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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2017
or
☐
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from            to           
 
Commission File Number: 001-37867
 
Dell Technologies Inc.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
80-0890963
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Dell Way, Round Rock, Texas 78682
(Address of principal executive offices) (Zip Code)

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

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

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

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

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

As of June 5, 2017, there were 771,976,220 shares of the registrant's common stock outstanding, consisting of 203,140,570 outstanding shares of Class V Common Stock, 409,659,012 outstanding shares of Class A Common Stock, 136,986,858 outstanding shares of Class B Common Stock, and 22,189,780 outstanding shares of Class C Common Stock.



1
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "may," "will," "anticipate," "estimate," "expect," "intend," "plan," "aim," "seek," and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flows and other operating results, business strategy, legal proceedings, and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in "Part I — Item 1A — Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended February 3, 2017 and in our other periodic and current reports filed with the Securities and Exchange Commission. Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement after the date as of which such statement was made, whether to reflect changes in circumstances or our expectations, the occurrence of unanticipated events, or otherwise.



2
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DELL TECHNOLOGIES INC.

TABLE OF CONTENTS
 
 
Page
 
 



3
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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

Index
 
Page
 



4
Table of Contents

DELL TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in millions; unaudited)
 
May 5, 2017
 
February 3, 2017
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
9,554

 
$
9,474

Short-term investments
1,620

 
1,975

Accounts receivable, net
8,834

 
9,420

Short-term financing receivables, net
3,255

 
3,222

Inventories, net
2,466

 
2,538

Other current assets
4,655

 
4,144

Total current assets
30,384

 
30,773

Property, plant, and equipment, net
5,438

 
5,653

Long-term investments
3,772

 
3,802

Long-term financing receivables, net
2,741

 
2,651

Goodwill
38,930

 
38,910

Intangible assets, net
33,283

 
35,053

Other non-current assets
1,492

 
1,364

Total assets
$
116,040

 
$
118,206

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

 
 

Short-term debt
$
4,842

 
$
6,329

Accounts payable
15,064

 
14,422

Accrued and other
6,376

 
7,119

Short-term deferred revenue
10,354

 
10,265

Total current liabilities
36,636

 
38,135

Long-term debt (Note 7)
44,948

 
43,061

Long-term deferred revenue
8,330

 
8,431

Other non-current liabilities
8,435

 
9,339

Total liabilities
98,349

 
98,966

Commitments and contingencies (Note 12)


 


Redeemable shares
301

 
231

Stockholders' equity:
 
 
 
Common stock and capital in excess of $.01 par value (Note 17)
20,057

 
20,199

Treasury stock at cost
(1,113
)
 
(752
)
Accumulated deficit
(6,859
)
 
(5,609
)
Accumulated other comprehensive loss
(553
)
 
(595
)
Total Dell Technologies Inc. stockholders’ equity
11,532

 
13,243

Non-controlling interests
5,858

 
5,766

Total stockholders' equity
17,390

 
19,009

Total liabilities, redeemable shares, and stockholders' equity
$
116,040

 
$
118,206


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
 
May 5, 2017
 
April 29, 2016
Net revenue:
 
 
 

Products
$
12,968

 
$
10,183

Services
4,848

 
2,058

Total net revenue
17,816

 
12,241

Cost of net revenue:
 
 
 
Products
11,459

 
8,799

Services
2,055

 
1,249

Total cost of net revenue
13,514

 
10,048

Gross margin
4,302

 
2,193

Operating expenses:
 
 
 
Selling, general, and administrative
4,669

 
2,068

Research and development
1,133

 
264

Total operating expenses
5,802

 
2,332

Operating loss
(1,500
)
 
(139
)
Interest and other, net
(573
)
 
(219
)
Loss from continuing operations before income taxes
(2,073
)
 
(358
)
Income tax provision (benefit)
(690
)
 
66

Net loss from continuing operations
(1,383
)
 
(424
)
Income from discontinued operations, net of income taxes (Note 3)
—

 
479

Net income (loss)
(1,383
)
 
55

Less: Net loss attributable to non-controlling interests
(49
)
 
—

Net income (loss) attributable to Dell Technologies Inc.
$
(1,334
)
 
$
55

 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - basic:
 
 
Continuing operations - Class V Common Stock - basic
$
0.57

 
$
—

Continuing operations - DHI Group - basic
$
(2.57
)
 
$
(1.05
)
Discontinued operations - DHI Group - basic
$
—

 
$
1.18

 
 
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted:
 
 
Continuing operations - Class V Common Stock - diluted
$
0.56

 
$
—

Continuing operations - DHI Group - diluted
$
(2.57
)
 
$
(1.05
)
Discontinued operations - DHI Group - diluted
$
—

 
$
1.18

 
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
 
May 5, 2017
 
April 29, 2016
Net income (loss)
$
(1,383
)
 
$
55

 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
Foreign currency translation adjustments
53

 
79

Available-for-sale investments:
 
 
 
Change in unrealized gains
28

 
—

Reclassification adjustment for net losses realized in net income (loss)
1

 
—

Net change in market value of investments
29

 
—

Cash flow hedges:
 
 
 
Change in unrealized losses
(16
)
 
(165
)
Reclassification adjustment for net (gains) losses included in net income (loss)
(21
)
 
54

Net change in cash flow hedges
(37
)
 
(111
)
 
 
 
 
Total other comprehensive income (loss), net of tax benefit (expense) of $(15) and $11, respectively
45

 
(32
)
Comprehensive income (loss), net of tax
(1,338
)
 
23

Less: Net loss attributable to non-controlling interests
(49
)
 
—

Less: Other comprehensive income attributable to non-controlling interests
3

 
—

Comprehensive income (loss) attributable to Dell Technologies Inc.
$
(1,292
)
 
$
23


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)
 
Three Months Ended
 
May 5, 2017
 
April 29, 2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,383
)
 
$
55

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,212

 
692

Stock-based compensation expense
201

 
14

Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies
27

 
27

Deferred income taxes
(839
)
 
(586
)
Provision for doubtful accounts — including financing receivables
34

 
26

Net gain on sale of businesses
(33
)
 
—

Amortization of debt issuance costs
46

 
12

Other
107

 
34

Changes in assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
Accounts receivable
561

 
108

Financing receivables
(136
)
 
73

Inventories
15

 
(20
)
Other assets
(529
)
 
126

Accounts payable
665

 
(440
)
Deferred revenue
(1
)
 
163

Accrued and other liabilities
(707
)
 
(347
)
Change in cash from operating activities
240

 
(63
)
Cash flows from investing activities:
 
 
 
Investments:
 
 
 

Purchases
(559
)
 
—

Maturities and sales
973

 
12

Capital expenditures
(245
)
 
(92
)
Proceeds from sale of facilities, land, and other assets
—

 
4

Capitalized software development costs
(89
)
 
—

Collections on purchased financing receivables
3

 
16

Acquisition of businesses, net
(12
)
 
—

Divestitures of businesses, net
(20
)
 
—

Change in cash from investing activities
51

 
(60
)

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)
 
Three Months Ended
 
May 5, 2017
 
April 29, 2016
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of common stock of subsidiaries
8

 
102

Repurchases of DHI Group Common Stock
(2
)
 
—

Repurchases of Class V Common Stock
(368
)
 
—

Issuance of common stock under employee plans
1

 
—

Payments for debt issuance costs
(5
)
 
(2
)
Proceeds from debt
3,441

 
552

Repayments of debt
(3,154
)
 
(1,041
)
Repurchases for tax withholdings on vesting of equity awards
(126
)
 
(1
)
Other
—

 
3

Change in cash from financing activities
(205
)
 
(387
)
Effect of exchange rate changes on cash and cash equivalents
(6
)
 
73

Change in cash and cash equivalents
80

 
(437
)
Cash and cash equivalents at beginning of the period, including amounts held for sale
9,474

 
6,576

Cash and cash equivalents at end of the period
9,554

 
6,139

Less: Cash included in current assets held for sale
—

 
268

Cash and cash equivalents from continuing operations
$
9,554

 
$
5,871


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


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

 
Common Stock and Capital in Excess of Par Value
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
DHI Group
 
Class V Common Stock
 
DHI Group
 
Class V Common Stock
 
 
 
 
 
 
 
 
 
 
 
Issued Shares
 
Amount
 
Issued Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income/(Loss)
 
Dell Technologies Stockholders' Equity
 
Non-Controlling Interests
 
Total Stockholders' Equity
Balances as of February 3, 2017
569

 
$
10,158

 
223

 
$
10,041

 
—

 
$
(10
)
 
14

 
$
(742
)
 
$
(5,609
)
 
$
(595
)
 
$
13,243

 
$
5,766

 
$
19,009

Adjustment for adoption of accounting standard (Note 1)
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
84

 
—

 
84

 
—

 
84

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,334
)
 
—

 
(1,334
)
 
(49
)
 
(1,383
)
Foreign currency translation adjustments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
53

 
53

 
—

 
53

Investments, net change
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
27

 
27

 
2

 
29

Cash flow hedges, net change
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(38
)
 
(38
)
 
1

 
(37
)
Issuance of common stock
—

 
(4
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
—

 
(4
)
Stock-based compensation expense
—

 
29

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
29

 
172

 
201

Treasury stock repurchases
—

 
—

 
—

 
—

 
—

 
(2
)
 
6

 
(359
)
 
—

 
—

 
(361
)
 
—

 
(361
)
Revaluation of redeemable shares
—

 
(70
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(70
)
 
—

 
(70
)
Impact from equity transactions of non-controlling interests
—

 
(88
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(88
)
 
(34
)
 
(122
)
Other
—

 
(9
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(9
)
 
—

 
(9
)
Balances as of May 5, 2017
569

 
$
10,016

 
223

 
$
10,041

 
—

 
$
(12
)
 
20

 
$
(1,101
)
 
$
(6,859
)
 
$
(553
)
 
$
11,532

 
$
5,858

—

$
17,390


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




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

 
DHI Group Common Stock and Capital in Excess of Par Value
 
Treasury Stock
 
 
 
 
 
 
 
 
 
 
 
Issued Shares
 
Amount
 
Shares
 
Amount
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income/(Loss)
 
Dell Technologies Stockholders' Equity
 
Non-Controlling Interests
 
Total Stockholders' Equity
Balances as of January 29, 2016
405

 
$
5,727

 
—

 
$
—

 
$
(3,937
)
 
$
(324
)
 
$
1,466

 
$
—

 
$
1,466

Net loss
—

 
—

 
—

 
—

 
55

 
—

 
55

 
—

 
55

Foreign currency translation adjustments
—

 
 
 
—

 
—

 
—

 
79

 
79

 
—

 
79

Cash flow hedges, net change
—

 
—

 
—

 
—

 
—

 
(111
)
 
(111
)
 
—

 
(111
)
Stock-based compensation expense
—

 
14

 
—

 
—

 
—

 
—

 
14

 
—

 
14

Revaluation of redeemable shares
—

 
(59
)
 
—

 
—

 
—

 
—

 
(59
)
 
—

 
(59
)
Impact from equity transactions of non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
125

 
125

Other
—

 
(1
)
 
—

 
—

 
(1
)
 
—

 
(2
)
 
—

 
(2
)
Balances as of April 29, 2016
405

 
$
5,681

 
—

 
$
—

 
$
(3,883
)
 
$
(356
)
 
$
1,442

 
$
125

 
$
1,567


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 — BASIS OF PRESENTATION

EMC Merger Transaction — On September 7, 2016, EMC Corporation, a Massachusetts corporation ("EMC"), became a wholly-owned subsidiary of Dell Technologies Inc. (the "Company") as a result of the merger of Universal Acquisition Co., a Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"), with and into EMC, with EMC surviving as a wholly-owned subsidiary of the Company (the "EMC merger transaction"). See Note 2 of the Notes to the Condensed Consolidated Financial Statements for additional information on the EMC merger transaction.

Divestitures — On November 2, 2016, the Company completed substantially all of the divestiture of Dell Services. On October 31, 2016, the Company completed the divestiture of Dell Software Group ("DSG"). On January 23, 2017, the Company completed the divestiture of the Dell EMC Enterprise Content Division ("ECD"). In accordance with applicable accounting guidance, the results of Dell Services, DSG, and ECD are presented as discontinued operations in the Condensed Consolidated Statements of Income (Loss) and, as such, have been excluded from both continuing operations and segment results for the relevant periods. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for additional information.

SecureWorks Initial Public Offering — On April 27, 2016, SecureWorks Corp. ("SecureWorks") completed a registered underwritten initial public offering ("IPO") of its Class A common stock. The results of the SecureWorks operations are included in other businesses. See Note 15 of the Notes to the Condensed Consolidated Financial Statements for more information.

Basis of Presentation — The accompanying Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes filed with the U.S. Securities and Exchange Commission ("SEC") in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2017 ("Fiscal 2017"). These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of Dell Technologies Inc. (individually and together with its consolidated subsidiaries, the "Company" or "Dell Technologies") as of May 5, 2017 and February 3, 2017, the results of its operations and corresponding comprehensive income (loss), as well as its cash flows, for the three months ended May 5, 2017 and April 29, 2016.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the Condensed Consolidated Financial Statements and the accompanying Notes. Actual results could differ materially from those estimates. The results of operations, comprehensive income (loss), and cash flows for the three months ended May 5, 2017 and April 29, 2016 are not necessarily indicative of the results to be expected for the full fiscal year or for any other fiscal period.

The Company's fiscal year is the 52- or 53-week period ending on the Friday nearest January 31. The fiscal year ended February 3, 2017 ("Fiscal 2017") was a 53-week period while the fiscal year ending February 2, 2018 ("Fiscal 2018") will be a 52-week period.

As a result of the EMC merger transaction completed on September 7, 2016, the Company's results for the fiscal periods reflected in these Condensed Consolidated Financial Statements are not directly comparable. The results of the businesses acquired in the EMC merger transaction are included in the consolidated results of Dell Technologies for the three months ended May 5, 2017. The Dell Technologies balance sheet reflects the full consolidation of EMC's assets and liabilities as a result of the closing of the EMC merger transaction on September 7, 2016.

Unless the context indicates otherwise, references in these Notes to the Condensed Consolidated Financial Statements to "VMware" mean the VMware reportable segment, which reflects the operations of VMware, Inc. (NYSE: VMW) within Dell Technologies. See Exhibit 99.1 filed with the Company's quarterly report on Form 10-Q for the quarterly period ended May 5, 2017 for information on the differences between VMware reportable segment results and VMware, Inc. results.



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



Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers — In May 2014, the Financial Accounting Standards Board (the "FASB") issued amended guidance on the recognition of revenue from contracts with customers. The objective of the new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede substantially all of the existing revenue recognition guidance, including industry-specific guidance. The new standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also provides guidance on the accounting for costs to fulfill or obtain a customer contract. Further, the new standard requires additional disclosures to help enable users of the financial statements to better understand the nature, amount, timing, risks, and judgments related to revenue recognition and related cash flows from contracts with customers.

In August 2015, the FASB approved a one-year deferral of the effective date of this standard. Public entities are required to adopt the new standard for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new revenue standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (modified retrospective method). The Company currently expects to adopt this standard retrospectively to each prior period presented for the fiscal year beginning February 3, 2018.

While the Company is currently evaluating the financial and system impacts that the new standard will have on the Condensed Consolidated Financial Statements, the Company expects that unearned license revenue related to the sale of software licenses and related deliverables will decline upon adoption. Currently, the Company defers revenue for certain software arrangements due to the absence of vendor specific objective evidence ("VSOE") of fair value for all or a portion of the deliverables. Under the new standard, the Company will no longer be required to establish VSOE of fair value in order to account for elements in an arrangement as separate units of accounting, and will be able to record revenue upon satisfaction of each performance obligation. Additionally, the Company expects the new standard to have an impact in the way the transaction price is allocated for certain non-standard warranties. The new standard is expected to result in more of the aggregate transaction price related to the non-standard warranty being recorded as revenue upon delivery of the underlying product, because the Company will no longer defer revenue based on the separately stated price of the non-standard warranty provided under the contract. The Company continues to make progress in assessing the impacts of the standard on the Condensed Consolidated Financial Statements and will continue to evaluate the impact of any changes to the standard or interpretations should they become available.

Recognition and Measurement of Financial Assets and Financial Liabilities — In January 2016, the FASB issued amended guidance 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 does not expect that the standard will have a material impact on the Condensed 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 Condensed 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, including the accounting for income taxes and forfeitures, classification of awards as either equity or liabilities, and classification of cash flows. The Company adopted this guidance during the three months ended May 5, 2017. In accordance with the new guidance, excess tax benefits or deficiencies for stock-based compensation are now reflected as a component of the provision for income taxes on the Condensed Consolidated Statements of Income (Loss), whereas they were previously recorded as additional paid-in capital. The Company has elected to continue to estimate expected forfeitures. Additionally, the Company now presents excess tax benefits as an operating activity rather than a financing activity on the Condensed Consolidated Statements of Cash Flows, while the cash flows related to employee taxes


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



paid for withheld shares are presented as a financing activity with prior periods adjusted accordingly. The adoption of the amended guidance did not have a material impact on the Condensed Consolidated Financial Statements. The prospective impact of the new standard will depend on the Company's stock price at the vesting or exercise dates of the awards and the number of awards that vest or are exercised in each period, but we do not expect the impact to be material in future periods.

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. Earlier adoption is not permitted. The Company is currently evaluating the impact that the standard will have on the Condensed Consolidated Financial Statements.

Classification of Certain Cash Receipts and Cash Payments — In August 2016, the FASB issued amended guidance on the presentation and classification of eight specific cash flow issues with the objective of reducing existing diversity in practice. Public entities must adopt the new guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Companies should reflect any adjustments on a retrospective basis, if practicable; otherwise, adoption is required to be applied as of the earliest date practicable. The Company is currently evaluating the timing of adoption as well as the impact that the standard will have on the Condensed Consolidated Financial Statements.

Intra-Entity Transfers of Assets Other Than Inventory — In October 2016, the FASB issued amended guidance on the accounting for income taxes. The new guidance requires companies to recognize the income tax effects of intra-entity asset transfers, other than transfers of inventory, when the transfer occurs instead of when the asset is sold to a third party. The new guidance should be applied on a modified-retrospective basis with the cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company early adopted this guidance during the three months ended May 5, 2017.  At adoption, approximately $84 million was reclassified from other non-current liabilities to retained earnings, resulting in a net credit to retained earnings.

Simplifying the Test for Goodwill Impairment — In January 2017, the FASB issued amended guidance to simplify the subsequent measurement of goodwill by removing Step 2 of the goodwill impairment test. Instead, under the amendments in the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Public entities must adopt the new guidance in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the new guidance and timing of adoption, but does not expect that the standard will have an impact on its Condensed Consolidated Financial Statements.



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



NOTE 2 — BUSINESS COMBINATIONS

EMC Merger Transaction

Transaction Overview — On September 7, 2016, EMC became a wholly-owned subsidiary of the Company as a result of the merger of Merger Sub with and into EMC, with EMC surviving as a wholly-owned subsidiary of the Company. Pursuant to the terms of the merger agreement, upon the completion of the EMC merger transaction, each issued and outstanding share of common stock, par value $0.01 per share, of EMC (approximately 2.0 billion as of September 7, 2016) was converted into the right to receive (1) $24.05 in cash, without interest, and (2) 0.11146 validly issued, fully paid and non-assessable shares of common stock of the Company designated as Class V Common Stock, par value $0.01 per share (the "Class V Common Stock"), plus cash in lieu of any fractional shares. Shares of the Class V Common Stock were approved for listing on the New York Stock Exchange (the "NYSE") under the ticker symbol "DVMT" and began trading on September 7, 2016.

In connection with the EMC merger transaction, the Company authorized 343 million shares of Class V Common Stock. On September 7, 2016, Dell Technologies issued 223 million shares of Class V Common Stock to EMC shareholders at a purchase price of $45.07 per share for an aggregate purchase price of approximately $10.0 billion. The total fair value of consideration transferred to effect the EMC merger transaction was approximately $64.0 billion, which primarily consisted of cash and such shares of Class V Common Stock, as well as the fair value of non-controlling interests in VMware, Inc. and Pivotal Software, Inc. ("Pivotal"), majority-owned consolidated subsidiaries of EMC. See Note 17 for more information on the Class V Common Stock.



15
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DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



Assets Acquired and Liabilities Assumed — The EMC merger transaction has been accounted for as a business combination under the acquisition method of accounting. The cumulative impact of any subsequent changes resulting from the facts and circumstances that existed as of the transaction date will be adjusted in the reporting period in which the adjustment amount is determined. The Company's purchase accounting is substantially complete. The following table summarizes, as of May 5, 2017, the preliminary purchase price allocation to the assets acquired and the liabilities assumed in the EMC merger transaction (in millions):
Current assets:
 
Cash and cash equivalents
$
10,080

Short-term investments
1,765

Accounts receivable
2,810

Short-term financing receivables
64

Inventories, net
1,993

Other current assets
903

Total current assets
17,615

Property, plant, and equipment
4,490

Long-term investments
4,317

Long-term financing receivables, net
65

Goodwill
31,539

Purchased intangibles
31,218

Other non-current assets
445

Total assets
$
89,689

Current liabilities:
 
Short-term debt
$
905

Accounts payable
728

Accrued and other
3,259

Short-term deferred revenue
4,954

Total current liabilities
9,846

Long-term debt
5,474

Long-term deferred revenue
3,469

Deferred tax liabilities
6,625

Other non-current liabilities
324

Total liabilities
25,738

Total net assets
$
63,951


The table above includes amounts allocated to ECD, which was divested in the fiscal year ended February 3, 2017. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for more information on discontinued operations.



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



Pro Forma Financial Information — The following table provides unaudited pro forma results of operations for the periods presented as if the transaction date had occurred on January 31, 2015, the first day of Fiscal 2016:
 
Three Months Ended
 
April 29, 2016
 
(in millions)
Total net revenue
$
17,205

Net loss attributable to Dell Technologies Inc.
$
(1,383
)
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - basic (a):
 
Continuing operations - Class V Common Stock
$
0.39

Continuing operations - DHI Group
$
(2.59
)
 
 
Earnings (loss) per share attributable to Dell Technologies Inc. - diluted (a):
 
Continuing operations - Class V Common Stock
$
0.39

Continuing operations - DHI Group
$
(2.59
)
____________________
(a)
For purposes of calculating pro forma earnings (loss) per share, the Company used the two-class method. Earnings are allocated between the Class V Common Stock and the DHI Group on a basis consistent with historical earnings (loss) per share.

The pro forma information for the three months ended April 29, 2016 combines the Company's historical results for the three months ended April 29, 2016 and EMC's historical results for the three months ended March 31, 2016. The historical results have been adjusted in the pro forma information to give effect to items that are (a) directly attributable to the EMC merger transaction, (b) factually supportable, and (c) expected to have a continuing impact on the combined company's results. The pro forma information is presented for informational purposes only. The unaudited pro forma results include the elimination of non-recurring transaction and integration costs of $63 million in the three months ended April 29, 2016. The pro forma information does not purport to represent what the combined company's results of operations or financial condition would have been had the EMC merger transaction actually occurred on the date indicated, and does not purport to project the combined company's results of operations for any future period or as of any future date.







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



NOTE 3 — DISCONTINUED OPERATIONS

Dell entered into a definitive agreement with NTT Data International L.L.C. to divest substantially all of Dell Services, and on November 2, 2016, the parties closed substantially all of the transaction. Dell entered into a definitive agreement with Francisco Partners and Elliot Management Corporation to divest substantially all of DSG, and on October 31, 2016, the parties closed the transaction. EMC, a subsidiary of the Company, entered into a definitive agreement with OpenText Corporation to divest the Dell EMC Enterprise Content Division, and on January 23, 2017, the parties closed the transaction.

Upon closing of the respective transactions, the Company entered into transition services agreements with NTT Data International L.L.C., Francisco Partners and Elliot Management, and OpenText Corporation pursuant to which the Company provides various administrative services on an interim transitional basis. Transition services may be provided for up to one year, with an option to renew after that period. The Company also entered into various commercial agreements with NTT Data International, Francisco Partners and Elliot Management, and OpenText Corporation that include reseller agreements for certain offerings.

In accordance with applicable accounting guidance, the Company reclassified the financial results of Dell Services, DSG, and ECD as discontinued operations in the Condensed Consolidated Statements of Income (Loss) for the relevant periods. The following table presents key financial results of Dell Services and DSG included in "Income from discontinued operations, net of income taxes (Note 3)" for the three months ended April 29, 2016:
 
Three Months Ended April 29, 2016
 
Dell Services
 
DSG
 
Total
 
(in millions)
Net revenue
$
646

 
$
321

 
$
967

Cost of net revenue
519

 
90

 
609

Operating expenses
111

 
249

 
360

Interest and other, net
—

 
14

 
14

Income (loss) from discontinued operations before income taxes
16

 
(4
)
 
12

Income tax benefit (a)
(463
)
 
(4
)
 
(467
)
Income from discontinued operations, net of income taxes
$
479

 
$
—

 
$
479

____________________
(a)
The tax benefit for Dell Services recorded during the three months ended April 29, 2016 was primarily due to temporary differences arising from outside basis differences in the stock entities to be disposed, offset by a valuation allowance.

Cash flows from the Company's discontinued operations are included in the accompanying Condensed Consolidated Statements of Cash Flows. The significant cash flow items from Dell Services and DSG for the three months ended April 29, 2016 were as follows:
 
Three Months Ended April 29, 2016
 
Dell Services
 
DSG
 
Total
 
(in millions)
Depreciation and amortization (a)
$
32

 
$
42

 
$
74

Capital expenditures
$
19

 
$
6

 
$
25

____________________
(a)
Depreciation and amortization ceased upon determination that Dell Services and DSG had met the criteria for discontinued operations reporting as of March 27, 2016 and June 19, 2016, respectively.



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



NOTE 4 — FAIR VALUE MEASUREMENTS

The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of May 5, 2017 and February 3, 2017:
 
May 5, 2017 (a)
 
February 3, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Quoted
Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Quoted
Prices
in Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
(in millions)
Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
5,477

 
$
—

 
$
—

 
$
5,477

 
$
4,866

 
$
—

 
$
—

 
$
4,866

Municipal obligations
—

 
15

 
—

 
15

 
—

 
3

 
—

 
3

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
454

 
430

 
—

 
884

 
444

 
470

 
—

 
914

U.S. corporate
—

 
1,720

 
—

 
1,720

 
—

 
1,800

 
—

 
1,800

Foreign
—

 
1,888

 
—

 
1,888

 
—

 
2,083

 
—

 
2,083

Municipal obligations
—

 
206

 
—

 
206

 
—

 
352

 
—

 
352

Asset-backed securities
—

 
—

 
—

 
—

 
—

 
4

 
—

 
4

Equity and other securities
204

 
1

 
—

 
205

 
169

 
—

 
—

 
169

Derivative instruments
—

 
108

 
—

 
108

 
—

 
205

 
—

 
205

Total assets
$
6,135

 
$
4,368

 
$
—

 
$
10,503

 
$
5,479

 
$
4,917

 
$
—

 
$
10,396

Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Derivative instruments
$
—

 
$
109

 
$
—

 
$
109

 
$
—

 
$
64

 
$
—

 
$
64

Total liabilities
$
—

 
$
109

 
$
—

 
$
109

 
$
—

 
$
64

 
$
—

 
$
64

____________________
(a) The Company did not transfer any securities between levels during the three months ended May 5, 2017.

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

Money Market Funds — The Company's investment in money market funds that are classified as cash equivalents hold underlying investments with a weighted average maturity of 90 days or less and are recognized at fair value. The valuations of these securities are based on quoted prices in active markets for identical assets, when available, or pricing models whereby all significant inputs are observable or can be derived from or corroborated by observable market data. The Company reviews security pricing and assesses liquidity on a quarterly basis. As of May 5, 2017, the Company's U.S. portfolio had no material exposure to money market funds with a fluctuating net asset value.

Cash Equivalent Municipal Obligations — The Company's municipal obligations that are classified as cash equivalents have original maturities of 90 days or less and are recognized at fair value. The valuation methodology for these securities is the same as the methodology for non-cash equivalent municipal obligations as described in the Debt Securities section below.

Debt Securities — The majority of the Company's debt securities consist of various fixed income securities such as U.S. government and agencies, U.S. corporate, and foreign. Valuation is based on pricing models whereby all significant inputs, including benchmark yields, reported trades, broker-dealer quotes, issue spreads, benchmark securities, bids, offers, and other market related data, are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset. Inputs are documented in accordance with the fair value measurements hierarchy. The Company reviews security pricing and assesses liquidity on a quarterly basis. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for additional information about investments.


19
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



 
Equity and Other Securities — The majority of the Company's investments in equity and other securities that are measured at fair value on a recurring basis consist of strategic investments in publicly traded companies. The valuation of these securities is based on quoted prices in active markets.
 
Derivative Instruments — The Company's derivative financial instruments consist primarily of foreign currency forward and purchased option contracts and interest rate swaps. The fair value of the portfolio is determined using valuation models based on market observable inputs, including interest rate curves, forward and spot prices for currencies, and implied volatilities. Credit risk is also factored into the fair value calculation of the Company's derivative instrument portfolio. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for a description of the Company's derivative financial instrument activities.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis — Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the recurring fair value table above. These assets consist primarily of non-financial assets such as goodwill and intangible assets. See Note 9 of the Notes to the Condensed Consolidated Financial Statements for additional information about goodwill and intangible assets.

As of May 5, 2017 and February 3, 2017, the Company held strategic investments of $489 million and $455 million, respectively. These investments are accounted for under the cost method and are not included in the recurring fair value table above. Investments accounted for under the cost method are recorded at cost initially, which approximates fair value. Subsequently, if there is an indicator of impairment, the impairment is recognized. In evaluating these investments for impairment, the Company uses inputs including pre- and post-money valuations of recent financing events and the impact of those on its fully diluted ownership percentages, as well as other available information regarding the issuer's historical and forecasted performance. As these investments are early-stage companies which are not publicly traded, it is not practicable for the Company to reliably estimate the fair value of these investments.

Carrying Value and Estimated Fair Value of Outstanding Debt — The following table summarizes the carrying value and estimated fair value of the Company's outstanding debt as described in Note 7 of the Notes to the Condensed Consolidated Financial Statements, including the current portion, as of the dates indicated:

 
May 5, 2017
 
February 3, 2017
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(in billions)
Senior Secured Credit Facilities
$
11.8

 
$
12.1

 
$
11.4

 
$
11.7

First Lien Notes
$
19.7

 
$
22.1

 
$
19.7

 
$
21.8

Unsecured Notes and Debentures
$
2.3

 
$
2.5

 
$
2.3

 
$
2.5

Senior Notes
$
3.1

 
$
3.5

 
$
3.1

 
$
3.5

EMC Notes
$
5.5

 
$
5.4

 
$
5.5

 
$
5.4

Margin Loan Facility
$
2.0

 
$
2.0

 
$
—

 
$
—

Bridge Facilities
$
1.5

 
$
1.5

 
$
4.0

 
$
4.0


The fair values of the outstanding Senior Secured Credit Facilities, First Lien Notes, Unsecured Notes and Debentures, Senior Notes, EMC Notes, Margin Loan Facility, and Bridge Facilities were determined based on observable market prices in a less active market or based on valuation methodologies using observable inputs and were categorized as Level 2 in the fair value hierarchy. The fair values of the other short-term debt and the structured financing debt approximate their carrying values due to their short-term maturities.


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



NOTE 5 — INVESTMENTS

The following table summarizes, by major security type, the carrying value and amortized cost of the Company's investments. All debt security investments with remaining effective maturities in excess of one year and substantially all equity and other securities are recorded as long-term investments in the Condensed Consolidated Statements of Financial Position.
 
May 5, 2017
 
February 3, 2017
 
Cost
 
Unrealized Gain
 
Unrealized (Loss)
 
Carrying Value
 
Cost
 
Unrealized Gain
 
Unrealized (Loss)
 
Carrying Value
 
(in millions)
Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
275

 
$
—

 
$
—

 
$
275

 
$
231

 
$
—

 
$
—

 
$
231

U.S. corporate debt securities
542

 
—

 
(1
)
 
541

 
651

 
—

 
(1
)
 
650

Foreign debt securities
599

 
—

 
(1
)
 
598

 
743

 
—

 
(1
)
 
742

Municipal obligations
206

 
—

 
—

 
206

 
348

 
—

 
—

 
348

Asset-backed securities
—

 
—

 
—

 
—

 
4

 
—

 
—

 
4

Total short-term investments
1,622

 
—

 
(2
)
 
1,620

 
1,977

 
—

 
(2
)
 
1,975

U.S. government and agencies
614

 
—

 
(5
)
 
609

 
689

 
—

 
(6
)
 
683

U.S. corporate debt securities
1,188

 
1

 
(10
)
 
1,179

 
1,164

 
—

 
(14
)
 
1,150

Foreign debt securities
1,299

 
1

 
(10
)
 
1,290

 
1,356

 
—

 
(15
)
 
1,341

Municipal obligations
—

 
—

 
—

 
—

 
4

 
—

 
—

 
4

Equity and other securities (a)
640

 
54

 
—

 
694

 
604

 
22

 
(2
)
 
624

Total long-term investments
3,741

 
56

 
(25
)
 
3,772

 
3,817

 
22

 
(37
)
 
3,802

Total investments
$
5,363

 
$
56

 
$
(27
)
 
$
5,392

 
$
5,794

 
$
22

 
$
(39
)
 
$
5,777

____________________
(a)
The majority of equity and other securities are strategic investments accounted for under the cost method, while the remainder are investments that are measured at fair value on a recurring basis. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for additional information on investments measured at fair value on a recurring basis.

The Company's investments in debt securities are classified as available-for-sale securities, which are carried at fair value. As of May 5, 2017, all investments in an unrealized loss position have been in a continuous unrealized loss position for less than 12 months.

The contractual maturities of debt securities held at May 5, 2017 are as follows:
 
Amortized Cost
 
Carrying Value
 
(in millions)
Due within one year
$
1,622

 
$
1,620

Due after 1 year through 5 years
3,024

 
3,002

Due after 5 years through 10 years
77

 
76

Total
$
4,723

 
$
4,698



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



NOTE 6 — FINANCIAL SERVICES

The Company offers or arranges various financing options and services for its business and consumer customers in 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 Technologies' products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including third-party originations, were $1.1 billion and $0.8 billion, respectively, for three months ended May 5, 2017 and April 29, 2016.

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 seek lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments as of May 5, 2017 were as follows: Fiscal 2018 - $1,434 million; Fiscal 2019 - $1,276 million; Fiscal 2020 - $703 million; Fiscal 2021 - $214 million; Fiscal 2022 and beyond - $54 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 May 5, 2017 and February 3, 2017:
 
May 5, 2017
 
February 3, 2017
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Financing receivables, net:
 

 
 

 
 
 
 
 
 
 
 
Customer receivables, gross
$
940

 
$
4,703

 
$
5,643

 
$
1,009

 
$
4,530

 
$
5,539

Allowances for losses
(85
)
 
(51
)
 
(136
)
 
(91
)
 
(52
)
 
(143
)
Customer receivables, net
855

 
4,652

 
5,507

 
918

 
4,478

 
5,396

Residual interest
—

 
489

 
489

 
—

 
477

 
477

Financing receivables, net
$
855

 
$
5,141

 
$
5,996

 
$
918

 
$
4,955

 
$
5,873

Short-term
$
855

 
$
2,400

 
$
3,255

 
$
918

 
$
2,304

 
$
3,222

Long-term
$
—

 
$
2,741

 
$
2,741

 
$
—

 
$
2,651

 
$
2,651




22
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
 
May 5, 2017
 
April 29, 2016
 
Revolving
 
Fixed-term
 
Total
 
Revolving
 
Fixed-term
 
Total
 
(in millions)
Allowance for financing receivable losses:
Balances at beginning of period
$
91

 
$
52

 
$
143

 
$
118

 
$
58

 
$
176

Charge-offs, net of recoveries
(22
)
 
(3
)
 
(25
)
 
(25
)
 
(3
)
 
(28
)
Provision charged to income statement
16

 
2

 
18

 
14

 
3

 
17

Balances at end of period
$
85

 
$
51

 
$
136

 
$
107

 
$
58

 
$
165


The following table summarizes the aging of the Company's customer financing receivables, gross, including accrued interest, as of May 5, 2017 and February 3, 2017, segregated by class:
 
May 5, 2017
 
February 3, 2017
 
Current
 
Past Due 1 — 90 Days
 
Past Due > 90 Days
 
Total
 
Current
 
Past Due 1 — 90 Days
 
Past Due > 90 Days
 
Total
 
(in millions)
Revolving — DPA
$
669

 
$
58

 
$
23

 
$
750

 
$
715

 
$
66

 
$
27

 
$
808

Revolving — DBC
162

 
23

 
5

 
190

 
175

 
22

 
4

 
201

Fixed-term — Consumer and Commercial
4,116

 
510

 
77

 
4,703

 
3,994

 
506

 
30

 
4,530

Total customer receivables, gross
$
4,947

 
$
591

 
$
105

 
$
5,643

 
$
4,884

 
$
594

 
$
61

 
$
5,539




23
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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 May 5, 2017 and February 3, 2017. The categories shown in the table below segregate customer receivables based on the relative degrees of credit risk. The credit quality indicators for DPA revolving accounts are measured primarily as of each quarter-end date, while all other indicators are generally updated on a periodic basis.

For DPA revolving receivables shown in the table below, the Company makes credit decisions based on proprietary scorecards, which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720 or above. The mid-category represents the mid-tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S. customer FICO scores below 660. For the DBC revolving receivables and fixed-term commercial receivables shown in the table below, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The grading criteria and classifications for the fixed-term products differ from those for the revolving products as loss experience varies between these product and customer groups. The credit quality categories cannot be compared between the different classes as loss experience varies substantially between the classes.
 
May 5, 2017
 
February 3, 2017
 
Higher
 
Mid
 
Lower
 
Total
 
Higher
 
Mid
 
Lower
 
Total
 
(in millions)
Revolving — DPA
$
134

 
$
216

 
$
400

 
$
750

 
$
136

 
$
244

 
$
428

 
$
808

Revolving — DBC
$
56

 
$
58

 
$
76

 
$
190

 
$
61

 
$
60

 
$
80

 
$
201

Fixed-term — Consumer and Commercial (a)
$
2,333

 
$
1,474

 
$
896

 
$
4,703

 
$
2,232

 
$
1,428

 
$
870

 
$
4,530

____________________
(a)
During the three months ended May 5, 2017, the Company modified its credit scoring methodology for fixed-term financing receivables in response to changes in its go-to-market strategy. This methodology has been modified to a single, consistent, and comparable model across all fixed-term product customers. In connection with this change, the Company has re-categorized existing fixed-term customers and has recast prior period credit quality categories to align with the current period presentation.

Structured Financing Debt

The Company maintains programs which facilitate the funding of financing receivables in the capital markets in the United States, Canada, and Europe. The Company's total structured financing debt, which is collateralized by financing receivables, was $3.9 billion and $3.5 billion as of May 5, 2017 and February 3, 2017, respectively, under the following programs.

•
Securitization Programs — The Company maintains securitization programs in the United States and Europe. The securitization programs in the United States include the fixed-term lease and loan securitization program and the revolving loan securitization program. The outstanding balance of debt under these U.S. programs was $1.1 billion and $1.5 billion as of May 5, 2017 and February 3, 2017, respectively. This debt is collateralized solely by the U.S. financing receivables in the programs. The debt has a variable interest rate and the duration of this debt is based on the terms of the underlying financing receivables. As of May 5, 2017, the total debt capacity related to the U.S. securitization programs was $2.1 billion. The Company enters into interest swap agreements to effectively convert the portion of its structured financing debt from a floating rate to a fixed rate. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps.

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



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



The Company established a securitization program in Europe for fixed-term leases and loans. This program became effective on January 13, 2017, and is effective for two years. The outstanding balance of debt under this program was $302 million as of May 5, 2017, and the total debt capacity related to the securitization program was $659 million.

The securitization programs contain standard structural features related to the performance of the securitized receivables which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the program, no further funding of receivables will be permitted and the timing of the Company's expected cash flows from over-collateralization will be delayed. As of May 5, 2017, these criteria were met.

•
Fixed-Term Securitization Programs — The Company periodically issues asset-backed debt securities under fixed-term securitization programs to private investors. As of May 5, 2017 and February 3, 2017, the associated debt balance of these securities was $2.1 billion and $1.4 billion, respectively. The asset-backed debt securities are collateralized solely by the U.S. fixed-term financing receivables in the offerings, which are held by SPEs, as discussed below. The interest rate on these securities is fixed and ranges from 0.42% to 3.61%, and the duration of these securities is based on the terms of the underlying financing receivables.

•
Other Structured Financing Programs — In connection with the Company's international financing operations, the Company has entered into revolving structured financing debt programs related to its fixed-term lease and loan products sold in Canada and Europe. The aggregate outstanding balances of the Canadian and European revolving structured loans as of May 5, 2017 and February 3, 2017 were $387 million and $382 million, respectively. As of May 5, 2017, the Canadian program, which was extended during the fiscal year ended May 5, 2017, had a total debt capacity of $160 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 first quarter of Fiscal 2016, is now 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 $330 million as of May 5, 2017.

Variable Interest Entities

In connection with the securitization programs discussed above, the Company transfers certain U.S. and European customer financing receivables to Special Purpose Entities ("SPEs") that meet the definition of a Variable Interest Entity ("VIE") and are consolidated, along with the associated debt, into the Condensed Consolidated Financial Statements, as the Company is the primary beneficiary of those VIEs. These SPEs are bankruptcy-remote legal entities with separate assets and liabilities. The purpose of these SPEs is to facilitate the funding of customer receivables in the capital markets.

The following table shows financing receivables held by the consolidated VIEs as of the respective dates:
 
May 5, 2017
 
February 3, 2017
 
(in millions)
Financing receivables held by consolidated VIEs, net:
 

 
 

Short-term, net
$
2,348

 
$
2,227

Long-term, net
1,636

 
1,381

Financing receivables held by consolidated VIEs, net
$
3,984

 
$
3,608


Financing receivables transferred via securitization through SPEs were $0.9 billion and $0.6 billion for the three months ended May 5, 2017 and April 29, 2016, respectively.

Some of the SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. The structured financing debt outstanding, which is collateralized by the financing receivables held by the consolidated VIEs, was $3.5 billion and $3.1 billion as of May 5, 2017 and February 3, 2017, respectively. The Company's risk of loss related to securitized receivables is limited to the amount by which the Company's right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities. The Company provides credit enhancement to the securitization in the form of over-collateralization.




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



Financing Receivable Sales

To manage certain concentrations of customer credit exposure, the Company may sell selected fixed-term financing receivables to unrelated third parties on a periodic basis. The amount of financing receivables sold was $55 million and $80 million for the three months ended May 5, 2017 and April 29, 2016, respectively.


26
Table of Contents
DELL TECHNOLOGIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 7 — DEBT

The following table summarizes the Company's outstanding debt as of the dates indicated:
 
May 5, 2017
 
February 3, 2017
 
(in millions)
Secured Debt

 
 
Structured financing debt
$
3,869

 
$
3,464

Senior Secured Credit Facilities:
 
 
 
3.50% Term Loan B Facility due September 2023
5,473

 
4,987

3.00% Term Loan A-1 Facility due December 2018
599

 
600

3.25% Term Loan A-2 Facility due September 2021
3,827

 
3,876

3.00% Term Loan A-3 Facility due December 2018
1,800

 
1,800

3.00% Revolving Credit Facility due September 2021
375

 
375

First Lien Notes:
 
 
 
3.48% due June 2019
3,750

 
3,750

4.42% due June 2021
4,500

 
4,500

5.45% due June 2023
3,750

 
3,750

6.02% due June 2026
4,500

 
4,500

8.10% due June 2036
1,500

 
1,500

8.35% due June 2046
2,000

 
2,000

Unsecured Debt
 
 
 
Unsecured Notes and Debentures:
 
 
 
5.65% due April 2018
500

 
500

5.875% due June 2019
600

 
600

4.625% due April 2021
400

 
400

7.10% due April 2028
300

 
300

6.50% due April 2038
388

 
388

5.40% due September 2040
265

 
265

Senior Notes:
 
 
 
5.875% due June 2021
1,625

 
1,625

7.125% due June 2024
1,625

 
1,625

EMC Notes:
 
 
 
1.875% due June 2018