NOTE 5 — FINANCIAL SERVICES

Dell Financial Services

Dell offers or arranges various financing options and services for its business and consumer customers in the U.S. and Canada through Dell Financial Services (“DFS”). DFS's key activities include the origination, collection, and servicing of customer receivables primarily related to the purchase of Dell products and services. The results of DFS are included in the business segment where the customer receivable was originated.

Dell's financing receivables are aggregated into the following categories:

•

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. These private label credit financing programs are referred to as Dell Preferred Account (“DPA”) and Dell Business Credit (“DBC”). The DPA product is primarily offered to individual customers, and the DBC product is primarily offered to small and medium-sized commercial customers. Revolving loans in the U.S. 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. As of November 2, 2012, and February 3, 2012, the carrying amounts of the receivables under these special programs were $275 million and $328 million, respectively.

•

Fixed-term sales-type leases and loans — 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 November 2, 2012, were as follows: Fiscal 2013 - $355 million; Fiscal 2014 - $996 million; Fiscal 2015 - $611 million; Fiscal 2016 - $208 million; Fiscal 2017 and beyond - $27 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years.

Dell has two portfolio segments that are based on how Dell assesses risk and determines the appropriate allowance levels, (1) fixed-term leases and loans and (2) revolving loans. Portfolio segments are further segregated into classes. During the first quarter of Fiscal 2013, Dell re-aligned the presentation of these classes based on products, customer type, credit risk evaluation, and whether the receivable was owned by Dell since its inception or was purchased subsequent to its inception. Prior to the first quarter of Fiscal 2013, portfolio classes were based on operating segment and whether the receivable was owned by Dell since its inception or was purchased subsequent to its inception. This change in presentation during the first quarter of Fiscal 2013 affected disclosures only and had no impact on how credit risk is assessed or on reserve rates.

The following table summarizes the components of Dell's financing receivables segregated by portfolio segment as of November 2, 2012, and February 3, 2012:



	November 2, 2012									February 3, 2012
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Financing Receivables, net:
Customer receivables, gross	$	1,819		$	2,484		$	4,303		$	2,096		$	2,443		$	4,539
Allowances for losses	(163		)	(22		)	(185		)	(179		)	(23		)	(202		)
Customer receivables, net	1,656			2,462			4,118			1,917			2,420			4,337
Residual interest	—			387			387			—			362			362
Financing receivables, net	$	1,656		$	2,849		$	4,505		$	1,917		$	2,782		$	4,699
Short-term	$	1,656		$	1,495		$	3,151		$	1,917		$	1,410		$	3,327
Long-term	—			1,354			1,354			—			1,372			1,372
Financing receivables, net	$	1,656		$	2,849		$	4,505		$	1,917		$	2,782		$	4,699

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



	Three Months Ended
	November 2, 2012									October 28, 2011
	Revolving			Fixed- term			Total			Revolving			Fixed- term			Total
	(in millions)
Allowance for financing receivable losses:
Balance at beginning of period	$	168		$	21		$	189		$	189		$	21		$	210
Principal charge-offs	(42		)	(8		)	(50		)	(45		)	(2		)	(47		)
Interest charge-offs	(8		)	—			(8		)	(8		)	—			(8		)
Recoveries	12			1			13			9			1			10
Provision charged to income statement	33			8			41			30			2			32
Balance at end of period	$	163		$	22		$	185		$	175		$	22		$	197



	Nine Months Ended
	November 2, 2012									October 28, 2011
	Revolving			Fixed- term			Total			Revolving			Fixed- term			Total
	(in millions)
Allowance for financing receivable losses:
Balance at beginning of period	$	179		$	23		$	202		$	214		$	27		$	241
Principal charge-offs	(133		)	(15		)	(148		)	(152		)	(6		)	(158		)
Interest charge-offs	(25		)	—			(25		)	(28		)	—			(28		)
Recoveries	46			3			49			39			3			42
Provision charged to income statement	96			11			107			102			(2		)	100
Balance at end of period	$	163		$	22		$	185		$	175		$	22		$	197

The following table summarizes the aging of Dell's customer receivables, gross, including accrued interest, as of November 2, 2012, and February 3, 2012, segregated by class:



	November 2, 2012								February 3, 2012
	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 — DPA
Owned since inception	$	1,134	$	133	$	43	$	1,310	$	1,249	$	148	$	49	$	1,446
Purchased	182		30		10		222		272		47		18		337
Fixed-term — Non-Commercial
Owned since inception	46		2		—		48		29		1		—		30
Purchased	34		3		—		37		61		5		1		67
Revolving — DBC	252		28		7		287		272		33		8		313
Fixed-term — Small Commercial	229		10		3		242		234		12		4		250
Fixed-term — Medium and Large Commercial	1,859		285		13		2,157		1,946		136		14		2,096
Total customer receivables, gross	$	3,736	$	491	$	76	$	4,303	$	4,063	$	382	$	94	$	4,539

DFS Acquisitions

In Fiscal 2012, Dell entered into a definitive agreement to acquire CIT Vendor Finance's Dell-related financing assets portfolio and sales and servicing functions in Europe. The acquisition of these assets will enable global expansion of Dell's direct finance model. Subject to customary closing, regulatory, and other conditions, Dell expects to complete this transaction in Fiscal 2014.

Purchased Credit-Impaired Loans

During the third quarter of Fiscal 2011, Dell purchased a portfolio of revolving loan receivables from CIT Group Inc. Prior to the acquisition, it was evident that Dell would not collect all contractually required principal and interest payments. As a result, these receivables met the definition of Purchased Credit-Impaired (“PCI”) loans. At November 2, 2012, the outstanding balance of these receivables, including principal and accrued interest, was $330 million and the carrying amount was $117 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.

The following table shows activity for the accretable yield on the PCI loans for the three and nine months ended November 2, 2012, and October 28, 2011. Dell expects the remaining balance of the accretable yield as of November 2, 2012 to be recognized over the next two years, using the effective interest method.



	Three Months Ended						Nine Months Ended
	November 2, 2012			October 28, 2011			November 2, 2012			October 28, 2011
	(in millions)
Accretable Yield:
Balance at beginning of period	$	113		$	152		$	142		$	137
Accretion	(19		)	(23		)	(58		)	(67		)
Prospective yield adjustment	7			8			17			67
Balance at end of period	$	101		$	137		$	101		$	137

Credit Quality

The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class, as of November 2, 2012, and February 3, 2012. For DPA revolving and fixed-term loans to individual customers, Dell makes credit decisions based on proprietary scorecards, which include the customer's credit history, payment history, credit usage, and other credit agency-related elements. For commercial customers, Dell utilizes an internal grading system 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 medium and large-sized commercial customers, which includes governmental customers. The credit level scores for DBC and small commercial customers generally range from one to six. The categories shown in the tables below segregate customer receivables based on the relative degrees of credit risk. The credit quality categories cannot be compared between the different classes as loss experience in each class varies substantially. The credit quality indicators for DPA revolving accounts are primarily as of each quarter-end date, and all others are generally updated on a periodic basis.

For the receivables shown in the table below, the higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720 or above. The mid-category represents the mid-tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S customer FICO scores below 660.



	November 2, 2012								February 3, 2012
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — DPA
Owned since inception	$	184	$	375	$	751	$	1,310	$	220	$	412	$	814	$	1,446
Purchased	$	19	$	55	$	148	$	222	$	28	$	80	$	229	$	337
Fixed-term — Non-Commercial
Owned since inception	$	2	$	24	$	22	$	48	$	2	$	14	$	14	$	30
Purchased	$	2	$	18	$	17	$	37	$	4	$	32	$	31	$	67

For the receivables shown in the table below, the higher quality category includes receivables that are generally within Dell's top two internal credit quality levels, which typically have the lowest loss experience. The middle category generally falls within credit levels three and four, and the lower category generally falls within Dell's bottom two credit levels, which experience higher loss rates. Although both fixed-term and revolving products generally rely on a six-level internal rating system, the grading criteria and classifications are different as the loss performance varies between these product and customer sets. Therefore, the credit levels are not comparable between the small commercial fixed-term and DBC revolving classes.



	November 2, 2012								February 3, 2012
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — DBC	$	97	$	88	$	102	$	287	$	111	$	98	$	104	$	313
Fixed-term — Small Commercial^(a)	$	97	$	66	$	79	$	242	$	91	$	74	$	85	$	250

_________________

^(a) During the first quarter of Fiscal 2013, Dell re-defined its internal scoring categorization for its small Commercial fixed-term customers. In connection with this change, Dell has re-categorized existing customers and has recast prior period credit quality categories for these customers to conform to the current year's classification. This change had no impact on Dell's allowance for loss rates.

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



	November 2, 2012								February 3, 2012
	Investment		Non-Investment		Sub-Standard		Total		Investment		Non-Investment		Sub-Standard		Total
	(in millions)
Fixed-term — Medium and Large Commercial	$	1,370	$	546	$	241	$	2,157	$	1,504	$	363	$	229	$	2,096

Asset Securitizations and Sales

Dell transfers certain U.S. customer financing receivables to Special Purpose Entities (“SPEs”) which meet the definition of a Variable Interest Entity ("VIE") and are consolidated into Dell's Condensed Consolidated Financial Statements. 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 by which Dell's right to receive collections for assets securitized exceeds 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. Customer receivables funded via securitization through SPEs were $550 million and $501 million during the three months ended November 2, 2012, and October 28, 2011, respectively, and $1.5 billion and $1.6 billion for the nine months ended November 2, 2012, and October 28, 2011, respectively.

The following table shows financing receivables held by the consolidated VIEs:



	November 2, 2012		February 3, 2012
	(in millions)
Financing receivables held by consolidated VIEs, net:
Short-term, net	$	1,136	$	1,096
Long-term, net	459		429
Financing receivables held by consolidated VIEs, net	$	1,595	$	1,525

Dell's securitization programs are generally effective for 12 months and are subject to an annual renewal process. These programs contain standard structural features related to the performance of the securitized receivables. The 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 November 2, 2012, these criteria were met.

Dell sells selected fixed-term financing receivables to unrelated third parties on a periodic basis, primarily to manage certain concentrations of customer credit exposure. For the three months ended November 2, 2012, and October 28, 2011, the amount of the receivables sold was $77 million and $62 million, respectively. For the nine months ended November 2, 2012, and October 28, 2011, the amount of the receivables sold was $375 million and $107 million, respectively.

Structured Financing Debt

The structured financing debt related to the fixed-term lease and loan programs and the revolving loan securitization program was $1.4 billion and $1.3 billion as of November 2, 2012, and February 3, 2012, 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. As of November 2, 2012, the total debt capacity related to the securitization programs was $1.5 billion. Dell's securitization programs are structured to operate near their debt capacity. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the structured financing debt.

Dell enters 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 qualify for hedge accounting treatment as cash flow hedges. See Note 7 of the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps.