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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
 
 
 
 
☒
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2016
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: 333-208524
 
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)

Denali Holding Inc.
(Former name or former address, if changed since last report.)

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 ☒ 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
 
Accelerated filer ☐
Non-accelerated filer ☒ (Do not check if a smaller reporting company)
 
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of the close of business on August 29, 2016, there were 306,528,252 shares of Dell Technologies Inc. Series A common stock outstanding, 98,181,818 shares of Dell Technologies Inc. Series B common stock outstanding, and 327,561 shares of Dell Technologies Inc. Series C common stock outstanding.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements.” The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks described in the section titled “Risk Factors — Risk Factors Relating to Denali, Dell and EMC — Risk Factors Relating to Denali and Dell” of the proxy statement/prospectus dated June 6, 2016 forming part of our registration statement on Form S-4 (Registration No. 333-208524) filed with the Securities and Exchange Commission. We changed our name from Denali Holding Inc. to Dell Technologies Inc. on August 25, 2016. Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances, including unanticipated events, after the date as of which such statement was made.



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TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS
DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions; unaudited)
 
July 29, 2016
 
January 29, 2016
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
7,226

 
$
6,322

Accounts receivable, net
5,257

 
4,848

Short-term financing receivables, net
2,867

 
2,915

Inventories, net
1,446

 
1,619

Other current assets
3,326

 
3,497

Current assets held for sale
4,125

 
4,372

Total current assets
24,247

 
23,573

Restricted cash (Note 5)
23,285

 
—

Property, plant, and equipment, net
1,562

 
1,649

Long-term investments
104

 
114

Long-term financing receivables, net
2,271

 
2,177

Goodwill
8,406

 
8,406

Intangible assets, net
7,595

 
8,577

Other non-current assets
1,446

 
626

Total assets
$
68,916

 
$
45,122

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

 
 

Short-term debt
$
2,500

 
$
2,981

Accounts payable
14,050

 
12,746

Accrued and other
3,835

 
4,217

Short-term deferred revenue
3,916

 
3,632

Current liabilities held for sale
1,522

 
1,829

Total current liabilities
25,823

 
25,405

Long-term debt (Note 5)
33,836

 
10,650

Long-term deferred revenue
4,154

 
4,089

Other non-current liabilities
2,733

 
3,406

Total liabilities
66,546

 
43,550

Commitments and contingencies (Note 9)


 


Redeemable shares
179

 
106

Stockholders' equity:
 
 
 
Common stock and capital in excess of $.01 par value, net of treasury stock; shares authorized: 700 (Series A: 350, Series B: 150, Series C: 200); shares issued and outstanding: 405 (Series A: 307, Series B: 98) and 405 (Series A: 307, Series B: 98), respectively
5,682

 
5,727

Accumulated deficit
(3,309
)
 
(3,937
)
Accumulated other comprehensive loss
(308
)
 
(324
)
Total Dell Technologies Inc. stockholders’ equity
2,065

 
1,466

Non-controlling interest
126

 
—

Total stockholders' equity
2,191

 
1,466

Total liabilities, redeemable shares, and stockholders' equity
$
68,916

 
$
45,122

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


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DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in millions, except per share amounts; unaudited)

 
Three Months Ended
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
July 29, 2016
 
July 31, 2015
Net revenue:
 
 
 

 
 

 
 
Products
$
10,961

 
$
10,938

 
$
21,144

 
$
21,462

Services, including software related
2,089

 
2,037

 
4,119

 
4,038

Total net revenue
13,050

 
12,975

 
25,263

 
25,500

Cost of net revenue:
 
 
 
 
 
 
 
Products
9,495

 
9,663

 
18,294

 
19,027

Services, including software related
1,226

 
1,233

 
2,453

 
2,482

Total cost of net revenue
10,721

 
10,896

 
20,747

 
21,509

Gross margin
2,329

 
2,079

 
4,516

 
3,991

Operating expenses:
 
 
 
 
 
 
 
Selling, general, and administrative
2,020

 
1,932

 
4,086

 
3,900

Research, development, and engineering
246

 
250

 
510

 
505

Total operating expenses
2,266

 
2,182

 
4,596

 
4,405

Operating income (loss)
63

 
(103
)
 
(80
)
 
(414
)
Interest and other, net
(349
)
 
(222
)
 
(568
)
 
(397
)
Loss from continuing operations before income taxes
(286
)
 
(325
)
 
(648
)
 
(811
)
Income tax provision (benefit)
(22
)
 
(33
)
 
42

 
(73
)
Net loss from continuing operations
(264
)
 
(292
)
 
(690
)
 
(738
)
Income (loss) from discontinued operations, net of income taxes
836

 
27

 
1,317

 
(31
)
Net income (loss)
572

 
(265
)
 
627

 
(769
)
Less: Net loss attributable to non-controlling interests
(1
)
 
—

 
(1
)
 
—

Net income (loss) attributable to Dell Technologies Inc.
$
573

 
$
(265
)
 
$
628

 
$
(769
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - basic:
Continuing operations
$
(0.65
)
 
$
(0.72
)
 
$
(1.70
)
 
$
(1.82
)
Discontinued operations
2.06

 
0.07

 
3.25

 
(0.08
)
Basic
$
1.41

 
$
(0.65
)
 
$
1.55

 
$
(1.90
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted:
Continuing operations
$
(0.65
)
 
$
(0.72
)
 
$
(1.70
)
 
$
(1.82
)
Discontinued operations
2.06

 
0.07

 
3.25

 
(0.08
)
Diluted
$
1.41

 
$
(0.65
)
 
$
1.55

 
$
(1.90
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
405

 
405

 
405

 
405

Diluted
405

 
405

 
405

 
405

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


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DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions; unaudited)

 
Three Months Ended
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
July 29, 2016
 
July 31, 2015
Net income (loss)
$
572

 
$
(265
)
 
$
627

 
$
(769
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(37
)
 
(14
)
 
42

 
(47
)
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
Change in unrealized gains (losses)
58

 
66

 
(107
)
 
60

Reclassification adjustment for net (gains) losses included in net income (loss)
27

 
(88
)
 
81

 
(272
)
Net change
85

 
(22
)
 
(26
)
 
(212
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss), net of tax benefit (expense) of $(6) and $(5), respectively and $5 and $8, respectively
48

 
(36
)
 
16

 
(259
)
Comprehensive income (loss), net of tax
620

 
(301
)
 
643

 
(1,028
)
Less: Net loss attributable to non-controlling interests
(1
)
 
—

 
(1
)
 
—

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

 
—

 
—

 
—

Comprehensive income (loss) attributable to Dell Technologies Inc.
$
621

 
$
(301
)
 
$
644

 
$
(1,028
)

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




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DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited; continued on next page)
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
Cash flows from operating activities:
 
Net income (loss)
$
627

 
$
(769
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,321

 
1,437

Stock-based compensation expense
34

 
34

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
47

 
53

Deferred income taxes
(1,619
)
 
(216
)
Provision for doubtful accounts — including financing receivables
45

 
76

Other
50

 
49

Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
(380
)
 
(175
)
Financing receivables
(74
)
 
(268
)
Inventories
171

 
150

Other assets
127

 
298

Accounts payable
1,232

 
68

Deferred revenue
286

 
459

Accrued and other liabilities
(52
)
 
(464
)
Change in cash from operating activities
1,815

 
732

Cash flows from investing activities:
 
 
 
Investments:
 
 
 

Purchases
(8
)
 
(26
)
Maturities and sales
18

 
1

Capital expenditures
(235
)
 
(230
)
Proceeds from sale of facilities, land, and other assets
19

 
85

Collections on purchased financing receivables
25

 
49

Divestitures of businesses, net of cash transferred
—

 
8

Other
(40
)
 
—

Change in cash from investing activities
(221
)
 
(113
)

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














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DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued; in millions; unaudited)
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
Cash flows from financing activities:
 
 
 
Payment of dissenting shares obligation
(446
)
 
—

Repurchases of common stock
(2
)
 
—

Contributions from non-controlling interests, net
100

 
—

Issuance of common stock under employee plans
—

 
2

Payments for debt issuance costs
(15
)
 
(7
)
Proceeds from debt
2,148

 
3,078

Repayments of debt
(2,638
)
 
(2,749
)
Other
4

 
3

Change in cash from financing activities
(849
)
 
327

Effect of exchange rate changes on cash and cash equivalents
52

 
(50
)
Change in cash and cash equivalents
797

 
896

Cash and cash equivalents at beginning of the period
6,576

 
5,398

Cash and cash equivalents at end of the period
$
7,373

 
$
6,294

Less: Cash included in assets held for sale
147

 
295

Cash and cash equivalents from continuing operations
$
7,226

 
$
5,999


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


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

NOTE 1 — EMC MERGER TRANSACTION, DIVESTITURES AND BASIS OF PRESENTATION

EMC Merger Transaction — On October 12, 2015, Dell Technologies Inc. (formerly Denali Holding Inc., referred to as Parent or Dell Technologies) entered into an agreement and plan of merger (the “EMC merger agreement”) with EMC Corporation (“EMC”), Dell Inc. (“Dell”) and Universal Acquisition Co., a direct wholly-owned subsidiary of Parent (“EMC Merger Sub”). Pursuant to the EMC merger agreement, EMC Merger Sub will merge with and into EMC (“the EMC merger”), with EMC continuing as the surviving corporation and a wholly-owned subsidiary of Parent.

Upon the closing of the EMC merger, each share of EMC common stock, par value $0.01 per share (“EMC common stock”) owned immediately prior to the effective time of the EMC merger (other than shares owned by Parent, EMC Merger Sub, EMC or any of its wholly-owned subsidiaries, and other than shares with respect to which EMC’s shareholders are entitled to and properly exercise appraisal rights) automatically will be converted into the right to receive the merger consideration, consisting of (1) $24.05 in cash, without interest, and (2) a number of shares of validly issued, fully paid and non-assessable Class V common stock of Parent (the “Class V Common Stock”) equal to the quotient (rounded to the nearest five decimal points) obtained by dividing (A) 222,966,450 by (B) the aggregate number of shares of EMC common stock issued and outstanding immediately prior to the effective time of the EMC merger, plus cash in lieu of any fractional shares. No fractional shares of Class V Common Stock will be issued in the EMC merger. The approximately 223 million shares of Class V Common Stock issuable in the EMC merger (assuming EMC shareholders are not entitled to or do not properly exercise appraisal rights) are intended to track and reflect the economic performance of approximately 65% of EMC’s current economic interest in the business of VMware, Inc. (“VMware”), which currently consists of approximately 343 million shares of VMware common stock. Based on the number of shares of EMC common stock Parent currently expects will be issued and outstanding immediately prior to the completion of the EMC merger, it is estimated that EMC shareholders will receive in the EMC merger approximately 0.111 shares of Class V Common Stock for each share of EMC common stock.

The EMC merger will be financed with a combination of equity and debt financing and cash on hand. As of September 6, 2016, Parent has obtained committed equity financing for up to $4.4 billion in the aggregate from Michael S. Dell, Chairman, Chief Executive Officer and founder of Dell, a separate property trust for the benefit of Mr. Dell's wife, MSDC Denali Investors, L.P. and MSDC Denali EIV, LLC (the “MSD Partners Funds”), funds affiliated with Silver Lake Partners, and an affiliate of Temasek Holdings (Private) Limited. Parent also has obtained debt financing commitments for up to $26.3 billion in the aggregate from financial institutions for the purpose of financing the EMC merger and refinancing certain existing indebtedness of Parent and EMC. The obligations of the lenders under Parent’s debt financing commitments are subject to a number of customary conditions. During the three months ended July 29, 2016, subsidiaries of Parent issued a total of $20.0 billion of First Lien Notes and $3.25 billion of Senior Unsecured Notes, the proceeds of which will be applied to finance the EMC merger upon closing. Parent’s debt financing commitments will terminate upon the earlier of the termination of the EMC merger agreement in accordance with its terms or December 16, 2016. In addition, each of Parent and EMC has agreed to make available a certain amount of cash on hand (at least $2.95 billion, in the case of Parent, and $4.75 billion, in the case of EMC) at the completion of the EMC merger for the purpose of financing the transactions contemplated by the EMC merger agreement.

The completion of the EMC merger is subject to specified conditions, including (a) approval by EMC’s shareholders, which was obtained at a special meeting held on July 19, 2016, (b) the absence of an order or law prohibiting consummation of the transactions contemplated by the EMC merger agreement, (c) the effectiveness of the registration statement of Parent registering the shares of Class V Common Stock issuable in connection with the EMC merger and (d) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain foreign antitrust approvals. In addition, each party’s obligation to consummate the EMC merger is subject to other conditions, including (1) the accuracy of the other party’s representations and warranties (including the absence of a material adverse effect), (2) the other party’s compliance with its obligations, (3) receipt by each party of an opinion of counsel, dated as of the date of the EMC merger, as to certain tax matters and (4) the listing of the Class V Common Stock on the New York Stock Exchange or the Nasdaq Stock Market. Parent has applied to list the Class V Common Stock on the New York Stock Exchange.

The EMC merger agreement contains specified termination rights for both Parent and EMC, including that either party may terminate the EMC merger agreement if the EMC merger is not consummated by December 16, 2016, if any governmental authority has adopted any law or regulation prohibiting or rendering the consummation of the EMC merger permanently illegal,


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


or if any governmental authority has issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the EMC merger, and such order, decree or ruling has become final and nonappealable. If the EMC merger agreement is terminated under certain specified circumstances, including in connection with EMC’s entry into a definitive agreement for a superior proposal, EMC must pay Parent a termination fee of $2.5 billion. Further, if the EMC merger agreement is terminated under specified circumstances and, within 12 months after the termination, EMC enters into a definitive agreement providing for, or consummates, an acquisition proposal, EMC will be obligated to pay Parent a termination fee of $2.5 billion. The EMC merger agreement also provides that Parent and Dell will be obligated to pay EMC a reverse termination fee of $4 billion under specified circumstances and, in certain instances, an alternative reverse termination fee of $6 billion.

Other than the recognition of certain expenses related to the EMC merger and interest expense associated with the issuance of the First Lien Notes and the Senior Unsecured Notes referred to above, the proceeds of which are held in escrow, there was no impact of the EMC merger on the accompanying Unaudited Condensed Consolidated Financial Statements. See Note 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.

Divestitures — On March 27, 2016, Dell entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services for cash consideration of approximately $3.1 billion. On June 19, 2016, Dell entered into a definitive agreement with Francisco Partners and Elliot Management Corporation to divest substantially all of Dell Software Group ("DSG") for cash consideration of approximately $2.4 billion. In accordance with applicable accounting guidance, the results of Dell Services and DSG 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 all periods presented. Further, the Company has reclassified the related assets and liabilities as held for sale in the accompanying Condensed Consolidated Statements of Financial Position. See Note 2 of the Notes to the Unaudited 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. Prior to the IPO, Dell Technologies owned indirectly, through Dell and Dell's subsidiaries, 100% of the outstanding equity interest in SecureWorks. As of July 29, 2016, Dell Technologies held approximately 86.8% of the outstanding equity interest in SecureWorks, which represented approximately 98.5% of the combined voting power of both classes of the SecureWorks common stock outstanding. The results of the SecureWorks operations are recorded in Corporate. See Note 12 and Note 15 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information.

Going-Private Transaction — On October 29, 2013, Dell was acquired by Dell Technologies in a merger transaction pursuant to an agreement and plan of merger, dated as of February 5, 2013, as amended. Dell Technologies is a Delaware corporation owned by Michael S. Dell and a separate property trust for the benefit of Mr. Dell’s wife, investment funds affiliated with Silver Lake Partners, the MSD Partners Funds, and certain members of Dell’s management and other investors. Mr. Dell serves as Chairman and Chief Executive Officer of Dell Technologies and Dell.

Basis of Presentation — The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of Dell Technologies Inc. (individually and together with its consolidated subsidiaries, "the Company") as of July 29, 2016 and January 29, 2016, the results of its operations and corresponding comprehensive income (loss) for the three and six months ended July 29, 2016 and July 31, 2015, and its cash flows for the six months ended July 29, 2016 and July 31, 2015. The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes for the fiscal year ended January 29, 2016 ("Fiscal 2016") included in the proxy statement/prospectus dated June 6, 2016 forming part of the Company’s registration statement on Form S-4 (Registration No. 333 208524).

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the Company's Condensed Consolidated Financial Statements and the accompanying Notes. Actual results could differ materially from those estimates. The results of operations, comprehensive income (loss), and cash flows for the three and six months ended July 29, 2016 and July 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year or for any other fiscal period.


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



The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. The fiscal year ending February 3, 2017 ("Fiscal 2017") will be a 53-week period.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers — In May 2014, the Financial Accounting Standards Board ("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 most 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. 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 years, beginning after December 15, 2017, with the option of applying the standard as early as the original effective date for public entities. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of the new guidance, the effective date, and the method of adoption.

Presentation of Debt Issuance Costs — In April 2015, the FASB issued amended guidance which changes the classification of debt issuance costs in the Consolidated Statements of Financial Position. The new guidance requires debt issuance costs to be presented as a direct deduction from the carrying amount of the related debt liability consistent with the presentation of debt discounts, rather than as an asset as currently presented. The guidance related to recognition and measurement of debt issuance costs remains unchanged. The Company implemented the new presentation in the six months ended July 29, 2016 on a retrospective basis, and except for the reclassification of debt issuance costs of $128 million as of January 29, 2016 in the accompanying Condensed Consolidated Statements of Financial Position, there was no other impact to the Consolidated Financial Statements.

Recognition and Measurement of Financial Assets and Financial Liabilities — In January 2016, the FASB issued amended guidance on Recognition and Measurement of Financial Assets and Financial Liabilities. The standard 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 years, beginning after December 15, 2017. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.

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 recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  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.

Improvements to Employee Share-Based Payment Accounting — In March 2016, the FASB issued amended guidance on the accounting for employee share-based payments. The topics that were amended in the update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Public entities must adopt the new guidance for fiscal years, and interim periods within those years, beginning after December 2016. 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 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, including interim periods within those fiscal years. All entities may adopt the amendments in the new standard as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. However, earlier adoption is not permitted. The Company is currently evaluating the impact that the standard will have on the Consolidated Financial Statements.


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


NOTE 2 —DISCONTINUED OPERATIONS

Dell Services Divestiture — On March 27, 2016, Dell entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services, including the Dell Services Federal Government business. Dell Services includes business process outsourcing, application management, and infrastructure services. The pending transaction does not include the global support, deployment, and professional services offerings. At the completion of the sale, total cash consideration, which may vary due to adjustments included in the transaction agreement, is expected to be between $2.9 billion and $3.1 billion, which would result in an estimated pre-tax gain on sale of approximately $1.7 billion to $2.0 billion. The pending transaction is expected to close in the fourth quarter of Fiscal 2017, subject to the satisfaction of customary closing conditions, including approvals from regulatory authorities. In connection with the sale, the Company expects to enter into various agreements that will provide a framework for the relationships between the parties after the sale, including, among others, a transition services agreement, intellectual property license agreements, and commercial support agreements.

Dell Software Group Divestiture — On June 19, 2016, Dell entered into a definitive agreement with Francisco Partners and Elliot Management Corporation to divest substantially all of DSG. The pending transaction includes DSG's systems and information management, security solutions, and Statistica businesses. The pending transaction does not include the Company's cloud integration business. At the completion of the sale, total cash consideration, which may vary due to the available cash balance held by DSG as well as other adjustments included in the transaction agreement, is expected to be between $2.3 billion and $2.6 billion, which would result in an estimated pre-tax gain on sale of approximately $1.0 billion to $1.3 billion. The pending transaction is expected to close in the fourth quarter of Fiscal 2017, subject to the satisfaction of customary closing conditions, including approvals from regulatory authorities.

Discontinued Operations Presentation — In accordance with applicable accounting guidance, the Company concluded that Dell Services and DSG have met the criteria for discontinued operations reporting as of March 27, 2016 and June 19, 2016, respectively. Accordingly, the Company reclassified the financial results of Dell Services and DSG to discontinued operations in the Condensed Consolidated Statements of Income (Loss) for all periods presented. These financial results are presented as “Income (loss) from discontinued operations, net of income taxes” on the accompanying Condensed Consolidated Statements of Income (Loss) for the three and six months ended July 29, 2016 and July 31, 2015. The Company reclassified the related assets and liabilities as “Current assets held for sale” and “Current liabilities held for sale” on the accompanying Condensed Consolidated Statements of Financial Position as of July 29, 2016 and January 29, 2016. Cash flows from the Company's discontinued operations are included in the Condensed Consolidated Statements of Cash Flows.



12
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Dell Services

The following table presents key financial results of Dell Services included in “Income (loss) from discontinued operations, net of income taxes” for the three and six months ended July 29, 2016 and July 31, 2015:

 
Three Months Ended
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
July 29, 2016
 
July 31, 2015
 
(in millions)
Net revenue
$
694

 
$
694

 
$
1,368

 
$
1,394

Cost of net revenue
536

 
546

 
1,077

 
1,138

Operating expenses
98

 
105

 
211

 
207

Income from discontinued operations before income taxes
60

 
43

 
80

 
49

Income tax provision (benefit) (a)
(453
)
 
14

 
(914
)
 
48

Income from discontinued operations, net of income taxes
$
513

 
$
29

 
$
994

 
$
1

____________________
(a) The tax benefits recorded during the three and six months ended July 29, 2016 were $0.5 billion and $0.9 billion, respectively. The additional tax benefit recorded in the three months ended July 29, 2016 was primarily due to the reversal of a valuation allowance for deferred tax assets that the Company now expects to utilize as a result of the DSG divestiture.

The following table presents the major classes of assets and liabilities as of July 29, 2016 and January 29, 2016 related to Dell Services which were classified as held for sale:
 
July 29, 2016
 
January 29, 2016
 
(in millions)
ASSETS
Current assets:
 

 
 

Accounts receivable, net
$
488

 
$
443

Other current assets
68

 
73

Total current assets
556

 
516

Property, plant, and equipment, net
545

 
515

Goodwill
252

 
252

Intangible assets, net
376

 
388

Other non-current assets
16

 
50

Total assets
$
1,745

 
$
1,721

 
 
 
 
LIABILITIES
Current liabilities:
 

 
 

Accounts payable
$
147

 
$
173

Accrued and other
160

 
180

Short-term deferred revenue
77

 
82

Total current liabilities
384

 
435

Long-term deferred revenue
47

 
53

Other non-current liabilities
—

 
126

Total liabilities
$
431

 
$
614




13
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The significant cash flow items from Dell Services for the six months ended July 29, 2016 and July 31, 2015 were as follows:
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
(in millions)
Depreciation and amortization (a)
$
32

 
$
110

Capital expenditures
$
(47
)
 
$
(41
)
____________________
(a) Amounts represent depreciation and amortization recognized up until March 27, 2016, the date Dell Services met the criteria for discontinued operations reporting. Depreciation and amortization ceased upon determination that the held for sale criteria were met.


Dell Software Group

The following table presents key financial results of DSG included in “Income (loss) from discontinued operations, net of income taxes” for the three and six months ended July 29, 2016 and July 31, 2015:

 
Three Months Ended
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
July 29, 2016
 
July 31, 2015
 
(in millions)
Net revenue
$
321

 
$
330

 
$
642

 
$
643

Cost of net revenue
85

 
89

 
175

 
185

Operating expenses
239

 
220

 
488

 
461

Interest and other, net
(7
)
 
(2
)
 
7

 
(6
)
Income (loss) from discontinued operations before income taxes
(10
)
 
19

 
(14
)
 
(9
)
Income tax provision (benefit) (a)
(333
)
 
21

 
(337
)
 
23

Income (loss) from discontinued operations, net of income taxes
$
323

 
$
(2
)
 
$
323

 
$
(32
)
____________________
(a) The tax benefits of $333 million and $337 million for the three and six months ended July 29, 2016, respectively, were primarily due to the Company's determination that it could no longer assert permanent reinvestment in the outside basis of the entities that will be divested.


14
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table presents the major classes of assets and liabilities as of July 29, 2016 and January 29, 2016 related to DSG which were classified as held for sale:
 
July 29, 2016
 
January 29, 2016
 
(in millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
147

 
$
254

Accounts receivable, net
210

 
244

Inventories, net
20

 
24

Other current assets
9

 
11

Total current assets
386

 
533

Property, plant, and equipment, net
111

 
106

Goodwill
1,391

 
1,391

Intangible assets, net
557

 
613

Other non-current assets (a)
10

 
8

Total assets
$
2,455

 
$
2,651

 
 
 
 
LIABILITIES
Current liabilities:
 

 
 

Accounts payable
20

 
15

Accrued and other
124

 
160

Short-term deferred revenue
603

 
625

Total current liabilities
747

 
800

Long-term deferred revenue
340

 
333

Other non-current liabilities (a)
79

 
82

Total liabilities
$
1,166

 
$
1,215

____________________
(a) Other non-current liabilities includes a $75 million deferred tax liability as of July 29, 2016 that is reflected in current assets held for sale on the Condensed Consolidated Statements of Financial Position due to jurisdictional netting of deferred taxes.

The significant cash flow items from DSG for the six months ended July 29, 2016 and July 31, 2015 were as follows:
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
(in millions)
Depreciation and amortization (a)
$
66

 
$
83

Capital expenditures
$
(15
)
 
$
(15
)
____________________
(a) Amounts represent depreciation and amortization recognized up until June 19, 2016, the date DSG met the criteria for discontinued operations reporting. Depreciation and amortization ceased upon determination that the held for sale criteria were met.



15
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 July 29, 2016 and January 29, 2016:

 
July 29, 2016 (a)
 
January 29, 2016
 
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 equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
4,406

 
$
—

 
$
—

 
$
4,406

 
$
3,832

 
$
—

 
$
—

 
$
3,832

Derivative instruments
—

 
87

 
—

 
87

 
—

 
195

 
—

 
195

Common stock purchase agreement
—

 
—

 
—

 
—

 
—

 
—

 
10

 
10

Restricted cash:


 


 


 


 


 


 


 


Money market funds
23,285

 
—

 
—

 
23,285

 
—

 
—

 
—

 
—

Total assets
$
27,691

 
$
87

 
$
—

 
$
27,778

 
$
3,832

 
$
195

 
$
10

 
$
4,037

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative instruments
$
—

 
$
28

 
$
—

 
$
28

 
$
—

 
$
12

 
$
—

 
$
12

Debt - Other
—

 
—

 
—

 
—

 
—

 
—

 
28

 
28

Common stock purchase agreement
—

 
—

 
1

 
1

 
—

 
—

 
—

 
—

Total liabilities
$
—

 
$
28

 
$
1

 
$
29

 
$
—

 
$
12

 
$
28

 
$
40

____________________
(a) The Company did not transfer any securities between levels during the six months ended July 29, 2016.

The following section describes the valuation methodologies the Company uses to measure financial instruments at fair value:

Money Market Funds — The Company's money market funds that are classified as cash equivalents have original maturities 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.

During the three months ended July 29, 2016, the Company issued $23.25 billion of debt securities in connection with the pending EMC merger transaction. The net proceeds were deposited directly into escrow and invested in money market funds. As of July 29, 2016, these money market funds had a carrying value of approximately $23.3 billion, which was included in restricted cash and classified as non-current on the Condensed Consolidated Statements of Financial Position as the funds will be used to consummate the EMC merger transaction.

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 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements for a description of the Company's derivative financial instrument activities.



16
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Debt - Other — As of January 29, 2016, the Company recognized a portion of its short-term debt at fair value. This debt was represented by promissory notes issued on August 3, 2015 and September 14, 2015, which were extinguished during the six months ended July 29, 2016. The Company determined fair value using a discounted cash flow model which included significant unobservable inputs and assumptions.  The unobservable inputs used include projected cash outflows over varying possible maturity dates, weighted by the probability of those possible outcomes, along with assumed discount rates.

Common Stock Purchase Agreements — The equity financing agreements obtained by Parent in connection with the EMC merger transaction described in Note 1 of the Notes to the Unaudited Condensed Consolidated Financial Statements permit Michael S. Dell, the MSD Partners Funds, Silver Lake Partners, and Temasek Holdings (Private) Limited ("Temasek") to purchase Parent common stock at a fixed price per share contingent on the closing of the EMC merger transaction. Each agreement also provides for a price protection in the event additional equity investors purchase Parent common stock at a lower price. The agreements with Michael S. Dell, the MSD Partners Funds, and Silver Lake Partners are not required to be remeasured to fair value and are effectively capital commitments, because of the degree of control and influence such persons can exercise over Parent, including control over when and at what price Parent will issue new shares, as well as the fact that the equity agreements were entered into solely for the purpose of financing the EMC merger transaction. The provision relating to price protection is considered substantive to Temasek as an unrelated party. Consequently, the Company has recognized the contract as an asset or liability, initially recorded at fair value of zero, with subsequent changes in fair value recorded in earnings. As of July 29, 2016, the Company recorded a liability of $1 million related to the Temasek equity contract.

The Company determined the fair value of this forward contract using a Black-Scholes valuation model, which included significant unobservable inputs and assumptions. The unobservable inputs used include the current value of the Parent common stock, which was estimated based on a combination of a discounted cash flow methodology and a market approach, the probability of the EMC merger occurring, the time period to contract expiration, and the probability that Parent will issue its shares below the foregoing fixed price per share. Varying these inputs could materially alter the fair value recognized for this instrument.

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 and investments accounted for under the cost method. See Note 7 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets. Investments accounted for under the cost method are measured at fair value initially. Subsequently, when there is an indicator of impairment, the impairment is recognized.

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 5 of the Notes to the Unaudited Condensed Consolidated Financial Statements, including the current portion, as of the dates indicated:

 
July 29, 2016
 
January 29, 2016
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(in billions)
Term Loan Facilities
$
5.9

 
$
6.1

 
$
6.1

 
$
6.2

Senior First Lien Notes
$
1.4

 
$
1.5

 
$
1.4

 
$
1.5

First Lien Notes
$
20.0

 
$
21.4

 
$
—

 
$
—

Unsecured Notes and Debentures
$
2.3

 
$
2.5

 
$
2.7

 
$
2.7

Senior Unsecured Notes
$
3.3

 
$
3.5

 
$
—

 
$
—


The fair values of the outstanding Term Loan Facilities, Senior First Lien Notes, Unsecured Notes and Debentures issued prior to the going-private transaction and the fair value of the outstanding First Lien Notes and Senior Unsecured Notes issued in connection with the pending EMC merger transaction were determined based on observable market prices in a less active market 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.


17
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 4 — FINANCIAL SERVICES

Dell Financial Services

The Company offers or arranges various financing options and services for its business and consumer customers in the United States, Canada, Europe, and Mexico 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 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 third-party originations, were $1.0 billion for both the three months ended July 29, 2016 and July 31, 2015, and $1.9 billion for both the six months ended July 29, 2016 and July 31, 2015.

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. 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 desire lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments as of July 29, 2016 were as follows: Fiscal 2017 - $885 million; Fiscal 2018 - $1,322 million; Fiscal 2019 - $747 million; Fiscal 2020 - $239 million; Fiscal 2021 and beyond - $52 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 July 29, 2016 and January 29, 2016:
 
July 29, 2016
 
January 29, 2016
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Financing Receivables, net:
 

 
 

 
 
 
 
 
 
 
 
Customer receivables, gross
$
1,043

 
$
3,786

 
$
4,829

 
$
1,173

 
$
3,637

 
$
4,810

Allowances for losses
(100
)
 
(56
)
 
(156
)
 
(118
)
 
(58
)
 
(176
)
Customer receivables, net
943

 
3,730

 
4,673

 
1,055

 
3,579

 
4,634

Residual interest
—

 
465

 
465

 
—

 
458

 
458

Financing receivables, net
$
943

 
$
4,195

 
$
5,138

 
$
1,055

 
$
4,037

 
$
5,092

Short-term
$
943

 
$
1,924

 
$
2,867

 
$
1,055

 
$
1,860

 
$
2,915

Long-term
$
—

 
$
2,271

 
$
2,271

 
$
—

 
$
2,177

 
$
2,177




18
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


The following table summarizes the changes in the allowance for financing receivable losses for the respective periods:

 
Three Months Ended
 
July 29, 2016
 
July 31, 2015
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Allowance for financing receivable losses:
 
 
 
 
 
 
 
 
 
 

Balance at beginning of period
$
107

 
$
58

 
$
165

 
$
134

 
$
53

 
$
187

Charge-offs, net of recoveries
(23
)
 
(2
)
 
(25
)
 
(21
)
 
(7
)
 
(28
)
Provision charged to income statement
16

 
—

 
16

 
14

 
4

 
18

Balance at end of period
$
100

 
$
56

 
$
156

 
$
127

 
$
50

 
$
177

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 29, 2016
 
July 31, 2015
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Allowance for financing receivable losses:
 
 
 
 
 
 
 
 
 
 
 
Balance at the beginning of period
$
118

 
$
58

 
$
176

 
$
145

 
$
49

 
$
194

Charge-offs, net of recoveries
(48
)
 
(5
)
 
(53
)
 
(52
)
 
(9
)
 
(61
)
Provision charged to income statement
30

 
3

 
33

 
34

 
10

 
44

Balance at end of period
$
100

 
$
56

 
$
156

 
$
127

 
$
50

 
$
177



The following table summarizes the aging of the Company's customer financing receivables, gross, including accrued interest, as of July 29, 2016 and January 29, 2016, segregated by class:

 
July 29, 2016
 
January 29, 2016
 
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
$
725

 
$
84

 
$
27

 
$
836

 
$
812

 
$
99

 
$
36

 
$
947

Revolving — DBC
186

 
17

 
4

 
207

 
202

 
20

 
4

 
226

Fixed-term — Consumer and Small Commercial
318

 
13

 
2

 
333

 
315

 
13

 
1

 
329

Fixed-term — Medium and Large Commercial
3,303

 
129

 
21

 
3,453

 
3,131

 
171

 
6

 
3,308

Total customer receivables, gross
$
4,532

 
$
243

 
$
54

 
$
4,829

 
$
4,460

 
$
303

 
$
47

 
$
4,810




19
Table of Contents
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 July 29, 2016 and January 29, 2016. 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.
 
July 29, 2016
 
January 29, 2016
 
Higher
 
Mid
 
Lower
 
Total
 
Higher
 
Mid
 
Lower
 
Total
 
(in millions)
Revolving — DPA
$
139

 
$
248

 
$
449

 
$
836

 
$
148

 
$
270

 
$
529

 
$
947

Revolving — DBC
$
62

 
$
61

 
$
84

 
$
207

 
$
68

 
$
65

 
$
93

 
$
226

Fixed-term — Consumer and Small Commercial
$
95

 
$
144

 
$
94

 
$
333

 
$
93

 
$
136

 
$
100

 
$
329

Fixed-term — Medium and Large Commercial
$
1,604

 
$
1,153

 
$
696

 
$
3,453

 
$
1,597

 
$
1,075

 
$
636

 
$
3,308


Securitizations and Structured Financing Debt

The Company transfers certain U.S. customer financing receivables to Special Purpose Entities ("SPEs") that meet the definition of a Variable Interest Entity ("VIE") and are consolidated, along with the associated debt, into the Company's 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:
 
July 29, 2016
 
January 29, 2016
 
(in millions)
Financing receivables held by consolidated VIEs, net:
 

 
 

Short-term, net
$
2,057

 
$
2,125

Long-term, net
1,255

 
1,215

Financing receivables held by consolidated VIEs, net
$
3,312

 
$
3,340


Financing receivables transferred via securitization through SPEs were $0.8 billion for both the three months ended July 29, 2016 and July 31, 2015, and $1.4 billion and $1.8 billion for the six months ended July 29, 2016 and July 31, 2015, 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 Company's risk of loss related to securitized receivables is limited to the amount by which


20
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


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.

The Company's total structured financing debt, which is collateralized by financing receivables in the United States, Canada, and Europe, was $3.5 billion and $3.4 billion as of July 29, 2016 and January 29, 2016, respectively, under the following programs:

•
The structured financing debt program in the United States, which is related to the fixed-term lease and loan securitization program and the revolving loan securitization program, was $0.9 billion and $1.3 billion as of July 29, 2016 and January 29, 2016, 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 July 29, 2016, the total debt capacity related to the securitization programs was $2.1 billion. The Company enters into interest swap agreements to effectively convert the portion of its structured financing debt from a floating rate to a fixed rate. See Note 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information about interest rate swaps.

The Company's securitization programs became effective on October 29, 2013. The revolving program, which was extended during the first quarter of Fiscal 2017, is effective for four and one-half years. The fixed term program, which was extended during the first quarter of Fiscal 2016, is effective for four and one-half years. The 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 July 29, 2016, these criteria were met.

•
The Company may periodically issue asset-backed debt securities to private investors. As of July 29, 2016, the associated debt balance of these securities was $2.0 billion. The asset-backed debt securities are collateralized solely by the U.S. fixed-term financing receivables in the offerings, which are held by SPEs. The interest rate on these securities is fixed and ranges from 0.26% to 3.61%, and the duration of these securities is based on the terms of the underlying financing receivables.

•
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. As of July 29, 2016, the Canadian program, which was extended during the six months ended July 29, 2016, had a total debt capacity of $167 million. This program is effective for two years, beginning on April 15, 2016, and is collateralized solely by the Canadian financing receivables. The European program, which was extended during the three months ended May 1, 2015, is effective for four years, beginning on December 23, 2013. The program is collateralized solely by the European financing receivables and had a total debt capacity of $665 million as of July 29, 2016. The aggregate outstanding balances of the Canadian and European revolving structured loans as of July 29, 2016 and January 29, 2016 were $580 million and $559 million, respectively.

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 $98 million and $31 million during the six months ended July 29, 2016 and July 31, 2015, respectively.



21
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DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 5 — DEBT

The following table summarizes the Company's outstanding debt as of the dates indicated:
 
July 29, 2016
 
January 29, 2016
 
(in millions)
Secured Debt
 

 
 

Structured financing debt
$
3,488

 
$
3,411

3.75% Floating rate due October 2018 ("Term Loan C Facility")
834

 
1,003

4.00% Floating rate due April 2020 ("Term Loan B Facility")
4,307

 
4,329

4.00% Floating rate due April 2020 ("Term Loan Euro Facility")
903

 
891

5.625% due October 2020 ("Senior First Lien Notes")
1,400

 
1,400

EMC merger financing issued on June 1, 2016 ("First Lien Notes"):
 
 
 
3.48% due June 2019
3,750

 
—

4.42% due June 2021
4,500

 
—

5.45% due June 2023
3,750

 
—

6.02% due June 2026
4,500

 
—

8.10% due June 2036
1,500

 
—

8.35% due June 2046
2,000

 
—

Unsecured Notes and Debentures
 
 
 
Notes and debentures issued prior to going-private transaction:
 
 
 
3.10% due April 2016
—

 
400

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

EMC merger financing issued on June 22, 2016 ("Senior Unsecured Notes"):
 
 
 
5.875% due June 2021
1,625

 
—

7.125% due June 2024
1,625

 
—

Other
58

 
93

Total debt, principal amount
36,693

 
13,980

Unamortized discount, net of unamortized premium
(218
)
 
(221
)
Debt issuance costs
(139
)
 
(128
)
Total debt, carrying value
$
36,336

 
$
13,631

Total short-term debt
$
2,500

 
$
2,981

Total long-term debt
$
33,836

 
$
10,650


To finance the going-private transaction, the Company issued $13.9 billion in debt, which included borrowings under the Term Loan facilities and the ABL Credit Facility, proceeds from the sale of the Senior First Lien Notes and other notes, as well as borrowings under the structured financing debt programs. During June 2016, the Company issued $23.25 billion of debt securities in connection with the pending EMC merger transaction, which included proceeds from the sale of the First Lien Notes and Senior Unsecured Notes. During the six months ended July 29, 2016, the Company repaid $0.4 billion of maturing Unsecured Notes and Debentures as well as $0.2 billion of Term Loan facilities, net.



22
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


EMC Merger Financing — On June 1, 2016, two subsidiaries of the Company completed a private offering of the First Lien Notes with an aggregate principal amount of $20.0 billion, and on June 22, 2016, two subsidiaries of the Company completed a private offering of the Senior Unsecured Notes with an aggregate principal amount of $3.25 billion.

Under the terms of the agreements relating to the issuance of the First Lien Notes and Senior Unsecured Notes, the proceeds of the offerings were deposited into escrow, with such proceeds to be released to finance the consummation of the EMC merger subject to the satisfaction of customary conditions. Upon the completion of the EMC merger, Dell International L.L.C. (a wholly-owned indirect subsidiary of Dell Technologies) and EMC will assume all of the co-issuers' obligations under the First Lien Notes and Senior Unsecured Notes, and the First Lien Notes and Senior Unsecured Notes will be guaranteed on a joint and several basis by Dell Technologies, Denali Intermediate Inc. (a wholly-owned direct subsidiary of Dell Technologies), Dell Inc. and each of Denali Intermediate Inc.'s wholly-owned domestic subsidiaries (including EMC's wholly-owned domestic subsidiaries following the completion of the EMC merger) that guarantees obligations under the new senior secured credit facilities that will be entered into in connection with the EMC merger.

The net proceeds held in escrow from the private offerings of multiple series of the First Lien Notes and Senior Unsecured Notes were included in restricted cash in the Condensed Consolidated Statements of Financial Position as of July 29, 2016, and such proceeds will be held as restricted cash until the completion of the EMC merger. The receipt of the net proceeds is not reflected in the Condensed Consolidated Statements of Cash Flows, given that the proceeds were required to be deposited directly into escrow rather than into the Company's unrestricted cash accounts. During the three months ended July 29, 2016, as required under the escrow agreement, the Company prepaid interest into escrow in the amount of $40 million, which is reflected as a cash outflow from investing activities in the Condensed Consolidated Statements of Cash Flows. This amount will be returned to the Company upon the closing of the EMC merger transaction and paid to the holders of the First Lien Notes and Senior Unsecured Notes on the scheduled interest payment dates.

The Company expects to incur costs of approximately $0.5 billion upon the closing of the EMC merger transaction relating to the issuance of the First Lien Notes and Senior Unsecured Notes, which will be capitalized as debt issuance costs in the Condensed Consolidated Statements of Financial Position.  If the EMC merger agreement is terminated, the Company expects to incur a First Lien Note redemption fee of $0.2 billion. Upon the closing of the EMC merger transaction, the Company will be party to new credit agreements containing covenants that are not expected to materially differ from the covenants contained in the Company's existing credit agreements.

Structured Financing Debt — As of July 29, 2016 and January 29, 2016, the Company had $3.5 billion and $3.4 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 4 and Note 6 of the Notes to the Unaudited 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.

Term Loan Facilities — The $1.5 billion Term Loan C Facility was issued on October 29, 2013, and provides for equal quarterly principal amortization in an annual amount equal to 10% of the original principal amount in the first year of the agreement and increasing annual percentage amounts in subsequent years with the payment of the outstanding balance due at maturity, in October 2018. The annual principal amortization percentage is currently 22.5%. The $4.7 billion Term Loan B Facility and the €0.7 billion Term Loan Euro Facility were issued on October 29, 2013, and provide for quarterly principal amortization in an annual amount equal to 1% of the original principal amount and payment of the outstanding balances due at maturity in April 2020. On June 10, 2015, the Company refinanced and amended the Term Loan facilities to reduce interest rate floors and margins and to modify certain covenant requirements. The refinancing increased the outstanding Term Loan Euro Facility to €0.8 billion, which was offset by a decrease in the Term Loan B Facility to $4.4 billion. Borrowings under the Term Loan facilities bear interest, payable quarterly, at a rate per annum equal to an applicable margin, plus, at the borrowers’ option, either (a) a base rate or (b) a LIBOR rate for the applicable currency, in each case, subject to interest rate floors. Under the Term Loan facilities, if the Company has excess cash flows that are not reinvested in working capital, strategic investments, or finance activities on an annual basis and if the Company’s secured leverage ratio falls within certain thresholds, a percentage of the excess cash flows is required to be applied to prepay secured debt.

Senior First Lien Notes — The Senior First Lien Notes were issued on October 7, 2013 in an aggregate principal amount of
$1.5 billion and are payable in full at maturity, in October 2020. As of July 29, 2016, the outstanding balance of these notes was $1.4 billion. Interest on the Senior First Lien Notes is payable semiannually.


23
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



ABL Credit Facility — On October 29, 2013, the Company entered into a secured ABL Credit Facility to support its working capital needs. The maximum aggregate borrowings under this revolving credit facility are approximately $2.0 billion. Borrowings under the ABL Credit Facility are subject to a borrowing base, which consists of certain receivables and inventory. Available borrowings under the ABL Credit Facility are reduced by draws on the facility as well as letters of credit. As of July 29, 2016, there were no draws on the facility and, after taking into account outstanding letters of credit, available borrowings totaled $1.4 billion. Borrowings under the facility bear interest at a rate per annum equal to an applicable margin, plus, at the borrowers’ option, either (a) a base rate, (b) a LIBOR rate or (c) certain other applicable rates. The applicable margin under the facility is determined based on excess liquidity as a percentage of the maximum borrowing amount under the facility. The ABL Credit Facility will expire in October 2018.

The borrowers under the Term Loan facilities and the ABL Credit Facility and the co-issuers of the Senior First Lien Notes are subsidiaries of Dell Inc. Dell Inc. and substantially all of its domestic subsidiaries guarantee the borrowings under the Term
Loan facilities and the obligations under the Senior First Lien Notes. Dell Inc. and certain of its domestic subsidiaries guarantee the borrowings under the ABL Credit Facility. All borrowings and other obligations under the Term Loan facilities and the ABL Credit Facility generally are secured by first-priority or second-priority security interests in substantially all of the assets of Dell Inc., the borrowers under the facilities and the guarantors of the facilities, as well as by pledges of the equity interests of Dell Inc. and certain of its subsidiaries, and a portion of the equity interests of certain first-tier foreign subsidiaries of Dell Inc. All obligations under the Senior First Lien Notes are secured by a first-priority security interest in certain cash flow collateral and a second-priority security interest in other collateral securing the ABL Credit Facility.

Unsecured Notes and Debentures — The Company has Unsecured Notes and Debentures that were issued prior to the going-private transaction. Interest on these borrowings is payable semiannually. See "EMC Merger Financing" above for a discussion of the Senior Unsecured Notes issued in connection with the EMC merger.



24
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Aggregate Future Maturities

As of July 29, 2016, aggregate future maturities of the Company's debt were as follows:
 
Maturities by Fiscal Year
 
2017 (remaining six months)
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
(in millions)
Structured Financing Debt
$
1,121

 
$
1,516

 
$
691

 
$
136

 
$
23

 
$
1

 
$
3,488

Term Loan Facilities, Senior First Lien Notes, and First Lien Notes
205

 
427

 
334

 
3,802

 
6,426

 
16,250

 
27,444

Unsecured Notes and Debentures
—

 
—

 
500

 
600

 
—

 
4,603

 
5,703

Other
21

 
9

 
2

 
—

 
—

 
26

 
58

Total maturities, principal amount
1,347

 
1,952

 
1,527

 
4,538

 
6,449

 
20,880

 
36,693

Associated carrying value adjustments
(2
)
 
(2
)
 
(16
)
 
(7
)
 
(130
)
 
(200
)
 
(357
)
Total maturities, carrying value amount
$
1,345

 
$
1,950

 
$
1,511

 
$
4,531

 
$
6,319

 
$
20,680

 
$
36,336


Covenants and Restricted Net Assets — The credit agreements for the Term Loan facilities and the ABL Credit Facility and the indenture governing the Senior First Lien Notes contain covenants restricting the ability of the Company and its restricted subsidiaries, subject to specified exceptions, to incur additional debt, create liens on certain assets to secure debt, pay dividends and make other restricted payments, make certain investments, sell or transfer certain assets, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets, and enter into certain transactions with affiliates. The Company designated certain subsidiaries as unrestricted subsidiaries for all purposes of the credit agreements and the indenture as of August 1, 2015, the impact of which was not material to its financial position as of July 29, 2016 or results of operations for the three and six months then ended. The indentures governing the Unsecured Notes and Debentures contain covenants limiting the Company's ability to create certain liens, enter into sale-and-lease back transactions, and consolidate or merge with, or convey, transfer, or lease all or substantially all of its assets to, another person. The credit agreements and all such 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 ABL Credit Facility requires compliance with conditions that must be satisfied prior to any borrowing and maintenance of a minimum fixed charge coverage ratio. The Company was in compliance with all financial covenants as of July 29, 2016.

The issuers and holders of the proceeds of the First Lien Notes and Senior Unsecured Notes issued in connection with the pending EMC merger transaction are unrestricted subsidiaries for purposes of the Company’s indebtedness. At the closing of the EMC merger transaction, Dell International and EMC, which are restricted subsidiaries for purposes of the Company’s indebtedness, will succeed to the obligations of such unrestricted subsidiaries as the issuers of the First Lien Notes and Senior Unsecured Notes.




25
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 6 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments

As part of its risk management strategy, the Company uses derivative instruments, primarily forward contracts, purchased options, and interest rate swaps to hedge certain foreign currency and interest rate exposures. 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 six months ended July 29, 2016 and July 31, 2015.

Foreign Exchange Risk

The Company uses forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The majority of these contracts typically expire in twelve months or less.

During the three and six months ended July 29, 2016 and July 31, 2015, 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.



26
Table of Contents
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:
 
July 29, 2016
 
January 29, 2016
 
(in millions)
Foreign Exchange Contracts
 

 
 

Designated as cash flow hedging instruments
$
3,782

 
$
3,947

Non-designated as hedging instruments
509

 
985

Total
$
4,291

 
$
4,932

 
 
 
 
Interest Rate Contracts
 
 
 
Non-designated as hedging instruments
$
757

 
$
1,017




27
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Effect of Derivative Instruments on the Consolidated Statements of Financial Position and the 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 July 29, 2016
 
 
 
 
 
 
 
 

 
Total net revenue
 
$
(21
)
 
 
 
 
Foreign exchange contracts
$
58

 
Total cost of net revenue
 
(6
)
 
 
 
 
Interest rate contracts
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
—

Total
$
58

 
 
 
$
(27
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
For the three months ended July 31, 2015
 
 
 
 
 
 
 
 

 
Total net revenue
 
$
82

 
 
 
 
Foreign exchange contracts
$
66

 
Total cost of net revenue
 
7

 
 
 
 
Interest rate contracts
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
(1
)
Total
$
66

 
 
 
$
89

 
 
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
For the six months ended July 29, 2016
 
 
 
 
 
 
 
 

 
Total net revenue
 
$
(66
)
 
 
 
 
Foreign exchange contracts
$
(107
)
 
Total cost of net revenue
 
(14
)
 
 
 
 
Interest rate contracts
—

 
Interest and other, net
 
—

 
Interest and other, net
 
$
(1
)
Total
$
(107
)
 
 
 
$
(80
)
 
 
 
$
(1
)