Dell 2006 Annual Report Download - page 56

Table of Contents
Purchase Obligations — Purchase obligations are defined as contractual obligations to purchase goods or services that are
enforceable and legally binding on us. These obligations specify all significant terms, including fixed or minimum quantities to
be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase
obligations do not include contracts that may be cancelled without penalty.
We utilize several suppliers to manufacture sub-assemblies for our products. Our efficient supply chain management allows
us to enter into flexible and mutually beneficial purchase arrangements with our suppliers in order to minimize inventory risk.
Consistent with industry practice, we acquire raw materials or other goods and services, including product components, by
issuing suppliers authorizations to purchase based on our projected demand and manufacturing needs. These purchase
orders are typically fulfilled within 30 days and are entered into during the ordinary course of business in order to establish
best pricing and continuity of supply for our production. Purchase orders are not included in the table above as they typically
represent our authorization to purchase rather than binding purchase obligations.
DFS Purchase Commitment — Included in the table above is our maximum purchase obligation to purchase CIT's 30%
interest in DFS at the expiration of the joint venture on January 29, 2010, for a purchase price ranging from approximately
$100 million to $345 million. We currently expect that the purchase price will likely be towards the upper end of the range.
See Note 7 of Notes to Consolidated Financial Statements included in "Part II — Item 8 — Financial Statements and
Supplementary Data."
Interest — See Note 3 of Notes to the Consolidated Financial Statements included in "Part II — Item 8 — Financial
Statements and Supplementary Data" for further discussion of our long-term debt and related interest expense.
Market Risk
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 managing our exposures to foreign currency exchange rate fluctuations is to reduce the impact of adverse
fluctuations on earnings and cash flows associated with foreign currency exchange rate changes. Accordingly, we utilize
foreign currency option contracts and forward contracts to hedge our exposure on forecasted transactions and firm
commitments in over 20 currencies in which we transact business. The principal currencies hedged during Fiscal 2007 were
the Euro, British Pound, Japanese Yen, and Canadian Dollar. We monitor our foreign currency exchange exposures to
ensure the overall effectiveness of our foreign currency hedge positions. However, there can be no assurance that our
foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on our results
of operations and financial position.
Based on our foreign currency cash flow hedge instruments outstanding at February 2, 2007 and February 3, 2006, we
estimate a maximum potential one-day loss in fair value of approximately $41 million and $46 million, respectively, using a
Value-at-Risk ("VAR") model. The VAR model estimates were made assuming normal market conditions and a 95%
confidence level. We used a Monte Carlo simulation type model that valued our foreign currency instruments against a
thousand randomly generated market price paths. Forecasted transactions, firm commitments, fair value hedge instruments,
and accounts receivable and payable denominated in foreign currencies were excluded from the model. The VAR model is a
risk estimation tool, and as such, is not intended to represent actual losses in fair value that will be incurred. Additionally, as
we utilize foreign currency instruments for hedging forecasted and firmly committed transactions, a loss in fair value for those
instruments is generally offset by increases in the value of the underlying exposure. As a result of our hedging activities,
foreign currency fluctuations did not have a material impact on our results of operations and financial position during Fiscal
2007, 2006, and 2005.
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