3 — 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 August 3, 2018 and February 2, 2018:
 
August 3, 2018 (a)
 
February 2, 2018
 
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
$
11,662

 
$

 
$

 
$
11,662

 
$
8,641

 
$

 
$

 
$
8,641

U.S. corporate debt securities

 

 

 

 

 
23

 

 
23

U.S. government and agencies

 
8

 

 
8

 

 

 

 

Foreign corporate debt securities

 

 

 

 

 
65

 

 
65

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
623

 
318

 

 
941

 
682

 
392

 

 
1,074

U.S. corporate

 
1,863

 

 
1,863

 

 
2,003

 

 
2,003

Foreign

 
2,323

 

 
2,323

 

 
2,547

 

 
2,547

Equity and other securities
430

 
14

 

 
444

 
236

 
5

 

 
241

Derivative instruments

 
311

 

 
311

 

 
83

 

 
83

Total assets
$
12,715

 
$
4,837

 
$

 
$
17,552

 
$
9,559

 
$
5,118

 
$

 
$
14,677

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative instruments
$

 
$
42

 
$

 
$
42

 
$

 
$
184

 
$

 
$
184

Total liabilities
$

 
$
42

 
$

 
$
42

 
$

 
$
184

 
$

 
$
184

____________________
(a) The Company did not transfer any securities between levels during the six months ended August 3, 2018.

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 August 3, 2018, 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,


22


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


including benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers, and other market related data, are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset. Inputs are documented in accordance with the fair value measurements hierarchy. The Company reviews security pricing and assesses liquidity on a quarterly basis. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for additional information about investments.

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 7 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 8 of the Notes to the Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets.

As of August 3, 2018 and February 2, 2018, the Company held strategic investments of $582 million and $485 million, respectively. As these investments represent early-stage companies without readily determinable fair values, they are not included in the recurring fair value table above.

The Company has elected to apply the measurement alternative for these investments. Under the alternative, the Company measures investments without readily determinable fair values at cost, less impairment, adjusted by observable price changes. The Company must make a separate election to use the alternative for each eligible investment and is required to reassess at each reporting period whether an investment qualifies for the alternative. In evaluating these investments for impairment or observable price changes, 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.

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 6 of the Notes to the Condensed Consolidated Financial Statements, including the current portion, as of the dates indicated:
 
August 3, 2018
 
February 2, 2018
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(in billions)
Senior Secured Credit Facilities
$
10.3

 
$
10.5

 
$
10.4

 
$
10.6

First Lien Notes
$
19.7

 
$
21.3

 
$
19.7

 
$
21.9

Unsecured Notes and Debentures
$
1.8

 
$
2.0

 
$
2.3

 
$
2.5

Senior Notes
$
3.1

 
$
3.4

 
$
3.1

 
$
3.4

EMC Notes
$
3.0

 
$
2.9

 
$
5.5

 
$
5.4

VMware Notes
$
4.0

 
$
3.9

 
$
4.0

 
$
3.9

Margin Loan Facility
$
2.0

 
$
2.0

 
$
2.0

 
$
2.0


The fair values of the outstanding debt shown in the table above, as well as the DFS debt described in Note 5 of the Notes to the Condensed Consolidated Financial Statements, 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 value of DFS debt approximates carrying value.



23


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


NOTE 4 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.
 
August 3, 2018
 
February 2, 2018
 
Cost
 
Unrealized Gain
 
Unrealized (Loss)
 
Carrying Value
 
Cost
 
Unrealized Gain
 
Unrealized (Loss)
 
Carrying Value
 
(in millions)
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
501

 
$

 
$
(2
)
 
$
499

 
$
485

 
$

 
$
(2
)
 
$
483

U.S. corporate debt securities
819

 

 
(3
)
 
816

 
660

 

 
(2
)
 
658

Foreign debt securities
1,192

 

 
(3
)
 
1,189

 
1,048

 

 
(2
)
 
1,046

Total short-term investments
2,512

 

 
(8
)
 
2,504

 
2,193

 

 
(6
)
 
2,187

U.S. government and agencies
450

 

 
(8
)
 
442

 
600

 

 
(9
)
 
591

U.S. corporate debt securities
1,067

 

 
(20
)
 
1,047

 
1,361

 

 
(16
)
 
1,345

Foreign debt securities
1,155

 

 
(21
)
 
1,134

 
1,518

 

 
(17
)
 
1,501

Equity and other securities (a)
717

 
309

 

 
1,026

 
640

 
86

 

 
726

Total long-term investments
3,389

 
309

 
(49
)
 
3,649

 
4,119

 
86

 
(42
)
 
4,163

Total investments
$
5,901

 
$
309

 
$
(57