Dell Technologies Inc. annual report, FY2022

Dell Technologies Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended January 28, 2022 (52 weeks; not a standalone Q4 filing). Dell provides IT infrastructure and client computing products and services through Infrastructure Solutions Group (ISG) and Client Solutions Group (CSG). VMware’s business, spun off November 1, 2021, is presented as discontinued operations; Dell’s VMware resale activity remains in continuing operations. Prior-period continuing results were recast accordingly.

Financial performance and position

Metric	FY2022	Prior comparable period
Net revenue	$101.2 billion, up 17%	$86.7 billion
Gross margin	$21.9 billion; 21.6% of revenue	$20.1 billion; 23.2%
Operating income	$4.7 billion; 4.6% margin	$3.7 billion; 4.3%
Continuing-operations net income	$4.9 billion	$2.2 billion
Net income attributable to Dell Technologies Inc.	$5.6 billion	$3.3 billion
Cash provided by operating activities	$10.3 billion	$11.4 billion

CSG revenue rose 27% to $61.5 billion, led by commercial growth of 29% and consumer growth of 23%. ISG revenue increased 4% to $34.4 billion; servers and networking grew 8%, while storage was approximately flat. Product revenue increased 18% and services revenue 13%.

Margins weakened despite higher sales: gross margin percentage fell 160 basis points, primarily from product and business mix and higher component and logistics costs that pricing did not fully offset. Non-GAAP operating income was $7.8 billion, up 12%, but its margin declined 30 basis points to 7.7%. Non-GAAP net income was $4.9 billion, up 31%; adjusted EBITDA was $9.7 billion, up 12%. These are non-GAAP measures and should be considered alongside GAAP results.

Reported earnings included significant transaction and tax effects. Dell recorded a $4.0 billion pre-tax gain on the Boomi sale (about $3.0 billion after $1.0 billion tax expense) and $1.6 billion of debt-extinguishment fees. Net income from continuing operations also benefited from lower amortization and interest expense. The effective tax rate was 16.6%, versus 4.3% in FY2021, with material discrete items in both periods.

Liquidity, debt and balance sheet

Cash and cash equivalents were $9.5 billion; available revolving-credit borrowings were about $5.0 billion, providing total cash and available borrowings of $14.4 billion. No revolver borrowings were outstanding at year-end.
Debt principal was $27.2 billion ($27.0 billion carrying value), down $12.4 billion during the year. Core debt fell to $16.1 billion from $29.2 billion; most DFS debt is associated with customer financing and largely non-recourse. Dell reported investment-grade ratings from three major agencies.
Operating cash flow was $10.3 billion, down from $11.4 billion. Capital expenditures and capitalized software costs were $2.8 billion. Cash flows include VMware through the spin-off date and discontinued operations.
Current assets were $45.0 billion and current liabilities $56.2 billion. Total stockholders’ equity was negative $1.6 billion at year-end, reflecting, among other items, the VMware spin-off and related equity accounting.
DFS had $10.6 billion of net financing receivables and $1.7 billion of equipment under operating leases. Its financing receivable charge-off rate was 0.6%, versus 0.7% the prior year.

Material changes and unusual items

Dell completed the VMware spin-off on November 1, 2021. VMware paid an $11.5 billion special dividend, of which Dell received $9.3 billion and used the proceeds primarily to repay debt. Dell and VMware entered a commercial framework agreement with an initial five-year term; VMware is now a related party.
Dell sold Boomi on October 1, 2021 for approximately $4.0 billion cash consideration. The sale generated a $4.0 billion pre-tax gain. Dell also sold RSA Security in FY2021, affecting prior-period comparisons.
Supply constraints and demand exceeding supply increased pending orders and customer lead times, while component and freight costs rose. Higher CSG sales contributed to revenue growth but shifted the sales mix toward lower-margin offerings.
FY2022 fourth-quarter revenue was $28.0 billion; continuing-operations net income was a loss of $29 million and net income attributable to Dell was $2 million. This contrasts with annual profitability and merits review alongside quarterly and transaction details.

Outlook, risks and contingencies

Management saw resilient demand and opportunities for growth in FY2023, but expected CSG demand growth to moderate from FY2022. Dell expected supply constraints and elevated freight costs to continue into the first half of FY2023, while anticipating the overall component-cost environment would turn deflationary in that period. No specific revenue or earnings guidance is provided in the supplied filing text.
FY2023 capital expenditures were expected to be $2.8–$3.0 billion, including approximately $0.8 billion for DFS operating-lease equipment and $0.3 billion for capitalized software development.
Key risks include continued supply-chain disruption, limited-source suppliers, freight and component costs, competitive and pricing pressure, and uncertainty in post-pandemic PC demand. Dell also cited cybersecurity, foreign-exchange, interest-rate, credit, and geopolitical risks.
As of the report date, Dell said it was not selling, servicing, or supporting products in Russia, Belarus, or the Donetsk and Luhansk regions of Ukraine; the broader business impact of the conflict and related sanctions remained uncertain.
The tax-free status of the VMware spin-off is a material contingency: failure to qualify could create significant tax liabilities. Dell also disclosed the Class V transaction litigation and litigation concerning VMware’s Pivotal acquisition; outcomes are uncertain, and Dell said it did not believe a material loss exceeding accruals was reasonably possible as of year-end.
Other notable exposures include $1.2 billion of additional liabilities for uncertain tax positions whose payment timing could not be reliably estimated, and approximately $36.5 billion of undistributed foreign earnings treated as indefinitely reinvested. The auditor identified revenue performance-obligation judgments and the tax-free VMware distribution determination as critical audit matters.
After year-end, Dell announced an intended quarterly dividend of $0.33 per share beginning in FY2023; the board may modify, suspend, or cancel the policy.

Investor facts to verify

Reconcile continuing-operations results and cash flows to the VMware spin-off and confirm consistent treatment of discontinued operations in comparisons.
Assess how much FY2022 earnings and cash generation depend on the Boomi gain, debt-extinguishment costs, tax items, and other nonrecurring or excluded adjustments.
Track backlog conversion, component availability, freight costs, pricing and gross-margin recovery, particularly in CSG and ISG.
Review debt maturities, interest costs, DFS funding and credit quality, and the sustainability of operating cash flow amid working-capital needs.
Monitor the tax-free spin-off contingency, disclosed litigation, related-party dealings with VMware, and the effects of Dell’s multi-class voting structure and potential share sales.

Audit and controls: PwC issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of January 28, 2022.