NOTE 5 — FINANCIAL SERVICES

Dell Financial Services L.L.C.

Dell offers or arranges various financing options and services for its business and consumer customers in the U.S. through Dell Financial Services L.L.C. (“DFS”), a wholly-owned subsidiary of Dell. DFS's key activities include the origination, collection, and servicing of customer receivables related to the purchase of Dell products and services. New financing originations, which represent the amounts of financing provided to customers for equipment and related software and services through DFS, were approximately $800 million and $900 million, for the three months ended April 29, 2011, and April 30, 2010, respectively.

In April 2011, Dell announced its intent to acquire Dell Financial Services Canada Limited. from CIT Group Inc. ("CIT"), as well as CIT Vendor Finance's Dell-related assets and sales and servicing functions in Europe. Dell expects to close the acquisition in Canada in the second quarter of Fiscal 2012 and the acquisition in Europe in Fiscal 2013 subject to customary closing conditions.

Dell transfers certain customer financing receivables to special purpose entities (“SPEs”). The SPEs are bankruptcy remote legal entities with separate assets and liabilities. The purpose of the SPEs is to facilitate the funding of customer receivables in the capital markets. These SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. Dell's risk of loss related to securitized receivables is limited to the amount of Dell's right to receive collections for assets securitized exceeding the amount required to pay interest, principal, and other fees and expenses related to the asset-backed securities. Dell provides credit enhancement to the securitization in the form of over-collateralization. These SPEs meet the definition of a variable interest entity and Dell has determined that it is the primary beneficiary of these SPEs and has consolidated them in Dell's condensed consolidated financial statements. The primary factors in this determination were the obligation to absorb losses due to the interest Dell retains in the assets transferred to the SPEs in the form of over-collateralization, and the power to direct activities through the servicing role performed by Dell.

Dell's securitization programs contain standard structural features related to the performance of the securitized receivables. These structural features include defined credit losses, delinquencies, average credit scores, and excess collections above or below specified levels. In the event one or more of these criteria are not met and Dell is unable to restructure the program, no further funding of receivables will be permitted and the timing of Dell's expected cash flows from over-collateralization will be delayed. At April 29, 2011, these criteria were met.

Financing Receivables

The following table summarizes the components of Dell's financing receivables segregated by portfolio segment:



	April 29, 2011									January 28, 2011
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Financing Receivables, net:
Customer receivables, gross	$	2,200		$	2,031		$	4,231		$	2,396		$	1,992		$	4,388
Allowances for losses	(191		)	(26		)	(217		)	(214		)	(27		)	(241		)
Customer receivables, net	2,009			2,005			4,014			2,182			1,965			4,147
Residual interest	—			314			314			—			295			295
Financing receivables, net	$	2,009		$	2,319		$	4,328		$	2,182		$	2,260		$	4,442
Short-term	$	2,009		$	1,196		$	3,205		$	2,182		$	1,461		$	3,643
Long-term	—			1,123			1,123			—			799			799
Financing receivables, net	$	2,009		$	2,319		$	4,328		$	2,182		$	2,260		$	4,442

Included in financing receivables, net, are receivables that are held by consolidated variable interest entities ("VIEs") as shown in the table below:



	April 29, 2011		January 28, 2011
	(in millions)
Financing receivables held by consolidated VIEs, net:
Short-term, net	$	936	$	1,087
Long-term, net	437		262
Financing receivables held by consolidated VIEs, net	$	1,373	$	1,349

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



	Three Months Ended
	April 29, 2011									April 30, 2010
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Allowance for financing receivable losses:
Balance at the beginning of period	$	214		$	27		$	241		$	224		$	13		$	237
Incremental allowance due to VIE consolidation	—			—			—			—			16			16
Principal charge-offs	(58		)	(2		)	(60		)	(49		)	(6		)	(55		)
Interest charge-offs	(11		)	—			(11		)	(6		)	—			(6		)
Recoveries	19			1			20			5			—			5
Provision charged to income statement	27			—			27			82			6			88
Balance at end of period	$	191		$	26		$	217		$	256		$	29		$	285

The following table summarizes the aging of Dell's customer receivables, gross, including accrued interest, as of April 29, 2011 and January 28, 2011 segregated by class:



	April 29, 2011								January 28, 2011
	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 — Consumer
Owned since inception	$	1,254	$	118	$	40	$	1,412	$	1,302	$	153	$	48	$	1,503
Purchased	389		58		23		470		447		88		35		570
Revolving — SMB
Owned since inception	253		20		5		278		246		26		5		277
Purchased	32		6		2		40		34		9		3		46
Fixed-term — Large Enterprise
Owned since inception	1,154		25		6		1,185		1,077		47		7		1,131
Fixed-term — Public
Owned since inception	423		17		2		442		463		12		1		476
Fixed-term — SMB
Owned since inception	395		7		2		404		371		11		3		385
Total customer receivables, gross	$	3,900	$	251	$	80	$	4,231	$	3,940	$	346	$	102	$	4,388

The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class as of April 29, 2011 and January 28, 2011. For revolving loans to consumers, Dell makes credit decisions based on propriety scorecards which include the customer's credit history, payment history, credit usage, and other FICO-related elements. For Commercial customers, 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. These credit level scores range from one to sixteen for Public and Large Enterprise customers, and from one to six for small and medium ("SMB") customers. The categories shown in the tables below segregate between the relative degrees of credit risk within that segment and product set. As loss experience varies substantially between financial products and customer segments, the credit quality categories cannot be compared between the different classes. The credit quality indicators for Consumer accounts are as of each quarter end date. Commercial accounts are generally updated on a periodic basis.



	April 29, 2011								January 28, 2011
	FICO 720+		FICO 660 to 719		FICO < 660		Total		FICO 720+		FICO 660 to 719		FICO < 660		Total
	(in millions)
Revolving — Consumer
Owned since inception	$	229	$	397	$	786	$	1,412	$	251	$	415	$	837	$	1,503
Purchased	$	43	$	108	$	319	$	470	$	50	$	127	$	393	$	570

For the revolving consumer receivables in the above table, the FICO 720+ category includes prime accounts which are generally higher credit quality, FICO 660 to 719 includes near-prime accounts and represents the mid-tier accounts, and FICO scores below 660 are generally sub-prime and represent lower credit quality accounts.



	April 29, 2011								January 28, 2011
	Investment		Non-Investment		Sub-Standard		Total		Investment		Non-Investment		Sub-Standard		Total
	(in millions)
Fixed-term — Large Enterprise
Owned since inception	$	874	$	189	$	122	$	1,185	$	806	$	166	$	159	$	1,131
Fixed-term — Public
Owned since inception	$	402	$	32	$	8	$	442	$	438	$	30	$	8	$	476

For the Large Enterprise and Public commercial receivables shown above, Dell's internal credit level scoring has been aggregated to their most comparable external commercial rating agency equivalents. Investment grade accounts are generally of the highest credit quality, non-investment grade represents middle quality accounts, and sub-standard represents the lowest quality accounts.



	April 29, 2011								January 28, 2011
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — SMB
Owned since inception	$	105	$	85	$	88	$	278	$	108	$	85	$	84	$	277
Purchased	$	14	$	21	$	5	$	40	$	16	$	24	$	6	$	46
Fixed-term — SMB
Owned since inception	$	40	$	128	$	236	$	404	$	62	$	129	$	194	$	385

For SMB receivables in the above table, the Higher category includes Dell's top two internal credit quality levels, which generally have the lowest loss experience, Mid includes credit levels three and four, and Lower includes Dell's bottom two credit levels, which experience higher loss rates. The revolving product is sold primarily to small business customers and the fixed-term products are more weighted toward medium-sized businesses. Although both fixed-term and revolving products rely on a six-level internal rating system, the grading criteria and classifications are different as the loss performance varies between these products and customer sets. Therefore, the credit levels are not comparable between the SMB fixed-term and revolving classes.

Customer Receivables

The following is the description of the components of Dell's customer receivables:

•

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. Revolving loans 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 12 months on average. Revolving loans are included in short-term financing receivables. From time to time, account holders may have the opportunity to finance their Dell purchases with special programs during which, if the outstanding balance is paid in full by a specific date, no interest is charged. These special programs generally range from 6 to 12 months. At April 29, 2011, and January 28, 2011, receivables under these special programs were $340 million and $398 million, respectively.

•

Sales-type leases — Dell enters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments at April 29, 2011 were as follows: Fiscal 2012 - $724 million; Fiscal 2013 - $696 million; Fiscal 2014 - $332 million; Fiscal 2015 and beyond - $61 million. Fixed-term loans are offered to qualified small businesses, large commercial accounts, governmental organizations, and educational entities.

Purchased Credit-Impaired Loans

Purchased Credit-Impaired (“PCI”) loans are acquired loans for which it is probable that Dell will not collect all contractually required principal and interest payments. During the third quarter of Fiscal 2011, Dell purchased a portfolio of revolving loan receivables from CIT Group Inc. that consisted of revolving Dell customer account balances that met the definition of PCI loans as Dell does not expect to collect all contractually required principal and interest payments. At April 29, 2011, the outstanding balance of these receivables, including principal and accrued interest, was $489 million and the carrying amount was $294 million.

The excess of cash flows expected to be collected over the carrying value of PCI loans is referred to as the accretable yield and is accreted into interest income using the effective yield method based on the expected future cash flows over the estimated lives of the PCI loans. Due to improved expectations of the amount of expected cash flows and higher recoveries, Dell increased the accretable yield associated with these PCI loans by $35 million during the first quarter of Fiscal 2012, which will be amortized over the remaining life of the loans.

The following table shows activity for the accretable yield on the PCI loans for the three months ended April 29, 2011:



	Three Months Ended
	April 29, 2011
	(in millions)
Accretable Yield:
Balance at beginning of period	$	137
Additions/ Purchases	—
Accretion	(21		)
Prospective yield adjustment	35
Balance at end of period	$	151

Residual Interest

Dell retains a residual interest in equipment leased under its fixed-term lease programs. The amount of the residual interest is established at the inception of the lease based upon estimates of the value of the equipment at the end of the lease term using historical studies, industry data, and future value-at-risk demand valuation methods. On a quarterly basis, Dell assesses the carrying amount of its recorded residual values for impairment. Anticipated declines in specific future residual values that are considered to be other-than-temporary are recorded in earnings.

Asset Securitizations

During the first quarters of Fiscal 2012 and Fiscal 2011, $499 million and $496 million of customer receivables, respectively, were funded via securitization through SPEs. The programs are effective for 12 month periods and subject to an annual renewal process.

The structured financing debt related to the fixed-term lease and loan, and revolving loan securitization programs was $1.2 billion and $1.0 billion as of April 29, 2011, and January 28, 2011, respectively. The debt is collateralized solely by the financing receivables in the programs. The debt has a variable interest rate and an average duration of 12 to 36 months based on the terms of the underlying financing receivables. The total debt capacity related to the securitization programs is $1.4 billion. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the structured financing debt.

During Fiscal 2011, Dell entered into interest rate swap agreements to effectively convert a portion of the structured financing debt from a floating rate to a fixed rate. The interest rate swaps qualified for hedge accounting treatment as cash flow hedges. See Note 7 of Notes to Condensed Consolidated Financial Statements for additional information about interest rate swaps.