Dell Reports Fiscal Year 2014 Second Quarter Financial Results

USE OF NON-GAAP FINANCIAL MEASURES

Dell uses non-GAAP financial measures to supplement the financial information presented on a GAAP basis. Dell believes that excluding certain items from Dell’s GAAP results allows management to better understand Dell’s consolidated financial performance from period to period and in relationship to the operating results of our segments, as management does not believe that the excluded items are reflective of Dell’s underlying operating performance. Dell also believes that excluding certain items from Dell’s GAAP results allows management to better project Dell’s future consolidated financial performance because forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, Dell believes these non-GAAP financial measures will provide investors with useful information to help them evaluate Dell’s operating results by facilitating an enhanced understanding of Dell’s operating performance, and enabling them to make more meaningful period to period comparisons.

The non-GAAP financial measures presented in this report include non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share. These non-GAAP financial measures, as defined by Dell, represent the comparable GAAP measures adjusted to exclude severance and facility action costs and acquisition-related charges, amortization of purchased intangible assets related to acquisitions, costs incurred in Fiscal 2014 related to Dell’s proposed merger, and special retention cash bonus awards granted to certain key employees in the first quarter of Fiscal 2014 that will be payable in March 2014. Non-GAAP net income and non-GAAP earnings per share also include the aggregate adjustment for income taxes related to the exclusion of the above items. For more information on each of these items and Dell’s reasons for excluding them, see the detail below. In future fiscal periods, Dell may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent, or unusual.

There are limitations to the use of the non-GAAP financial measures presented in this report. Dell’s non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in Dell’s industry, may calculate the non-GAAP financial measures differently than Dell, 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. Further, items such as severance and facility actions, acquisition-related costs, and other charges 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 GAAP results and using non-GAAP financial measures supplementally or for projections when comparable GAAP financial measures are not available. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for gross margin, operating expenses, operating income, net income, and earnings per share prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. See below for reconciliations of each non-GAAP financial measure to its most directly comparable GAAP financial measure. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented.

The following is a summary of the costs and other items excluded from the most comparable GAAP financial measures to calculate non-GAAP financial measures:

  • Severance and Facility Actions and Acquisition-related Costs - Severance and facility action costs are primarily related to facilities charges, including accelerated depreciation and severance and benefits for employees terminated pursuant to cost synergies related to strategic acquisitions and actions taken as part of a comprehensive review of costs. Acquisition-related charges are expensed as incurred and consist primarily of retention payments, integration costs, and other costs. Retention payments include stock-based compensation and cash incentives awarded to employees, which are recognized over the vesting period. Integration costs primarily include IT costs related to the integration of IT systems and processes, costs related to the integration of employees, consulting expenses, and for acquisitions made prior to Fiscal 2013, costs related to full-time employees who were working on the integration. Severance and facility actions and acquisition-related charges are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although Dell may incur these types of expenses in the future, it believes that eliminating these charges for purposes of calculating the non-GAAP financial measures presented below facilitates a more meaningful evaluation of Dell’s current operating performance and comparisons to Dell’s past operating performance.
  • Amortization of Intangible Assets - Amortization of purchased intangible assets consists primarily of amortization of customer relationships, acquired technology, non-compete covenants, and trade names purchased in connection with business acquisitions. Dell incurs charges related to the amortization of these intangibles, and those charges are included in Dell’s Condensed Consolidated Financial Statements. Amortization charges for purchased intangible assets are significantly impacted by the timing and magnitude of Dell’s acquisitions. Accordingly, these charges may vary in amount from period to period. Dell excludes these charges for purposes of calculating the non-GAAP financial measures presented below to facilitate a more meaningful evaluation of Dell’s current operating performance and comparisons to Dell’s past operating performance.
  • Other Items - Dell also adjusts GAAP financial results for expenses associated with Dell's proposed merger. These expenses consist of professional fees incurred by Dell in connection with Dell's proposed merger as well as the reimbursement of transaction-related expenses incurred by certain participants approved by a special committee of the Board of Directors. In addition, Dell adjusts GAAP financial results for special retention cash bonus awards granted to certain key employees in the first quarter of Fiscal 2014 that will be payable in March 2014. Dell is excluding these expenses for the purpose of calculating the non-GAAP financial measures presented below because Dell believes these items are outside our ordinary course of business and do not contribute to a meaningful evaluation of Dell's current operating performance or comparisons to Dell's past operating performance.
  • The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.
 
DELL INC.
Reconciliation of Non-GAAP Financial Measures
(in millions, except per share data and percentages)
(unaudited)
                     
Three Months Ended % Growth Rates
August 2, May 3, August 3,
2013 2013 2012 Sequential Yr. to Yr.
 
Revenue
GAAP gross margin $ 2,689 $ 2,747 $ 3,138 (2 %) (14 %)
 
Non-GAAP adjustments:
Amortization of intangibles 141 140 109
Severance and facility actions and acquisition-related 8 10 23
Other (a)   1     2     -  
Non-GAAP gross margin $ 2,839   $ 2,899   $ 3,270   (2 %) (13 %)
 
GAAP operating expenses $ 2,417 $ 2,521 $ 2,237 (4 %) 8 %
 
Non-GAAP adjustments:
Amortization of intangibles (55 ) (56 ) (41 )
Severance and facility actions and acquisition-related (79 ) (70 ) (49 )
Other (a)   (46 )   (86 )   -  
Non-GAAP operating expenses $ 2,237   $ 2,309   $ 2,147   (3 %) 4 %
 
GAAP operating income $ 272 $ 226 $ 901 20 % (70 %)
 
Non-GAAP adjustments:
Amortization of intangibles 196 196 150
Severance and facility actions and acquisition-related 87 80 72
Other (a)   47     88     -  
Non-GAAP operating income $ 602   $ 590   $ 1,123   2 % (46 %)
 
GAAP net income $ 204 $ 130 $ 732 56 % (72 %)
 
Non-GAAP adjustments:
Amortization of intangibles 196 196 150
Severance and facility actions and acquisition-related 87 80 72
Other (a) 47 88 -
Aggregate adjustment for income taxes   (101 )   (122 )   (79 )
Non-GAAP net income $ 433   $ 372   $ 875   16 % (51 %)
 
GAAP earnings per share - diluted $ 0.12 $ 0.07 $ 0.42 71 % (71 %)
Non-GAAP adjustments per share - diluted   0.13     0.14     0.08  
Non-GAAP earnings per share - diluted $ 0.25   $ 0.21   $ 0.50   19 % (50 %)
 
 
Diluted WAS 1,764 1,761 1,753
 
 

Percentage of Total Net Revenue:

 
GAAP gross margin 18.5 % 19.5 % 21.6 %
Non-GAAP adjustment   1.1 %   1.1 %   1.0 %
Non-GAAP gross margin   19.6 %   20.6 %   22.6 %
 
GAAP operating expenses 16.6 % 17.9 % 15.4 %
Non-GAAP adjustment   (1.2 %)   (1.5 %)   (0.6 %)
Non-GAAP operating expenses   15.4 %   16.4 %   14.8 %
 
GAAP operating income 1.9 % 1.6 % 6.2 %
Non-GAAP adjustment   2.2 %   2.6 %   1.6 %
Non-GAAP operating income   4.1 %   4.2 %   7.8 %
 
GAAP net income 1.4 % 0.9 % 5.1 %
Non-GAAP adjustment   1.6 %   1.7 %   0.9 %
Non-GAAP net income   3.0 %   2.6 %   6.0 %
 

(a) Other includes expenses associated with Dell's proposed merger and retention cash bonus awards granted to certain key employees in the first quarter of Fiscal 2014.

 
Note: Percentage growth rates and ratios are calculated based on underlying data in thousands.
 
 
DELL INC.
Reconciliation of Non-GAAP Financial Measures
(in millions, except per share data and percentages)
(unaudited)
           
Six Months Ended % Growth Rates
August 2, August 3,
2013 2012 Yr. to Yr.
 
Revenue
GAAP gross margin $ 5,436 $ 6,205 (12 %)
 
Non-GAAP adjustments:
Amortization of intangibles 281 197
Severance and facility actions and acquisition-related 18 35
Other (a)   3     -  
Non-GAAP gross margin $ 5,738   $ 6,437   (11 %)
 
GAAP operating expenses $ 4,938 $ 4,480 10 %
 
Non-GAAP adjustments:
Amortization of intangibles (111 ) (63 )
Severance and facility actions and acquisition-related (149 ) (113 )
Other (a)   (132 )   -  
Non-GAAP operating expenses $ 4,546   $ 4,304   6 %
 
GAAP operating income $ 498 $ 1,725 (71 %)
 
Non-GAAP adjustments:
Amortization of intangibles 392 260
Severance and facility actions and acquisition-related 167 148
Other (a)   135     -  
Non-GAAP operating income $ 1,192   $ 2,133   (44 %)
 
GAAP net income $ 334 $ 1,367 (76 %)
 
Non-GAAP adjustments:
Amortization of intangibles 392 260
Severance and facility actions and acquisition-related 167 148
Other (a) 135 -
Aggregate adjustment for income taxes   (223 )   (139 )
Non-GAAP net income $ 805   $ 1,636   (51 %)
 
GAAP earnings per share - diluted $ 0.19 $ 0.77 (75 %)
Non-GAAP adjustments per share - diluted   0.27     0.16  
Non-GAAP earnings per share - diluted $ 0.46   $ 0.93   (51 %)
 
 
Diluted WAS 1,763 1,764
 
 

Percentage of Total Net Revenue:

 
GAAP gross margin 19.0 % 21.5 %
Non-GAAP adjustment   1.1 %   0.8 %
Non-GAAP gross margin   20.1 %   22.3 %
 
GAAP operating expenses 17.3 % 15.5 %
Non-GAAP adjustment   (1.4 %)   (0.6 %)
Non-GAAP operating expenses   15.9 %   14.9 %
 
GAAP operating income 1.7 % 6.0 %
Non-GAAP adjustment   2.5 %   1.4 %
Non-GAAP operating income   4.2 %   7.4 %
 
GAAP net income 1.2 % 4.7 %
Non-GAAP adjustment   1.6 %   1.0 %
Non-GAAP net income   2.8 %   5.7 %
 

(a) Other includes expenses associated with Dell's proposed merger and retention cash bonus awards granted to certain key employees in the first quarter of Fiscal 2014.

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

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