Dell 2004 Annual Report Download - page 32

Table of Contents
Operating Leases — Dell leases property and equipment, manufacturing facilities, and office space under non-cancelable leases. Certain of
these leases obligate Dell to pay taxes, maintenance, and repair costs.
Advances Under Credit Facilities — DFS maintains credit facilities with CIT which provide DFS with a funding capacity of up to $1.0 billion.
Outstanding advances under these facilities totaled $158 million and are included in other current and non-current liabilities on Dell's
consolidated statement of financial position as of January 28, 2005.
Long-Term Debt — As of January 28, 2005, Dell had outstanding $200 million in Senior Notes due April 15, 2008 and $300 million in Senior
Debentures due April 15, 2028. For additional information regarding these issuances, see Note 2 of Notes to Consolidated Financial
Statements included in "Item 8 — Financial Statements and Supplementary Data."
Concurrent with the issuance of the Senior Notes and Senior Debentures, Dell entered into interest rate swap agreements converting Dell's
interest rate exposure from a fixed rate to a floating rate basis to better align the associated interest rate characteristics to its cash and
investments portfolio. The interest rate swap agreements have an aggregate notional amount of $200 million maturing April 15, 2008 and
$300 million maturing April 15, 2028. The floating rates are based on three-month London Interbank Offered Rates plus 0.41% and 0.79% for
the Senior Notes and Senior Debentures, respectively. As a result of the interest rate swap agreements, Dell's effective interest rates for the
Senior Notes and Senior Debentures were 2.059% and 2.392%, respectively, for fiscal 2005.
Purchase Obligations — Purchase obligations are defined as contractual obligations to purchase goods or services that are enforceable and
legally binding on Dell and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable
price provisions; and the approximate timing of the transaction. Purchase obligations do not include contracts that may be cancelled without
penalty.
Dell utilizes several suppliers to manufacture sub-assemblies for the company's products. Dell's highly efficient supply chain management
allows the company to enter into flexible and mutually beneficial purchase arrangements with its suppliers in order to minimize inventory risk.
Consistent with industry practice, Dell acquires raw materials or other goods and services, including product components, by issuing suppliers
authorizations to purchase based on Dell's projected demand and manufacturing needs. These purchase orders are typically fulfilled within
30 days and are entered into during the ordinary course of business in order to establish best pricing and continuity of supply for Dell's
production. Purchase orders are not included in the table above as they typically represent Dell's authorization to purchase rather than binding
purchase obligations.
DFS Purchase Commitment — Included in the table above is Dell's minimum purchase obligation to purchase CIT's 30% interest in DFS at the
expiration of the joint venture on January 29, 2010, for a purchase price ranging from $100 million to $345 million. See Note 6 of "Notes to
Consolidated Financial Statements" included in "Item 8 — Financial Statements and Supplementary Data."
Market Risk
Dell is exposed to a variety of risks, including foreign currency exchange rate fluctuations and changes in the market value of its investments. In
the normal course of business, Dell employs established policies and procedures to manage these risks.
Foreign Currency Hedging Activities
Dell's objective in managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations on
earnings and cash flows associated with foreign currency exchange rate changes. Accordingly, Dell utilizes foreign currency option contracts
and forward contracts to hedge its exposure on forecasted transactions and firm commitments in most of the foreign countries in which it
operates. The principal currencies hedged during fiscal 2005 were the 29