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DELL INC (4331)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/15/2006
Filed Period 02/03/2006

Table of contents

  • Page 1
    DELL INC (4331) 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/15/2006 Filed Period 02/03/2006

  • Page 2
    ...Dell Way, Round Rock, Texas 78682 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code:(512) 338-4400 Securities registered pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value...

  • Page 3
    ... ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm CONSOLIDATED STATEMENTS...

  • Page 4
    ... desktop computer systems, mobility products, software and peripherals, servers and networking products, enhanced services, and storage products. During calendar 2005, Dell was the number one supplier of personal computer systems worldwide as well as in the United States. Dell's global market...

  • Page 5
    ... and Services Dell designs, develops, manufactures, markets, sells, and supports a wide range of products that are customized to individual customer requirements. Dell's product categories include desktop computer systems, mobility products, software and peripherals, servers and networking products...

  • Page 6
    ... the purchasing process for supplies by displaying ink or toner levels on the status window during every print job and proactively prompting users to order replacement cartridges directly from Dell. During fiscal 2006, Dell shipped more than 6.3 million Dell-branded printers. - Displays. Dell offers...

  • Page 7
    .... Dell operates Enterprise Command Centers in the United States, Ireland, China, Japan, and Malaysia to provide rapid, around-the-clock support for critical enterprise systems. Dell enterprise support services include warranty services and provide proactive maintenance to help prevent problems as...

  • Page 8
    ... points of contact and accountability with global account specialists, special global pricing, consistent service and support programs across global regions, and access to central purchasing facilities. Dell also maintains specific sales and marketing programs targeted at federal, state, and local...

  • Page 9
    ...manufacturing locations worldwide to service its global customer base. See "Item 2 - Properties" for information about Dell's manufacturing locations. Dell believes that its manufacturing processes and supply-chain management techniques provide it a distinct competitive advantage. Its build-to-order...

  • Page 10
    ...region, which is based in Round Rock, Texas, covers the U.S., Canada, and Latin America. Within the Americas, Dell is further segmented into Business and U.S. Consumer. The Americas Business segment includes sales to corporate, government, healthcare, and education customers, while the U.S. Consumer...

  • Page 11
    ...'s corporate headquarters are located in Round Rock, Texas. Its manufacturing facilities are located in Austin, Texas; Winston-Salem, North Carolina; Lebanon, Tennessee; Eldorado do Sul, Brazil; Limerick, Ireland; Penang, Malaysia; and Xiamen, China. See "Item 2 - Properties." Trademarks and Service...

  • Page 12
    ... Senior Vice President, Global eBusiness Group, Global Brand Marketing, and Dell International Services Senior Vice President, Americas Senior Vice President, Human Resources Senior Vice President, Product Group Senior Vice President, Worldwide Procurement and Global Customer Experience Senior Vice...

  • Page 13
    ... customer service centers in Penang, Malaysia, and Xiamen, China. Mr. Felice joined Dell in February 1999 and held various executive roles in Dell's sales and consulting services organizations. From February 2002 until July 2005, Mr. Felice was Vice President, Corporate Business Group, Dell Americas...

  • Page 14
    ... Group, Global Brand Marketing and Dell International Services in November 2005. In this role Mr. Hamlin is responsible for Dell's worldwide eBusiness, including online sales, service technology and content development; Dell's worldwide brand and advertising strategy; and Dell International Services...

  • Page 15
    ... for Dell's Americas Business units, serving corporate, government, education, healthcare, consumer, and small and medium business customers in the United States, Canada, and Latin America. He is also responsible for Dell's services business for Dell's manufacturing operations in Austin, Nashville...

  • Page 16
    ... on high technology, Internet and media related transactions, and where he served five years as managing partner of the firm's Hong Kong office. Mr. Tu's prior experience also includes serving as General Counsel Asia-Pacific for Goldman Sachs, attorney for the U.S. State Department and law clerk...

  • Page 17
    ... procure components from single-sourced suppliers. Dell maintains several single-source supplier relationships, either because alternative sources are not available or the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations. If the supply...

  • Page 18
    ... to new accounting regulations requiring the expensing of stock options, if Dell continues to rely on equity compensation to attract and retain qualified personnel, Dell's compensation costs may increase. • Loss of government contracts could harm Dell's business. Government contracts are subject...

  • Page 19
    ... 2.1 million square feet of office and lab space. Dell's sales, marketing, and support staff for the Americas region, as well as the corporate headquarters and support functions, are located on the Round Rock campus. Dell also owns approximately 550 acres of land in Austin, Texas, referred to...

  • Page 20
    ... in Xiamen, China. Dell also leases approximately 1.7 million square feet of office space in Bangalore, Mohali, Chandigarh and Hyderabad, India. ITEM 3 - LEGAL PROCEEDINGS Dell is subject to various legal proceedings and claims arising in the ordinary course of business. Dell's management does not...

  • Page 21
    ... Purchasers Dell has a share repurchase program that authorizes it to purchase shares of common stock in order to both distribute cash to stockholders and manage dilution resulting from shares issued under Dell's equity compensation plans. However, Dell does not currently have a policy that...

  • Page 22
    ... reported. Includes a pre-tax charge of $742 million. Approximately $482 million relates to employee termination benefits, facilities closure costs, and other asset impairments and exit costs, while the balance of $260 million relates to other-than-temporary declines in the fair value of equity...

  • Page 23
    ... worldwide, and we manage our business in three geographic segments: the Americas, EMEA, and APJ regions. During the year, we began shipping products from our third U.S. manufacturing facility located in North Carolina, and opened new customer-contact facilities in Oklahoma City, Canada, India...

  • Page 24
    ... technology infrastructure to support our rapid global growth and the increased complexity of our product and service offerings. Fiscal Year Performance Highlights Share position Revenue Operating Income(a) • We shipped an industry record 37.3 million units, resulting in a worldwide PC share...

  • Page 25
    ...year. During fiscal 2006, we began shipping products from our third U.S. manufacturing facility located in North Carolina, opened new customer contact facilities in Oklahoma City, Canada, and El Salvador, and expanded our small parts hub in Ohio. • Business - Americas Business revenue increased 12...

  • Page 26
    ...: February 3, 2006 % of Dollars Revenue Fiscal Year Ended January 28, 2005 % of Dollars Revenue (in billions, except percentages) January 30, 2004 % of Dollars Revenue Revenue: Desktop PCs Mobility Software & Peripherals Servers & Networking Enhanced Services Storage Total revenue $ $ 21.1 14...

  • Page 27
    ... on 24% unit growth year-over-year. Servers and networking remains a strategic focus area. We competitively price our server products to facilitate additional sales of storage products and higher margin enhanced services. As a result, in fiscal 2006, we grew the enhanced services revenue related to...

  • Page 28
    ... As part of our focus on improving margins, we remain committed to reducing costs in three primary areas: warranty costs, structural materials, and infrastructure. Cost savings initiatives include providing certain customer technical support and back-office functions from cost-effective locations as...

  • Page 29
    ... tax rate will continue to decline. Accelerated Vesting of "Out-of-Money" Stock Options - On January 5, 2006, our Board of Directors approved the acceleration of vesting of "out-of-money" stock options with exercise prices equal to or greater than $30.75 per share previously awarded under our equity...

  • Page 30
    ... that, in turn, issue asset-backed debt securities in the capital markets. Transfers of financing receivables are recorded in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment...

  • Page 31
    ...No. 123(R), Share-Based Payment in the first quarter of fiscal 2007, cash flow from operations will be reduced by the excess tax benefit associated with employee stock option exercises. • Key Performance Metrics - Our direct business model allows us to maintain a leading asset management system in...

  • Page 32
    ... markets later in fiscal 2007 to fund DFS funding requirements as well as other potential uses for cash. Capital Commitments Share Repurchase Program - We have a share repurchase program that authorizes us to purchase shares of common stock in order to both distribute cash to stockholders and manage...

  • Page 33
    .... Capital expenditures during fiscal 2007 are expected to be funded by cash flows from operating activities and are estimated to increase compared to recent years due to our continued expansion worldwide and the need for additional manufacturing capacity. Restricted Cash - Pursuant to an agreement...

  • Page 34
    ... We are exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of our investments. In the normal course of business, we employ established policies and procedures to manage these risks. Foreign Currency Hedging Activities Our objective in...

  • Page 35
    ... accounting policies relate to revenue recognition, warranty accruals, and income taxes. We have discussed the development, selection, and disclosure of our critical accounting policies with the Audit Committee of Dell's Board of Directors. These critical accounting policies and our other accounting...

  • Page 36
    ... at the time of sale for the estimated costs that may be incurred under its limited warranty. The specific warranty terms and conditions vary depending upon the product sold and country in which Dell does business, but generally includes technical support, parts, and labor over a period ranging from...

  • Page 37
    ...: Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Position at February 3, 2006 and January 28, 2005 Consolidated Statements of Income for the fiscal years ended February 3, 2006, January 28, 2005 and January 30, 2004 Consolidated Statements of Cash Flows...

  • Page 38
    ... and their cash flows for each of the three years in the period ended February 3, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all...

  • Page 39
    ... external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and...

  • Page 40
    ... DELL INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (in millions) February 3, January 28, 2006 2005 Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Financing receivables, net Inventories Other Total current assets Property, plant, and equipment...

  • Page 41
    Table of Contents DELL INC. CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts) Fiscal Year Ended January 28, 2005 February 3, 2006 January 30, 2004 Net revenue Cost of revenue Gross margin Operating expenses: Selling, general, and administrative Research, development, and...

  • Page 42
    ...and sales Capital expenditures Purchase of assets held in master lease facilities Cash assumed in consolidation of Dell Financial Services L.P. Net cash provided by (used in) investing activities Cash flows from financing activities: Repurchase of common stock Issuance of common stock under employee...

  • Page 43
    ...in net unrealized loss on derivative instruments, net of taxes of $4 Total comprehensive income Stock issuances under employee plans, including tax benefits Repurchases Other Balances at February 3, 2006 Treasury Stock Shares Amount Shares Amount 2,681 $ 6,018 102 $ (4,539 40 - - 2,721 - - - - 48...

  • Page 44
    ... not considered to be cash equivalents are separately categorized as investments. Investments - Dell's investments in debt securities and publicly traded equity securities are classified as available-for-sale and are reported at fair market value (based on quoted market prices) using the specific...

  • Page 45
    ... date, Dell retired all such repurchased shares, which were recorded as a reduction to retained earnings. Dell accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders' equity. Revenue Recognition - Net revenue includes sales of hardware, software...

  • Page 46
    ...fiscal 2006, 2005, and 2004, respectively. General and administrative expenses include items for Dell's administrative functions, such as Finance, Legal, Human Resources, and information technology support. These functions include costs for items such as salaries, maintenance and supplies, insurance...

  • Page 47
    ... Accounting for Stock Issued to Employees, and related Interpretations in accounting for those plans. On January 5, 2006, Dell's Board of Directors approved the acceleration of vesting of certain unvested and "out-of-money" stock options with exercise prices equal to or greater than $30.75 per share...

  • Page 48
    ...the fair value method for all awards, net of related tax effects increased $384 million for fiscal 2006. February 3, 2006 Fiscal Year Ended January 28, 2005 January 30, 2004 Expected term: Stock options Employee stock purchase plan Risk-free interest rate Volatility Dividends 3.8 years 3 months...

  • Page 49
    ... balance sheet date. The estimated fair value of foreign currency purchased option contracts is based on market quoted rates at the applicable balance sheet date and the Black-Scholes option pricing model. The estimates presented herein are not necessarily indicative of the amounts that Dell could...

  • Page 50
    ...Unrealized Fair Gain (Loss) Value (in millions) January 28, 2005 Cost Unrealized Gain (Loss) Debt securities: U.S. government and agencies U.S. corporate International corporate State and municipal governments Total debt securities Equity and other securities Total investments Short-term Long-term...

  • Page 51
    ... gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. These contracts generally expire in three months or less. If the derivative is designated as a cash flow hedge, the effective portion of the change in...

  • Page 52
    ... Department of Treasury issued further guidance that addressed the drafting oversight. In the second quarter of fiscal 2006, Dell reduced its original estimate of the tax charge by $85 million as a result of the guidance issued by the Treasury Department. As of February 3, 2006, Dell had completed...

  • Page 53
    ...Dell's net deferred tax asset are as follows: February 3, 2006 January 28, 2005 (in millions) Deferred tax assets: Deferred revenue Inventory and warranty provisions Investment impairments and unrealized gains Provisions for product returns and doubtful accounts Capital loss Leasing and financing...

  • Page 54
    ... stock. The right to purchase shares pursuant to existing stock option agreements typically vests prorata at each option anniversary date over a five-year period. The options, which are generally granted with option exercise prices equal to the fair market value of Dell shares on the date of grant...

  • Page 55
    ...1, 2005, the Dell Employee Stock Purchase Plan was amended. The amended plan allows participating employees to purchase common stock through payroll deductions at the end of each three-month participation period at a purchase price equal to 85% of the fair market value of the common stock at the end...

  • Page 56
    ...to the market value of the restricted shares on the date of grant and charges the unearned compensation to expense over the vesting period. 401(k) Plan - Dell has a defined contribution retirement plan that complies with Section 401(k) of the Internal Revenue Code. Substantially all employees in the...

  • Page 57
    ... or term loan financing, Dell sells equipment directly to customers who, in turn, enter into agreements with CIT Bank, a subsidiary of CIT, to finance their purchases. For customers who desire lease financing, Dell sells the equipment to DFS, and DFS enters into direct financing lease arrangements...

  • Page 58
    ... in turn, issue asset-backed debt securities in the capital markets. Transfers of financing receivables are recorded in accordance with the provisions of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. NOTE 7 - Deferred Revenue and Warranty...

  • Page 59
    ... credit risk for investments exists for Dell. Dell markets and sells its products and services to large corporate clients, governments, healthcare and education accounts, as well as small-to-medium businesses and individuals. Dell's receivables from such parties are well diversified. Dell purchases...

  • Page 60
    ...conducts operations worldwide and is managed in three geographic segments: the Americas, Europe, Middle East and Africa ("EMEA"), and Asia Pacific-Japan ("APJ") regions. The Americas region, which is based in Round Rock, Texas, covers the U.S., Canada, and Latin America. Within the Americas, Dell is...

  • Page 61
    ... $307 million for estimated warranty costs of servicing or replacing certain OptiPlexTM systems that include a vendor part that failed to perform to Dell's specifications, as well as additional charges for product rationalizations and workforce realignment. Charges relate to workforce realignment...

  • Page 62
    ... or long-lived assets during fiscal 2006, 2005, and 2004. The following is net revenue by product groups: February 3, 2006 Fiscal Year Ended January 28, 2005 (in billions) January 30, 2004 Revenue: Desktop PCs Mobility Software & Peripherals Servers & Networking Enhanced Services Storage Total...

  • Page 63
    ...liabilities: Deferred revenue and warranty liability Compensation Income taxes Other Other non-current liabilities: Deferred revenue and warranty liability Other...5,241 1,701 388 2,089 $ $ $ $ $ February 3, 2006 Fiscal Year Ended January 28, 2005 (in millions) January 30, 2004 Supplemental ...

  • Page 64
    ... 2006 3rd 2nd Quarter(a) Quarter(b) (in millions, except per share data) 1st Quarter Net revenue Gross margin Net income Earnings per common share(d): Basic Diluted Weighted average shares outstanding: Basic Diluted Stock sales prices per share: High Low $ $ $ $ $ 15,183 2,709 1,012 0.43 0.43...

  • Page 65
    ... public accounting firm, as stated in their Report of Independent Registered Public Accounting Firm included in "Item 8 - Financial Statements and Supplementary Data." Changes in Internal Control Over Financial Reporting - Dell's management, with the participation of Dell's Chief Executive Officer...

  • Page 66
    ... Management and Related Stockholder Matters, Item 13 - Certain Relationships and Related Transactions, and Item 14 - Principal Accounting Fees and Services), to the extent not set forth herein under "Item 1 - Business - Executive Officers of Dell," is incorporated by reference from Dell's definitive...

  • Page 67
    ...: Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Position at February 3, 2006 and January 28, 2005 Consolidated Statements of Income for the fiscal years ended February 3, 2006, January 28, 2005 and January 30, 2004 Consolidated Statements of Cash Flows...

  • Page 68
    ...on Form 8-K filed April 28, 1998, Commission File No. 0-17017) 10.1* - Dell Computer Corporation 1989 Stock Option Plan, as amended and restated (incorporated by reference to Exhibit 10.4 of Dell's Annual Report on Form 10-K for the fiscal year ended January 31, 1993, Commission File No. 0-17017) 10...

  • Page 69
    ... Dell and each Non-Employee Director of Dell (incorporated by reference to Exhibit 10.11 to Dell's Annual Report on Form 10-K for the fiscal year ended January 31, 2003, Commission File No. 0-17017) 10.11* - Form of Performance Based Stock Unit Agreement under the 2002 Long Term Incentive Plan...

  • Page 70
    ... at End of Period Fiscal Year Description Trade Receivables: 2006 Allowance for doubtful accounts 2005 Allowance for doubtful accounts 2004 Allowance for doubtful accounts Financing Receivables: 2006 Allowance for doubtful accounts 2005 Allowance for doubtful accounts 2004 Allowance for doubtful...

  • Page 71
    ..., 2006 Director March 15, 2006 Director March 15, 2006 Director March 15, 2006 Director March 15, 2006 Director March 15, 2006 Sr. Vice President and Chief Financial Officer (principal financial officer) March 15, 2006 Vice President, Corporate Finance (principal accounting officer) 68...

  • Page 72
    ... corporation, having its principal office in Austin, Texas (hereinafter referred to as the "Employer"): R E C I T A L S: WHEREAS, the Employer has previously established the Dell Inc. 401(k) Plan as amended and restated effective as of January 1, 2003 (the "Plan") for the benefit of those employees...

  • Page 73
    ...Oy Dell A.B. Dell S.A. Dell GmbH Dell Halle GmbH Dell Technology Products and Services S.A Dell Distribution (EMEA) Limited Magyarorszagi Kereskedelmi Kepviselet - Rep. Office Dell Products (Europe) B.V. - Ireland Branch Dell Computer Limited Dell Direct Dell Financial Services International Limited...

  • Page 74
    ... Limited Dell Hong Kong Limited Dell Asia Pacific Sdn. India Liaison Office Dell International Services India Private Limited Dell India Private Ltd. Dell Asia Pacific Sdn. - Indonesia Representative Office Dell Japan Inc. Dell Asia Pacific Sdn. Dell Global Procurement Malaysia Sdn. Bhd. Dell New...

  • Page 75
    ... Dell Eastern Europe Corporation Dell Equipment Funding L.P. Dell Equipment GP L.L.C Dell Federal Systems Corporation Dell Federal Systems GP L.L.C. Dell Federal Systems L.P. Dell Federal Systems LP L.L.C. Dell Financial Services L.P. Dell Funding L.L.C. Dell Gen. P. Corp. Dell International...

  • Page 76
    .... International Americas - Dell Export Sales Corporation Dell Computadores do Brasil Ltda. Dell Procurement International Dell Computer de Chile Ltda Dell Technology Services Inc. S.R.L. Dell El Salvador S.A. DE C.V. Dell Mexico, S.A. de C.V. Dell Computer Services de Mexico SA de CV Dell Canada Inc...

  • Page 77
    ...-111215 of Dell Inc. (formerly Dell Computer Corporation) of our report dated March 15, 2006 relating to the financial statements, financial statement schedules, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over...

  • Page 78
    ... fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 3. 4. (b) (c) (d) 5. The registrant's other certifying officer...

  • Page 79
    ... OFFICER, PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, James M. Schneider, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Dell Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state...

  • Page 80
    ... B. ROLLINS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AND JAMES M. SCHNEIDER, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, PURSUANT TO 18 U.S.C. SECTION 1350 The undersigned officers of Dell Inc. hereby certify that (a) Dell's Annual Report on Form 10-K for the fiscal year ended February 3, 2006...