Derivative Instruments and Hedging Activities (Notes)

6 Months Ended

Aug. 03, 2012

Derivative Instruments and Hedges, Assets [Abstract]

Derivative Instruments and Hedging Activities

NOTE 7 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments

As part of its risk management strategy, Dell uses derivative instruments, primarily forward contracts and purchased options, to hedge certain foreign currency exposures and interest rate swaps to manage the exposure of its debt portfolio to interest rate risk. Dell's objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge the exposures, thereby reducing volatility of earnings and protecting fair values of assets and liabilities. Dell assesses hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative and recognizes any ineffective portion of the hedge, as well as amounts not included in the assessment of effectiveness, in earnings as a component of interest and other, net. Hedge ineffectiveness and amounts not included in the assessment of effectiveness were not material for fair value or cash flow hedges for the three and six months ended August 3, 2012, and July 29, 2011.

Foreign Exchange Risk

Dell uses a combination of forward contracts and purchased options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted transactions denominated in currencies other than the U.S. dollar. The risk of loss associated with purchased options is limited to premium amounts paid for the option contracts. The risk of loss associated with forward contracts is equal to the exchange rate differential from the time the contract is entered into until the time it is settled. The majority of these contracts typically expire in 12 months or less.

During the three and six months ended August 3, 2012, and July 29, 2011, Dell did not discontinue any cash flow hedges related to foreign exchange contracts that had a material impact on Dell's results of operations, as substantially all forecasted foreign currency transactions were realized in Dell's actual results.

In addition, Dell uses forward contracts to hedge monetary assets and liabilities denominated in a foreign currency. These contracts generally expire in three months or less, are considered economic hedges and are not designated. The change in the fair value of these instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. Dell recognized gains (losses) for the change in fair value of these foreign currency forward contracts of $(16) million and $(32) million during the three months ended August 3, 2012, and July 29, 2011, respectively, and $(4) million and $10 million during the six months ended August 3, 2012, and July 29, 2011, respectively.

Interest Rate Risk

Dell uses interest rate swaps to hedge the variability in cash flows related to the interest rate payments on structured financing debt. The interest rate swaps economically convert the variable rate on the structured financing debt to a fixed interest rate to match the underlying fixed rate being received on fixed term customer leases and loans. The duration of these contracts typically ranges from 30 to 42 months. Certain of these swaps are designated as cash flow hedges.

In addition, Dell may use forward-starting interest rate swaps and interest rate lock agreements to lock in fixed interest rates on its forecasted issuances of debt. The objective of these hedges is to offset the variability of future payments associated with the interest rate on debt instruments. As of August 3, 2012, Dell had $600 million in aggregate notional amounts of forward-starting interest rate swaps outstanding. These hedges are designated as cash flow hedges. Dell did not have any forward-starting interest rate swaps designated as cash flow hedges at July 29, 2011.

Periodically, Dell also uses interest rate swaps designated as fair value hedges to modify the market risk exposures in connection with long-term debt to achieve primarily LIBOR-based floating interest expense. As of August 3, 2012, Dell had outstanding interest rate swaps that economically hedge a portion of its interest rate exposure on certain tranches of its long-term debt. Dell did not have any interest rate contracts designated as fair value hedges at July 29, 2011.

Notional Amounts of Outstanding Derivative Instruments

The notional amounts of Dell's outstanding derivative instruments are as follows as of the dates indicated:

	August 3, 2012		February 3, 2012
	(in millions)
Foreign Exchange Contracts
Designated as cash flow hedging instruments	$	3,831	$	4,549
Non-designated as hedging instruments	326		168
Total	$	4,157	$	4,717
Interest Rate Contracts
Designated as fair value hedging instruments	$	800	$	650
Designated as cash flow hedging instruments	1,437		751
Non-designated as hedging instruments	147		132
Total	$	2,384	$	1,533

Derivative Instruments Additional Information

The unrealized net loss for interest rate swaps and foreign currency exchange contracts, recorded as a component of accumulated other comprehensive loss in the Condensed Consolidated Statements of Financial Position, as of August 3, 2012, and February 3, 2012, was $15 million and $40 million, respectively.

Dell has reviewed the existence and nature of credit-risk-related contingent features in derivative trading agreements with its counterparties. Certain agreements contain clauses under which, if Dell's credit ratings were to fall below investment grade upon a change of control of Dell, counterparties would have the right to terminate those derivative contracts where Dell is in a net liability position. As of August 3, 2012, there had been no such triggering events.

Effect of Derivative Instruments on the Consolidated Statements of Financial Position and the Consolidated Statements of Income

Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in Accumulated OCI, Net of Tax, on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain (Loss) Recognized in Income on Derivative (Ineffective Portion)
(in millions)
For the three months ended August 3, 2012
				Total net revenue	$	36
Foreign exchange contracts	$	79		Total cost of net revenue	4
Interest rate contracts	(3		)	Interest and other, net	—			Interest and other, net	$	—
Total	$	76			$	40			$	—
For the three months ended July 29, 2011
				Total net revenue	$	(85	)
Foreign exchange contracts	$	(4	)	Total cost of net revenue	(8		)
Interest rate contracts	(1		)	Interest and other, net	—			Interest and other, net	$	(2	)
Total	$	(5	)		$	(93	)		$	(2	)
For the six months ended August 3, 2012
				Total net revenue	$	33
Foreign exchange contracts	$	54		Total cost of net revenue	(7		)
Interest rate contracts	(3		)	Interest and other, net	—			Interest and other, net	$	—
Total	$	51			$	26			$	—
For the six months ended July 29, 2011
				Total net revenue	$	(238	)
Foreign exchange contracts	$	(242	)	Total cost of net revenue	(22		)
Interest rate contracts	2			Interest and other, net	—			Interest and other, net	$	(2	)
Total	$	(240	)		$	(260	)		$	(2	)

Fair Value of Derivative Instruments in the Consolidated Statements of Financial Position

Dell presents its foreign exchange derivative instruments on a net basis in the Condensed Consolidated Statements of Financial Position due to the right of offset by its counterparties under master netting arrangements. The fair value of those derivative instruments presented on a gross basis as of each date indicated below was as follows:

	August 3, 2012
	Other Current Assets			Other Non- Current Assets		Other Current Liabilities			Other Non-Current Liabilities			Total Fair Value
				(in millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position	$	267		$	—	$	2		$	—		$	269
Foreign exchange contracts in a liability position	(147		)	—		(5		)	—			(152		)
Interest rate contracts in an asset position	—			14		—			—			14
Interest rate contracts in a liability position	—			—		—			(7		)	(7		)
Net asset (liability)	120			14		(3		)	(7		)	124
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position	44			—		1			—			45
Foreign exchange contracts in a liability position	(49		)	—		(7		)	—			(56		)
Net asset (liability)	(5		)	—		(6		)	—			(11		)
Total derivatives at fair value	$	115		$	14	$	(9	)	$	(7	)	$	113
	February 3, 2012
	Other Current Assets			Other Non- Current Assets		Other Current Liabilities			Other Non-Current Liabilities			Total Fair Value
				(in millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in an asset position	$	266		$	—	$	2		$	—		$	268
Foreign exchange contracts in a liability position	(140		)	—		(7		)	—			(147		)
Interest rate contracts in an asset position	—			8		—			—			8
Interest rate contracts in a liability position	—			—		—			(3		)	(3		)
Net asset (liability)	126			8		(5		)	(3		)	126
Derivatives not Designated as Hedging Instruments
Foreign exchange contracts in an asset position	67			—		1			—			68
Foreign exchange contracts in a liability position	(61		)	—		(10		)	—			(71		)
Net asset (liability)	6			—		(9		)	—			(3		)
Total derivatives at fair value	$	132		$	8	$	(14	)	$	(3	)	$	123