Dell Technologies Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 1, 2019 (Fiscal 2019, 52 weeks), compared mainly with the 52-week year ended February 2, 2018. This is an annual filing, not a standalone fourth-quarter report; the filing separately reports selected Q4 results. All amounts are U.S. dollars.
Business context
Dell Technologies sells technology products, software and services through Infrastructure Solutions Group (ISG), Client Solutions Group (CSG), VMware and other businesses. Its portfolio spans servers, storage, PCs, virtualization, cloud and related services, supported by Dell Financial Services. The Class V tracking-stock structure ended in December 2018; Class C stock now represents an interest in the company as a whole.
Financial highlights
| Metric | Fiscal 2019 | Fiscal 2018 | Change / context |
|---|---|---|---|
| Net revenue | $90.621 billion | $79.040 billion | Up 15% |
| Gross margin | $25.053 billion; 27.6% | $20.537 billion; 26.0% | Up 22%; margin improved 160 basis points |
| Operating income (loss) | $(191) million; (0.2)% | $(2.416) billion; (3.1)% | Loss narrowed substantially |
| Net loss from continuing operations | $(2.181) billion | $(2.926) billion | Loss narrowed 25% |
| Non-GAAP operating income | $8.854 billion | $7.772 billion | Up 14%; non-GAAP measure |
| Non-GAAP net income from continuing operations | $5.227 billion | $4.355 billion | Up 20%; non-GAAP measure |
| Adjusted EBITDA | $10.296 billion | $9.134 billion | Up 13%; non-GAAP measure |
| Cash from operating activities | $6.991 billion | $6.843 billion | Up modestly |
| Capital expenditures | $1.158 billion | $1.212 billion | FY2020 estimate: $2.7–$2.9 billion |
Product revenue rose 16% to $71.287 billion; services revenue rose 9% to $19.334 billion. FY2019 segment revenue and operating income were: ISG $36.720 billion and $4.151 billion; CSG $43.196 billion and $1.960 billion; VMware $9.088 billion and $2.989 billion. CSG operating income declined 4%, while ISG revenue and operating income grew 19% and 35%, respectively.
Fiscal 2019 Q4 revenue was $23.841 billion and gross margin was $7.109 billion. Dell Technologies reported a $299 million net loss attributable to the company for the quarter. The filing’s quarterly presentation includes the Class V/DHI allocation structure, which ended when the transaction closed; comparisons with post-transaction reporting require care.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $9.676 billion at year-end, down from $13.942 billion. Including $5.586 billion available under revolving facilities, reported cash and available borrowings totaled $15.262 billion. Management said liquidity and expected operating cash flows and borrowings should fund operations and obligations for at least 12 months.
- Debt principal was $54.239 billion, versus $52.694 billion a year earlier; carrying value was $53.521 billion. Core debt, as defined by the company, was $39.307 billion. A 100-basis-point increase in rates was estimated to add about $179 million to annual interest expense on variable-rate debt.
- Current assets were $36.138 billion and current liabilities $44.972 billion. Total liabilities were $111.566 billion; Dell Technologies stockholders’ equity was negative $5.765 billion and total stockholders’ equity was negative $942 million.
- Cash from investing activities was $3.389 billion, largely reflecting investment sales used to help fund the Class V transaction. Financing activities used $14.329 billion, including the $14 billion cash payment to Class V holders. The transaction was also funded by $8.87 billion of Dell’s share of VMware’s special dividend, $3.67 billion of new term loans, a $1.35 billion margin-loan financing and cash on hand.
Material changes, outlook and unusual items
- Revenue increased across all three reportable segments amid what management described as robust demand. ISG server and networking revenue rose 28%, storage revenue 9%, commercial CSG revenue 12%, consumer CSG revenue 5%, and VMware revenue 14%.
- GAAP operating loss improved mainly because amortization of intangibles and purchase-accounting charges fell; those items affecting operating income totaled $7.0 billion, compared with $8.5 billion in Fiscal 2018. GAAP results also include transaction-related and other corporate expenses. Non-GAAP measures exclude significant items and are not substitutes for GAAP results.
- On December 28, 2018, Dell completed the Class V transaction, paying $14 billion in cash and issuing 149.4 million Class C shares. Cash elections exceeded the $14 billion cap and were prorated. The transaction eliminated the tracking stock and changed the company’s public equity structure.
- Management expects FY2020 capital expenditures of $2.7–$2.9 billion, including an estimated $1.5 billion classification impact from new lessor lease accounting. It expects FY2019 inventory and related working-capital effects to normalize in FY2020, and anticipated slightly deflationary component costs for ISG and CSG into the first half of FY2020. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Management expects higher interest expense and lower investment income in FY2020 following the Class V transaction’s additional borrowing and investment liquidation. After year-end, Dell refinanced certain 2019 maturities with new notes, term loans and an increased margin loan.
- A $190 million goodwill impairment was recorded for Virtustream after revised forecasts; approximately $205 million of Virtustream goodwill remained. RSA Security’s reporting-unit fair value exceeded carrying value by 11%, which management said it would continue to monitor.
- Key risks include substantial leverage and rate exposure, intense competition and margin pressure in PCs, storage and infrastructure, dependence on contract manufacturers and limited-source suppliers, foreign exchange and global economic conditions, cyber and privacy risks, and execution of integration and growth plans. Dell disclosed that it detected and disrupted unauthorized network activity attempting to obtain Dell.com customer information in November 2018.
- Four putative class actions concerning the Class V transaction were consolidated in Delaware; a separate securities class action relating to earlier Dell statements remained in discovery. Management said it did not believe a material loss exceeding accrued amounts was reasonably possible as of year-end, while acknowledging litigation outcomes are uncertain.
Most important facts for investors to verify
- Reconcile the strong non-GAAP earnings and EBITDA growth with GAAP losses, recurring interest costs and the substantial excluded charges.
- Review debt maturities, refinancing terms, covenant headroom, variable-rate exposure and the company’s ability to reduce core debt while funding operations.
- Assess the cash, share issuance and VMware dividend effects of the Class V transaction, including the implications of the new capital structure and ownership concentration.
- Track whether ISG growth and storage improvement continue, and whether CSG and VMware margins stabilize after their FY2019 declines.
- Monitor the FY2020 capital-spending outlook, inventory normalization, financing-receivable credit quality and cash conversion.
- Review the status and potential financial effects of Class V litigation, tax uncertainties and cybersecurity remediation. The filing reports $3.4 billion of liabilities associated with uncertain tax positions, excluding the timing of any settlement.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of February 1, 2019.