Dell Revises Fiscal 2011 First Quarter Results to Reflect Potential Legal Liability

ROUND ROCK, Texas--(BUSINESS WIRE)--June 10, 2010--Dell today said as a result of ongoing discussions with the staff of the U.S. Securities and Exchange Commission (SEC), the company recorded a $100 million liability in its first quarter of Fiscal 2011 to establish a reserve for the potential settlement by the company of the previously reported SEC investigation. The settlement would involve a civil injunctive action against the company for alleged violations of certain federal securities laws, including the antifraud provisions of federal securities laws, relating to certain accounting and financial reporting matters. The settlement would also include negligence-based fraud charges, as well as other non-fraud based charges, relating to the company’s disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of its commercial relationship with Intel Corp.

In addition, the company reported that Michael Dell, Chairman and CEO, and the SEC staff have recently commenced discussion of a settlement framework relating to Mr. Dell that would resolve allegations relating to the company’s disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of the company’s commercial relationship with Intel Corp. Any such settlement by Mr. Dell would involve alleged violations of negligence-based fraud provisions of the federal securities laws, as well as other non-fraud based provisions, and would not include any bar against Mr. Dell’s service as an officer and director of a public company. Any settlement would be made without admitting or denying the SEC’s allegations.

“We are hopeful that these settlement discussions will achieve a comprehensive resolution in the near future. The independent directors of the Board have affirmed that Michael Dell will continue to lead the company as its Chairman and CEO, and he continues to have our complete confidence and support,” said Sam Nunn, presiding director of the Dell Board.

The investigation of the company began in 2005. In response, Dell undertook an independent investigation, completed in 2007, which led to a restatement of certain historical financial reports and implementation of extensive remedial measures.

Because this latest development in Dell’s discussions with the SEC staff occurred before Dell filed its Quarterly Report on Form 10-Q for its first quarter of Fiscal 2011, the company revised its previously announced financial results and recorded a liability for the potential settlement involving the company. The Form 10-Q report for the company’s first fiscal quarter was filed today.

As a result of the liability recorded, the company’s net income on a GAAP basis for the first quarter of Fiscal 2011 has been reduced by $100 million, or 5 cents per share. Results on a non-GAAP basis did not change.

The following table summarizes the revised results for the first quarter of Fiscal 2011 and provides a comparison to the first quarter of Fiscal 2010:

Information about Dell’s use of non-GAAP financial information is provided under “Non-GAAP Financial Measures” below. Non-GAAP financial information excludes costs related to the amortization of purchased intangibles, severance and facility-action costs, acquisition-related charges and accruals for a potential settlement with the SEC as well as a provision for settlement of securities class-action litigation. All comparisons in this press release are year over year unless otherwise noted.

Discussions concerning the potential settlements involving the company and Mr. Dell are ongoing. No assurance can be given as to when any settlement might occur or as to the final terms and conditions of any settlement. Any settlement recommended by the SEC staff would be subject to approval by the Commission.

Dell Inc. (NASDAQ: DELL) listens to customers and delivers worldwide innovative technology, business solutions and services they trust and value. For more information, visit www.dell.com.

This press release includes information about non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share (collectively the “non-GAAP financial measures”), which are not measurements of financial performance prepared in accordance with U.S. generally accepted accounting principles. In the following tables, Dell has provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure under the heading “Reconciliation of Non-GAAP Financial Measures” and has presented a detailed discussion of its reasons for including the non-GAAP financial measures and the limitations associated with those measures under the heading “Use of Non-GAAP Financial Measures.” Dell encourages investors to review the reconciliation and the non-GAAP discussion in conjunction with Dell’s presentation of these non-GAAP financial measures.

Statements in this press release that relate to future results and events (including statements about a potential settlement of the SEC investigation) are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on Dell's current expectations. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including that Dell can give no assurance as to the ultimate outcome of the SEC investigation, when any settlement with the SEC might occur, the terms or conditions of any settlement, or the potential impact of any resolution of this matter on Dell’s business, as well as the other risks and uncertainties discussed in Dell’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for its fiscal year ended January 29, 2010. Dell assumes no obligation to update its forward-looking statements.

Revised consolidated statements of income, financial position and cash flows and other financial data follow.

DELL INC.
Condensed Consolidated Statement of Income and Related Financial Highlights
(in millions, except per share data and percentages)
(unaudited)

	Three Months Ended									% Growth Rates
	April 30,			January 29,			May 1,
	2010⁽¹⁾			2010⁽¹⁾			2009			Sequential		Yr. to Yr.

Net revenue
Products	$	12,086		$	12,096		$	10,232		0	%	18	%
Services, including software related		2,788			2,804			2,110		(1	%)	32	%
Net revenue		14,874			14,900			12,342		0	%	21	%

Cost of net revenue
Products		10,385			10,501			8,786		(1	%)	18	%
Services, including software related		1,973			1,930			1,388		2	%	42	%
Total cost of net revenue		12,358			12,431			10,174		(1	%)	21	%

Gross margin		2,516			2,469			2,168		2	%	16	%

Selling, general and administrative		1,830			1,780			1,613		3	%	13	%
Research, development and engineering		167			179			141		(7	%)	18	%
Total operating expenses		1,997			1,959			1,754		2	%	14	%

Operating income		519			510			414		2	%	25	%

Interest and other, net		(68	)		(41	)		(2	)	(67	%)	NM
Income before income taxes		451			469			412		(4	%)	9	%
Income tax provision		110			135			122		(18	%)	(10	%)
Net income	$	341		$	334		$	290		2	%	18	%

Earnings per share:
Basic	$	0.17		$	0.17		$	0.15		0	%	13	%
Diluted	$	0.17		$	0.17		$	0.15		0	%	13	%

Weighted average shares outstanding:
Basic		1,961			1,957			1,949		0	%	1	%
Diluted		1,973			1,971			1,952		0	%	1	%

Percentage of Total Net Revenue:
Gross margin		16.9	%		16.6	%		17.6	%
Selling, general and administrative		12.3	%		12.0	%		13.1	%
Research and development		1.1	%		1.2	%		1.1	%
Operating expenses		13.4	%		13.2	%		14.2	%
Operating income		3.5	%		3.4	%		3.4	%
Income before income taxes		3.0	%		3.2	%		3.3	%
Net income		2.3	%		2.2	%		2.3	%
Income tax rate		24.4	%		28.7	%		29.6	%

Net Revenue by Product Category:
Servers and Networking	$	1,785		$	1,804		$	1,286		(1	%)	39	%
Storage		554			599			534		(8	%)	4	%
Services⁽¹⁾		1,891			1,922			1,238		(2	%)	53	%
Software and Peripherals		2,496			2,477			2,246		1	%	11	%
Mobility		4,563			4,653			3,875		(2	%)	18	%
Desktop PCs		3,585			3,445			3,163		4	%	13	%
Consolidated net revenue	$	14,874		$	14,900		$	12,342		0	%	21	%

Percentage of Total Net Revenue:
Servers and Networking		12	%		12	%		10	%
Storage		4	%		4	%		4	%
Services⁽¹⁾		13	%		13	%		10	%
Software and Peripherals		17	%		17	%		18	%
Mobility		30	%		31	%		32	%
Desktop PCs		24	%		23	%		26	%

Net Revenue by Global Segment:
Large Enterprise	$	4,246		$	4,197		$	3,400		1	%	25	%
Public		3,856			3,820			3,171		1	%	22	%
Small and Medium Business		3,524			3,336			2,967		6	%	19	%
Consumer		3,248			3,547			2,804		(8	%)	16	%
Consolidated net revenue	$	14,874		$	14,900		$	12,342		0	%	21	%

Percentage of Total Net Revenue:
Large Enterprise		28	%		28	%		27	%
Public		26	%		26	%		26	%
Small and Medium Business		24	%		22	%		24	%
Consumer		22	%		24	%		23	%

Consolidated Operating Income:
Large Enterprise	$	283		$	281		$	192
Public		298			333			293
Small and Medium Business		313			282			230
Consumer		17			9			(1	)
Consolidated segment operating income		911			905			714
Severance and facility actions		(57	)		(86	)		(185	)
Broad based long-term incentives		(87	)		(107	)		(76	)
Amortization of intangible assets		(88	)		(86	)		(39	)
Acquisition-related		(20	)		(116	)		-
Other⁽²⁾		(140	)		-			-
Consolidated operating income	$	519		$	510		$	414

Note: Percentage growth rates and ratios are calculated based on underlying data in thousands.

⁽¹⁾Includes the results of Perot Systems Corporation ("Perot Systems"), which was acquired on November 3, 2009, from the date of acquisition.

⁽²⁾Includes a $100 million liability for a potential settlement of the SEC investigation and a $40 million securities litigation accrual.

DELL INC.
Condensed Consolidated Statement of Financial Position and Related Financial Highlights
(in millions, except for "Ratios")
(unaudited)

	April 30,			January 29,			May 1,
	2010			2010			2009
Assets:
Current assets:
Cash and cash equivalents	$	10,255		$	10,635		$	9,691
Short-term investments		627			373			434
Accounts receivable, net		5,880			5,837			4,278
Financing receivables, net		3,221			2,706			1,775
Inventories, net		1,182			1,051			842
Other		3,619			3,643			2,890
Total current assets		24,784			24,245			19,910
Property, plant and equipment, net		2,049			2,181			2,181
Investments		714			781			568
Long-term financing receivables, net		528			332			445
Goodwill		4,181			4,074			1,742
Purchased intangible assets, net		1,658			1,694			684
Other non-current assets		327			345			659
Total assets	$	34,241		$	33,652		$	26,189

Liabilities and Equity:
Current liabilities:
Short-term debt	$	1,079		$	663		$	101
Accounts payable		11,402			11,373			7,844
Accrued and other		3,549			3,884			3,464
Short-term deferred services revenue		2,950			3,040			2,732
Total current liabilities		18,980			18,960			14,141
Long-term debt		3,582			3,417			2,396
Long-term deferred services revenue		3,194			3,029			2,954
Other non-current liabilities		2,607			2,605			2,468
Total liabilities		28,363			28,011			21,959
Stockholders' equity		5,878			5,641			4,230
Total liabilities and equity	$	34,241		$	33,652		$	26,189


Ratios:
Days of sales outstanding ⁽¹⁾		38			38			34
Days supply in inventory		9			8			7
Days in accounts payable		(83	)		(82	)		(69	)
Cash conversion cycle		(36	)		(36	)		(28	)

Average total revenue/unit (approximate)	$	1,360		$	1,340		$	1,360

⁽¹⁾ Days of sales outstanding (“DSO”) is based on the ending net trade receivables and most recent quarterly revenue for each period. DSO includes the effect of product costs related to customer shipments not yet recognized as revenue that are classified in the other current assets. At April 30, 2010, January 29, 2010, and May 1, 2009, DSO and days of customer shipments not yet recognized were 35 and 3 days, 35 and 3 days, 31 and 3 days, respectively.

DELL INC.
Condensed Consolidated Statements of Cash Flows
(in millions, unaudited)

	Three Months Ended
	April 30,			May 1,
	2010			2009⁽¹⁾
Cash flows from operating activities:
Net income	$	341		$	290
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		247			201
Stock-based compensation		76			67
Effects of exchange rate changes on monetary assets and
liabilities denominated in foreign currencies		30			-
Deferred income taxes		(31	)		(26	)
Provision for doubtful accounts - including financing receivables		122			105
Other		-			18
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable		(119	)		380
Financing receivables		(208	)		(27	)
Inventories		(132	)		24
Other assets		69			547
Accounts payable		22			(483	)
Deferred services revenue		72			(25	)
Accrued and other liabilities		(251	)		(310	)
Change in cash from operating activities		238			761

Cash flows from investing activities:
Investments:
Purchases		(350	)		(428	)
Maturities and sales		169			642
Capital expenditures		(46	)		(80	)
Acquisition of business, net of cash received		(133	)		(3	)
Change in cash from investing activities		(360	)		131

Cash flows from financing activities:
Repurchase of common stock		(200	)		-
Issuance of common stock under employee plans		7			-
Issuance of commercial paper (maturity 90 days or less), net		234			-
Proceeds from debt		268			497
Repayments of debt		(566	)		(12	)
Other		3			-
Change in cash from financing activities		(254	)		485


Effect of exchange rate changes on cash and cash equivalents		(4	)		(38	)

Change in cash and cash equivalents		(380	)		1,339

Cash and cash equivalents at beginning of period		10,635			8,352
Cash and cash equivalents at end of period	$	10,255		$	9,691

⁽¹⁾ Prior period amounts have been reclassified to conform to the current year presentation.

The tables on the following pages set forth, for the periods indicated, a reconciliation of non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share (collectively, the “non-GAAP financial measures”) to the most comparable GAAP financial measures. These non-GAAP financial measures may not be directly comparable to similarly titled measures reported by other companies. See “Use of Non-GAAP Financial Measures” following the tables for additional information regarding Dell’s reasons for including the non-GAAP financial measures and for material limitations with respect to the usefulness of these measures.

DELL INC.
Reconciliation of Non-GAAP Financial Measures
(in millions, except per share data and percentages)
(unaudited)

	Three Months Ended									% Growth Rates
	April 30,			January 29,			May 1,
	2010			2010			2009			Sequential		Yr. to Yr.


GAAP gross margin	$	2,516		$	2,469		$	2,168		2	%	16	%

Non-GAAP adjustments:
Amortization of intangibles		68			71			26
Severance and facility actions		29			55			65
Acquisition-related		1			1			-
Non-GAAP gross margin	$	2,614		$	2,596		$	2,259		1	%	16	%


GAAP operating expenses	$	1,997		$	1,959		$	1,754		2	%	14	%

Non-GAAP adjustments:
Amortization of intangibles		(20	)		(15	)		(13	)
Severance and facility actions		(28	)		(31	)		(120	)
Acquisition-related		(19	)		(115	)		-
Other⁽¹⁾		(140	)		-			-
Non-GAAP operating expenses	$	1,790		$	1,798		$	1,621		0	%	10	%


GAAP operating income	$	519		$	510		$	414		2	%	25	%

Non-GAAP adjustments:
Amortization of intangibles		88			86			39
Severance and facility actions		57			86			185
Acquisition-related		20			116			-
Other⁽¹⁾		140			-			-
Non-GAAP operating income	$	824		$	798		$	638		3	%	29	%


GAAP net income	$	341		$	334		$	290		2	%	18	%

Non-GAAP adjustments:
Amortization of intangibles		88			86			39
Severance and facility actions		57			86			185
Acquisition-related		20			116			-
Other⁽¹⁾		140			-			-
Aggregate adjustment for income taxes		(62	)		(78	)		(28	)
Non-GAAP net Income	$	584		$	544		$	486		7	%	20	%


GAAP earnings per share - diluted	$	0.17		$	0.17		$	0.15		0	%	13	%
Non-GAAP adjustments per share - diluted		0.13			0.11			0.10
Non-GAAP earnings per share - diluted	$	0.30		$	0.28		$	0.25		7	%	20	%


GAAP Diluted WAS		1,973			1,971			1,952


Percentage of Total Net Revenue:

GAAP gross margin		16.9	%		16.6	%		17.6	%
Non-GAAP adjustment		0.7	%		0.8	%		0.7	%
Non-GAAP gross margin		17.6	%		17.4	%		18.3	%

GAAP operating expenses		13.4	%		13.2	%		14.2	%
Non-GAAP adjustment		(1.4	%)		(1.1	%)		(1.1	%)
Non-GAAP operating expenses		12.0	%		12.1	%		13.1	%

GAAP operating income		3.5	%		3.4	%		3.4	%
Non-GAAP adjustment		2.0	%		2.0	%		1.8	%
Non-GAAP operating income		5.5	%		5.4	%		5.2	%

Note: Percentage growth rates and ratios are calculated based on underlying data in thousands.

⁽¹⁾Includes a $100 million liability for a potential settlement of the SEC investigation and a $40 million securities litigation accrual.

Dell provides non-GAAP financial information to investors to supplement GAAP financial information. Dell believes that excluding certain items from Dell’s GAAP results allows Dell’s management to better understand Dell’s consolidated financial performance from period to period and in relationship to the operating results of Dell’s segments, as management does not believe that the excluded items are reflective of underlying operating performance. The non-GAAP financial measures, as defined by Dell, represent the comparable GAAP measures adjusted to exclude acquisition related charges primarily related to our acquisition of Perot Systems in the fourth quarter of Fiscal 2010, amortization of purchased intangible assets related to acquisitions, severance and facility action costs, and accruals for a potential settlement of the SEC investigation as well as a provision for a securities litigation matter that were accrued for the first quarter of Fiscal 2011. In the future, Dell expects that it may again exclude such items and may incur expenses similar to these excluded items, including in connection with any future acquisitions. Accordingly, the exclusion of these items and other similar items in Dell’s non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual. Dell believes the non-GAAP financial measures will provide investors with useful information to help them evaluate Dell’s operating results. These non-GAAP financial measures facilitate an enhanced understanding of historical results and enable more meaningful period to period comparisons.

This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for gross margin, operating expenses, operating income, net income, and earnings per share prepared in accordance with GAAP.

The non-GAAP financial measures for the periods indicated in the tables above reflect adjustments related to the following items:

There are limitations to the use of non-GAAP financial measures. Other companies, including companies in Dell’s industry, may calculate the non-GAAP financial measures differently than Dell does, limiting the usefulness of those measures for comparative purposes. In addition, items such as amortization of purchased intangible assets represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in the non-GAAP financial measures and such measures, therefore, do not reflect the full economic effect of such loss. Lastly, items such as severance and facility action costs and acquisition expenses that are excluded from the non-GAAP financial measures can have a material impact on earnings. Dell’s management compensates for the foregoing limitations by relying primarily on Dell’s GAAP results and using non-GAAP financial measures only supplementally. Non-GAAP financial measures are not an alternative to GAAP financial measures and should be read only in conjunction with financial information presented on a GAAP basis. Dell provides detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure within the financial information included with this press release and in other written materials that include the non-GAAP financial measures, and Dell encourages investors to review the reconciliations in conjunction with the presentation of any non-GAAP financial measures.

CONTACT:
Dell
Media Contacts: 512-728-4100
Jess Blackburn, 512-728-8295
jess_blackburn@dell.com
or
David Frink, 512-728-2678
david_frink@dell.com
or
Investor Relations Contacts:
Robert Williams, 512-728-7570
robert_williams@dell.com
or
Shep Dunlap, 512-723-0341
shep_dunlap@dell.com
or
Frank Molina, 512-723-5116
frank_molina@dell.com

	First Quarter
(in millions, except share data)	FY11	FY10	Change
Revenue	$14,874	$12,342	21%

Operating Income (GAAP)	$519	$414	25%
Net Income (GAAP)	$341	$290	18%
EPS (GAAP)	$0.17	$0.15	13%

Operating Income (non-GAAP)	$824	$638	29%
Net Income (non-GAAP)	$584	$486	20%
EPS (non-GAAP)	$0.30	$0.25	20%