NOTE 4 — 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. DFS results are allocated to Dell's segments based on the product or services business unit to which the origination relates.

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.

•

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 May 3, 2013, were as follows: Fiscal 2014 - $946 million; Fiscal 2015 - $845 million; Fiscal 2016 - $410 million; Fiscal 2017 - $74 million; Fiscal 2018 and beyond - $11 million. Dell also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to four years.

The following table summarizes the components of Dell's financing receivables segregated by portfolio segment as of May 3, 2013, and February 1, 2013:



	May 3, 2013									February 1, 2013
	Revolving			Fixed-term			Total			Revolving			Fixed-term			Total
	(in millions)
Financing Receivables, net:
Customer receivables, gross	$	1,701		$	2,470		$	4,171		$	1,834		$	2,535		$	4,369
Allowances for losses	(157		)	(22		)	(179		)	(169		)	(23		)	(192		)
Customer receivables, net	1,544			2,448			3,992			1,665			2,512			4,177
Residual interest	—			382			382			—			385			385
Financing receivables, net	$	1,544		$	2,830		$	4,374		$	1,665		$	2,897		$	4,562
Short-term	$	1,544		$	1,447		$	2,991		$	1,665		$	1,548		$	3,213
Long-term	—			1,383			1,383			—			1,349			1,349
Financing receivables, net	$	1,544		$	2,830		$	4,374		$	1,665		$	2,897		$	4,562

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



	Three Months Ended
	May 3, 2013									May 4, 2012
	Revolving			Fixed- term			Total			Revolving			Fixed- term			Total
	(in millions)
Allowance for financing receivable losses:
Balance at beginning of period	$	169		$	23		$	192		$	179		$	23		$	202
Principal charge-offs	(44		)	(3		)	(47		)	(49		)	(2		)	(51		)
Interest charge-offs	(8		)	—			(8		)	(9		)	—			(9		)
Recoveries	13			1			14			12			1			13
Provision charged to income statement	27			1			28			36			1			37
Balance at end of period	$	157		$	22		$	179		$	169		$	23		$	192

The following table summarizes the aging of Dell's customer financing receivables, gross, including accrued interest, as of May 3, 2013, and February 1, 2013, segregated by class:



	May 3, 2013								February 1, 2013
	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	$	1,247	$	125	$	41	$	1,413	$	1,322	$	163	$	54	$	1,539
Revolving — DBC	257		26		5		288		264		25		6		295
Fixed-term — Consumer and Small Commercial	304		15		1		320		310		16		1		327
Fixed-term — Medium and Large Commercial	1,937		201		12		2,150		2,015		172		21		2,208
Total customer receivables, gross	$	3,745	$	367	$	59	$	4,171	$	3,911	$	376	$	82	$	4,369

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 during the second half of Fiscal 2014.

Credit Quality

The following tables summarize customer receivables, gross, including accrued interest by credit quality indicator segregated by class, as of May 3, 2013, and February 1, 2013. 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 DPA revolving receivables shown in the table below, 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. 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.



	May 3, 2013								February 1, 2013
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — DPA	$	183	$	397	$	833	$	1,413	$	201	$	435	$	903	$	1,539

For the receivables shown in the table below, 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. The higher category includes receivables that are generally within Dell's top credit quality levels, which typically have the lowest loss experience. The middle category generally falls within the mid-tier credit levels, and the lower category generally falls within Dell's bottom credit levels, which experience higher loss rates. The grading criteria and classifications are different between the fixed-term and revolving products as the loss performance varies between these product and customer sets. Therefore, the credit levels are not comparable between the consumer and small commercial fixed-term class and the DBC revolving class.



	May 3, 2013								February 1, 2013
	Higher		Mid		Lower		Total		Higher		Mid		Lower		Total
	(in millions)
Revolving — DBC	$	94	$	84	$	110	$	288	$	99	$	88	$	108	$	295
Fixed-term — Consumer and Small Commercial	$	87	$	119	$	114	$	320	$	90	$	117	$	120	$	327

For the receivables in the table below, an internal grading system is also utilized that assigns a credit level score based on liquidity, operating performance, and industry outlook. 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.



	May 3, 2013								February 1, 2013
	Investment		Non-Investment		Sub-Standard		Total		Investment		Non-Investment		Sub-Standard		Total
	(in millions)
Fixed-term — Medium and Large Commercial	$	1,310	$	560	$	280	$	2,150	$	1,355	$	582	$	271	$	2,208

Asset Securitizations and Sales

Dell transfers certain U.S. customer financing receivables to Special Purpose Entities (“SPEs”) that meet the definition of a Variable Interest Entity ("VIE") and are consolidated into Dell's Condensed Consolidated Financial Statements. These 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 $534 million and $536 million during the three months ended May 3, 2013, and May 4, 2012, respectively.

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



	May 3, 2013		February 1, 2013
	(in millions)
Financing receivables held by consolidated VIEs, net:
Short-term, net	$	1,184	$	1,089
Long-term, net	462		386
Financing receivables held by consolidated VIEs, net	$	1,646	$	1,475

Dell's securitization programs are generally effective for 6 to 12 months and are subject to a periodic 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 May 3, 2013, 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 May 3, 2013, and May 4, 2012, the amount of the receivables sold was $53 million and $71 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 $1.5 billion and $1.3 billion as of May 3, 2013, and February 1, 2013, 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 May 3, 2013, 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 5 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 6 of the Notes to the Condensed Consolidated Financial Statements for additional information about interest rate swaps.