Dell Revises Fiscal 2011 First Quarter Results to Reflect Potential Legal Liability
ROUND ROCK, Texas--(BUSINESS WIRE)-- Dell today said as a result of ongoing discussions with the staff of the U.S. Securities and Exchange Commission (SEC), the company recorded a $100 million liability in its first quarter of Fiscal 2011 to establish a reserve for the potential settlement by the company of the previously reported SEC investigation. The settlement would involve a civil injunctive action against the company for alleged violations of certain federal securities laws, including the antifraud provisions of federal securities laws, relating to certain accounting and financial reporting matters. The settlement would also include negligence-based fraud charges, as well as other non-fraud based charges, relating to the company's disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of its commercial relationship with Intel Corp.
In addition, the company reported that Michael Dell, Chairman and CEO, and the SEC staff have recently commenced discussion of a settlement framework relating to Mr. Dell that would resolve allegations relating to the company's disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of the company's commercial relationship with Intel Corp. Any such settlement by Mr. Dell would involve alleged violations of negligence-based fraud provisions of the federal securities laws, as well as other non-fraud based provisions, and would not include any bar against Mr. Dell's service as an officer and director of a public company. Any settlement would be made without admitting or denying the SEC's allegations.
"We are hopeful that these settlement discussions will achieve a comprehensive resolution in the near future. The independent directors of the Board have affirmed that Michael Dell will continue to lead the company as its Chairman and CEO, and he continues to have our complete confidence and support," said Sam Nunn, presiding director of the Dell Board.
The investigation of the company began in 2005. In response, Dell undertook an independent investigation, completed in 2007, which led to a restatement of certain historical financial reports and implementation of extensive remedial measures.
Because this latest development in Dell's discussions with the SEC staff occurred before Dell filed its Quarterly Report on Form 10-Q for its first quarter of Fiscal 2011, the company revised its previously announced financial results and recorded a liability for the potential settlement involving the company. The Form 10-Q report for the company's first fiscal quarter was filed today.
As a result of the liability recorded, the company's net income on a GAAP basis for the first quarter of Fiscal 2011 has been reduced by $100 million, or 5 cents per share. Results on a non-GAAP basis did not change.
The following table summarizes the revised results for the first quarter of Fiscal 2011 and provides a comparison to the first quarter of Fiscal 2010:
First Quarter
(in millions, except share data) FY11 FY10 Change
Revenue $14,874 $12,342 21%
Operating Income (GAAP) $519 $414 25%
Net Income (GAAP) $341 $290 18%
EPS (GAAP) $0.17 $0.15 13%
Operating Income (non-GAAP) $824 $638 29%
Net Income (non-GAAP) $584 $486 20%
EPS (non-GAAP) $0.30 $0.25 20%
Information about Dell's use of non-GAAP financial information is provided under "Non-GAAP Financial Measures" below. Non-GAAP financial information excludes costs related to the amortization of purchased intangibles, severance and facility-action costs, acquisition-related charges and accruals for a potential settlement with the SEC as well as a provision for settlement of securities class-action litigation. All comparisons in this press release are year over year unless otherwise noted.
Discussions concerning the potential settlements involving the company and Mr. Dell are ongoing. No assurance can be given as to when any settlement might occur or as to the final terms and conditions of any settlement. Any settlement recommended by the SEC staff would be subject to approval by the Commission.
About Dell
Dell Inc. (NASDAQ: DELL) listens to customers and delivers worldwide innovative technology, business solutions and services they trust and value. For more information, visit www.dell.com.
Non-GAAP Financial Measures:
This press release includes information about non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share (collectively the "non-GAAP financial measures"), which are not measurements of financial performance prepared in accordance with U.S. generally accepted accounting principles. In the following tables, Dell has provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure under the heading "Reconciliation of Non-GAAP Financial Measures" and has presented a detailed discussion of its reasons for including the non-GAAP financial measures and the limitations associated with those measures under the heading "Use of Non-GAAP Financial Measures." Dell encourages investors to review the reconciliation and the non-GAAP discussion in conjunction with Dell's presentation of these non-GAAP financial measures.
Forward-Looking Statements:
Statements in this press release that relate to future results and events (including statements about a potential settlement of the SEC investigation) are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on Dell's current expectations. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including that Dell can give no assurance as to the ultimate outcome of the SEC investigation, when any settlement with the SEC might occur, the terms or conditions of any settlement, or the potential impact of any resolution of this matter on Dell's business, as well as the other risks and uncertainties discussed in Dell's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for its fiscal year ended January 29, 2010. Dell assumes no obligation to update its forward-looking statements.
Revised consolidated statements of income, financial position and cash flows and other financial data follow.
Dell is a trademark of Dell Inc.
Dell disclaims any proprietary interest in the marks and names of others.
DELL INC.
Condensed Consolidated Statement of Income and Related Financial Highlights
(in millions, except per share data and percentages)
(unaudited)
Three Months Ended % Growth Rates
April 30, January 29, May 1,
2010(1) 2010(1) 2009 Sequential Yr. to Yr.
Net revenue
Products $ 12,086 $ 12,096 $ 10,232 0 % 18 %
Services, including 2,788 2,804 2,110 (1 %) 32 %
software related
Net revenue 14,874 14,900 12,342 0 % 21 %
Cost of net revenue
Products 10,385 10,501 8,786 (1 %) 18 %
Services, including 1,973 1,930 1,388 2 % 42 %
software related
Total cost of net 12,358 12,431 10,174 (1 %) 21 %
revenue
Gross margin 2,516 2,469 2,168 2 % 16 %
Selling, general 1,830 1,780 1,613 3 % 13 %
and administrative
Research,
development and 167 179 141 (7 %) 18 %
engineering
Total operating 1,997 1,959 1,754 2 % 14 %
expenses
Operating income 519 510 414 2 % 25 %
Interest and other, (68 ) (41 ) (2 ) (67 %) NM
net
Income before 451 469 412 (4 %) 9 %
income taxes
Income tax 110 135 122 (18 %) (10 %)
provision
Net income $ 341 $ 334 $ 290 2 % 18 %
Earnings per share:
Basic $ 0.17 $ 0.17 $ 0.15 0 % 13 %
Diluted $ 0.17 $ 0.17 $ 0.15 0 % 13 %
Weighted average
shares outstanding:
Basic 1,961 1,957 1,949 0 % 1 %
Diluted 1,973 1,971 1,952 0 % 1 %
Percentage of Total
Net Revenue:
Gross margin 16.9 % 16.6 % 17.6 %
Selling, general 12.3 % 12.0 % 13.1 %
and administrative
Research and 1.1 % 1.2 % 1.1 %
development
Operating expenses 13.4 % 13.2 % 14.2 %
Operating income 3.5 % 3.4 % 3.4 %
Income before 3.0 % 3.2 % 3.3 %
income taxes
Net income 2.3 % 2.2 % 2.3 %
Income tax rate 24.4 % 28.7 % 29.6 %
Net Revenue by
Product Category:
Servers and $ 1,785 $ 1,804 $ 1,286 (1 %) 39 %
Networking
Storage 554 599 534 (8 %) 4 %
Services(1) 1,891 1,922 1,238 (2 %) 53 %
Software and 2,496 2,477 2,246 1 % 11 %
Peripherals
Mobility 4,563 4,653 3,875 (2 %) 18 %
Desktop PCs 3,585 3,445 3,163 4 % 13 %
Consolidated net $ 14,874 $ 14,900 $ 12,342 0 % 21 %
revenue
Percentage of Total
Net Revenue:
Servers and 12 % 12 % 10 %
Networking
Storage 4 % 4 % 4 %
Services(1) 13 % 13 % 10 %
Software and 17 % 17 % 18 %
Peripherals
Mobility 30 % 31 % 32 %
Desktop PCs 24 % 23 % 26 %
Net Revenue by
Global Segment:
Large Enterprise $ 4,246 $ 4,197 $ 3,400 1 % 25 %
Public 3,856 3,820 3,171 1 % 22 %
Small and Medium 3,524 3,336 2,967 6 % 19 %
Business
Consumer 3,248 3,547 2,804 (8 %) 16 %
Consolidated net $ 14,874 $ 14,900 $ 12,342 0 % 21 %
revenue
Percentage of Total
Net Revenue:
Large Enterprise 28 % 28 % 27 %
Public 26 % 26 % 26 %
Small and Medium 24 % 22 % 24 %
Business
Consumer 22 % 24 % 23 %
Consolidated
Operating Income:
Large Enterprise $ 283 $ 281 $ 192
Public 298 333 293
Small and Medium 313 282 230
Business
Consumer 17 9 (1 )
Consolidated
segment operating 911 905 714
income
Severance and (57 ) (86 ) (185 )
facility actions
Broad based
long-term (87 ) (107 ) (76 )
incentives
Amortization of (88 ) (86 ) (39 )
intangible assets
Acquisition-related (20 ) (116 ) -
Other(2) (140 ) - -
Consolidated $ 519 $ 510 $ 414
operating income
Note: Percentage growth rates and ratios are calculated based on underlying data in thousands.
(1) Includes the results of Perot Systems Corporation ("Perot Systems"), which was acquired on November 3, 2009, from the date of acquisition.
(2) Includes a $100 million liability for a potential settlement of the SEC investigation and a $40 million securities litigation accrual.
DELL INC.
Condensed Consolidated Statement of Financial Position and Related Financial
Highlights
(in millions, except for "Ratios")
(unaudited)
April 30, January 29, May 1,
2010 2010 2009
Assets:
Current assets:
Cash and cash equivalents $ 10,255 $ 10,635 $ 9,691
Short-term investments 627 373 434
Accounts receivable, net 5,880 5,837 4,278
Financing receivables, net 3,221 2,706 1,775
Inventories, net 1,182 1,051 842
Other 3,619 3,643 2,890
Total current assets 24,784 24,245 19,910
Property, plant and equipment, net 2,049 2,181 2,181
Investments 714 781 568
Long-term financing receivables, net 528 332 445
Goodwill 4,181 4,074 1,742
Purchased intangible assets, net 1,658 1,694 684
Other non-current assets 327 345 659
Total assets $ 34,241 $ 33,652 $ 26,189
Liabilities and Equity:
Current liabilities:
Short-term debt $ 1,079 $ 663 $ 101
Accounts payable 11,402 11,373 7,844
Accrued and other 3,549 3,884 3,464
Short-term deferred services revenue 2,950 3,040 2,732
Total current liabilities 18,980 18,960 14,141
Long-term debt 3,582 3,417 2,396
Long-term deferred services revenue 3,194 3,029 2,954
Other non-current liabilities 2,607 2,605 2,468
Total liabilities 28,363 28,011 21,959
Stockholders' equity 5,878 5,641 4,230
Total liabilities and equity $ 34,241 $ 33,652 $ 26,189
Ratios:
Days of sales outstanding (1) 38 38 34
Days supply in inventory 9 8 7
Days in accounts payable (83 ) (82 ) (69 )
Cash conversion cycle (36 ) (36 ) (28 )
Average total revenue/unit (approximate) $ 1,360 $ 1,340 $ 1,360
Note: Ratios are calculated based on underlying data in thousands.
(1) Days of sales outstanding ("DSO") is based on the ending net trade receivables and most recent quarterly revenue for each period. DSO includes the effect of product costs related to customer shipments not yet recognized as revenue that are classified in the other current assets. At April 30, 2010, January 29, 2010, and May 1, 2009, DSO and days of customer shipments not yet recognized were 35 and 3 days, 35 and 3 days, 31 and 3 days, respectively.
DELL INC.
Condensed Consolidated Statements of Cash Flows
(in millions, unaudited)
Three Months Ended
April 30, May 1,
2010 2009(1)
Cash flows from operating activities:
Net income $ 341 $ 290
Adjustments to reconcile net income to net cash provided
by
operating activities:
Depreciation and amortization 247 201
Stock-based compensation 76 67
Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies 30 -
Deferred income taxes (31 ) (26 )
Provision for doubtful accounts - including financing 122 105
receivables
Other - 18
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (119 ) 380
Financing receivables (208 ) (27 )
Inventories (132 ) 24
Other assets 69 547
Accounts payable 22 (483 )
Deferred services revenue 72 (25 )
Accrued and other liabilities (251 ) (310 )
Change in cash from operating activities 238 761
Cash flows from investing activities:
Investments:
Purchases (350 ) (428 )
Maturities and sales 169 642
Capital expenditures (46 ) (80 )
Acquisition of business, net of cash received (133 ) (3 )
Change in cash from investing activities (360 ) 131
Cash flows from financing activities:
Repurchase of common stock (200 ) -
Issuance of common stock under employee plans 7 -
Issuance of commercial paper (maturity 90 days or less), 234 -
net
Proceeds from debt 268 497
Repayments of debt (566 ) (12 )
Other 3 -
Change in cash from financing activities (254 ) 485
Effect of exchange rate changes on cash and cash (4 ) (38 )
equivalents
Change in cash and cash equivalents (380 ) 1,339
Cash and cash equivalents at beginning of period 10,635 8,352
Cash and cash equivalents at end of period $ 10,255 $ 9,691
(1) Prior period amounts have been reclassified to conform to the current year presentation.
SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES
The tables on the following pages set forth, for the periods indicated, a reconciliation of non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share (collectively, the "non-GAAP financial measures") to the most comparable GAAP financial measures. These non-GAAP financial measures may not be directly comparable to similarly titled measures reported by other companies. See "Use of Non-GAAP Financial Measures" following the tables for additional information regarding Dell's reasons for including the non-GAAP financial measures and for material limitations with respect to the usefulness of these measures.
DELL INC.
Reconciliation of Non-GAAP Financial Measures
(in millions, except per share data and percentages)
(unaudited)
Three Months Ended % Growth Rates
April 30, January 29, May 1,
2010 2010 2009 Sequential Yr. to Yr.
GAAP gross margin $ 2,516 $ 2,469 $ 2,168 2 % 16 %
Non-GAAP
adjustments:
Amortization of 68 71 26
intangibles
Severance and 29 55 65
facility actions
Acquisition-related 1 1 -
Non-GAAP gross $ 2,614 $ 2,596 $ 2,259 1 % 16 %
margin
GAAP operating $ 1,997 $ 1,959 $ 1,754 2 % 14 %
expenses
Non-GAAP
adjustments:
Amortization of (20 ) (15 ) (13 )
intangibles
Severance and (28 ) (31 ) (120 )
facility actions
Acquisition-related (19 ) (115 ) -
Other(1) (140 ) - -
Non-GAAP operating $ 1,790 $ 1,798 $ 1,621 0 % 10 %
expenses
GAAP operating $ 519 $ 510 $ 414 2 % 25 %
income
Non-GAAP
adjustments:
Amortization of 88 86 39
intangibles
Severance and 57 86 185
facility actions
Acquisition-related 20 116 -
Other(1) 140 - -
Non-GAAP operating $ 824 $ 798 $ 638 3 % 29 %
income
GAAP net income $ 341 $ 334 $ 290 2 % 18 %
Non-GAAP
adjustments:
Amortization of 88 86 39
intangibles
Severance and 57 86 185
facility actions
Acquisition-related 20 116 -
Other(1) 140 - -
Aggregate
adjustment for (62 ) (78 ) (28 )
income taxes
Non-GAAP net Income $ 584 $ 544 $ 486 7 % 20 %
GAAP earnings per $ 0.17 $ 0.17 $ 0.15 0 % 13 %
share - diluted
Non-GAAP
adjustments per 0.13 0.11 0.10
share - diluted
Non-GAAP earnings $ 0.30 $ 0.28 $ 0.25 7 % 20 %
per share - diluted
GAAP Diluted WAS 1,973 1,971 1,952
Percentage of Total
Net Revenue:
GAAP gross margin 16.9 % 16.6 % 17.6 %
Non-GAAP adjustment 0.7 % 0.8 % 0.7 %
Non-GAAP gross 17.6 % 17.4 % 18.3 %
margin
GAAP operating 13.4 % 13.2 % 14.2 %
expenses
Non-GAAP adjustment (1.4 %) (1.1 %) (1.1 %)
Non-GAAP operating 12.0 % 12.1 % 13.1 %
expenses
GAAP operating 3.5 % 3.4 % 3.4 %
income
Non-GAAP adjustment 2.0 % 2.0 % 1.8 %
Non-GAAP operating 5.5 % 5.4 % 5.2 %
income
Note: Percentage growth rates and ratios are calculated based on underlying data in thousands.
(1) Includes a $100 million liability for a potential settlement of the SEC investigation and a $40 million securities litigation accrual.
USE OF NON-GAAP FINANCIAL MEASURES
Dell provides non-GAAP financial information to investors to supplement GAAP financial information. Dell believes that excluding certain items from Dell's GAAP results allows Dell's management to better understand Dell's consolidated financial performance from period to period and in relationship to the operating results of Dell's segments, as management does not believe that the excluded items are reflective of underlying operating performance. The non-GAAP financial measures, as defined by Dell, represent the comparable GAAP measures adjusted to exclude acquisition related charges primarily related to our acquisition of Perot Systems in the fourth quarter of Fiscal 2010, amortization of purchased intangible assets related to acquisitions, severance and facility action costs, and accruals for a potential settlement of the SEC investigation as well as a provision for a securities litigation matter that were accrued for the first quarter of Fiscal 2011. In the future, Dell expects that it may again exclude such items and may incur expenses similar to these excluded items, including in connection with any future acquisitions. Accordingly, the exclusion of these items and other similar items in Dell's non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual. Dell believes the non-GAAP financial measures will provide investors with useful information to help them evaluate Dell's operating results. These non-GAAP financial measures facilitate an enhanced understanding of historical results and enable more meaningful period to period comparisons.
This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for gross margin, operating expenses, operating income, net income, and earnings per share prepared in accordance with GAAP.
The non-GAAP financial measures for the periods indicated in the tables above reflect adjustments related to the following items:
-- Acquisition-related charges are expensed as incurred and consist
primarily of cash compensation payments, retention payments, integration
costs, bankers' fees, legal fees, and consulting fees that are primarily
attributable to the acquisition of Perot Systems. The cash compensation
payments include payments that were triggered by the acquisition made to
Perot Systems employees who are now employed with Dell. Retention
payments include stock-based compensation and cash incentives awarded to
employees, which are recognized over the vesting period. Integration
costs include incremental business costs that are directly attributable
to the acquisition of Perot Systems and that are incurred during the
integration period. These costs primarily include IT costs related to
the integration of IT systems and processes, costs related to the
integration of Perot Systems employees, costs related to full-time
employees who are working on the integration, and consulting expenses.
Acquisition-related charges are inconsistent in amount and are
significantly impacted by the timing and nature of acquisitions.
Therefore, although Dell may incur these types of expenses in connection
with future acquisitions, Dell believes eliminating the expenses
relating to the Perot Systems acquisition for purposes of calculating
the non-GAAP financial measures facilitates a more meaningful evaluation
of Dell's current operating performance and comparisons to Dell's past
operating performance.
-- Amortization of purchased intangible assets consists primarily of
amortization of customer relationships, customer lists, acquired
technology, trade names, and non-compete covenants purchased in
connection with business acquisitions. Dell incurs charges relating to
the amortization of these intangibles, and those charges are included in
Dell's GAAP financial statements. Amortization charges for Dell's
purchased intangible assets are inconsistent in amount and are
significantly impacted by the timing and magnitude of Dell's
acquisitions. Consequently, Dell excludes these charges for purposes of
calculating the non-GAAP financial measures to facilitate a more
meaningful evaluation of Dell's current operating performance and
comparisons to Dell's past operating performance.
-- Severance and facility action costs primarily relate to facilities
charges including accelerated depreciation and to severance and benefits
for employees terminated pursuant to actions taken as part of a
comprehensive review of costs. Management measures the performance of
Dell excluding the effects of severance and facility action costs and
has been, for recent quarters, providing the effects to investors to
supplement GAAP financial information. Dell excludes these severance and
facility action costs for purposes of calculating the non-GAAP financial
measures because it believes that these historical costs do not reflect
expected future operating expenses and do not contribute to a meaningful
evaluation of Dell's current operating performance or comparisons to
Dell's past operating performance.
-- For the first quarter of Fiscal 2011, Dell recorded a $100 million
liability related to a potential settlement of the SEC investigation,
which was initiated in 2005. Dell also accrued $40 million for a
securities litigation class action lawsuit that was filed against Dell
during Fiscal 2007. Dell is excluding these settlements for the purpose
of calculating the non-GAAP financial measures because it believes these
settlements are outside Dell's ordinary course of business and do not
contribute to a meaningful evaluation of Dell's current operating
performance.
-- The aggregate adjustment for income taxes is the estimated combined
income tax effect for the adjustments mentioned above. The tax effects
are determined based on the jurisdictions where the adjustments were
incurred.
There are limitations to the use of non-GAAP financial measures. Other companies, including companies in Dell's industry, may calculate the non-GAAP financial measures differently than Dell does, limiting the usefulness of those measures for comparative purposes. In addition, items such as amortization of purchased intangible assets represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in the non-GAAP financial measures and such measures, therefore, do not reflect the full economic effect of such loss. Lastly, items such as severance and facility action costs and acquisition expenses that are excluded from the non-GAAP financial measures can have a material impact on earnings. Dell's management compensates for the foregoing limitations by relying primarily on Dell's GAAP results and using non-GAAP financial measures only supplementally. Non-GAAP financial measures are not an alternative to GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Dell provides detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure within the financial information included with this press release and in other written materials that include the non-GAAP financial measures, and Dell encourages investors to review the reconciliations in conjunction with the presentation of any non-GAAP financial measures.
Source: Dell Inc.
Released June 10, 2010