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UNITED STATES

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Quarterly Period Ended August 1, 2003

Commission file number: 0-17017

Dell Inc.

One Dell Way

(512) 338-4400

Dell Computer Corporation

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past 90 days.     Yes þ     No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ     No

As of the close of business on August 29, 2003, 2,563,709,377 shares of common stock, par value $.01 per share, were outstanding.

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PART I — FINANCIAL INFORMATION

ITEM 1.     Financial Statements

DELL INC.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DELL INC.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DELL INC.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DELL INC.

NOTE 1 — BASIS OF PRESENTATION

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements of Dell Inc., formerly Dell Computer Corporation (“Dell”), should be read in conjunction with the consolidated financial statements and notes thereto filed with the U.S. Securities and Exchange Commission (the “SEC”) in Dell’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial position of Dell and its consolidated subsidiaries at August 1, 2003 and January 31, 2003, the results of their operations for the three and six months ended August 1, 2003 and August 2, 2002, and cash flows for the six months ended August 1, 2003 and August 2, 2002.

NOTE 2 — INVENTORIES

NOTE 3 — EARNINGS PER COMMON SHARE, INCLUDING PRO FORMA EFFECTS OF STOCK-BASED COMPENSATION

Basic earnings per share is based on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive common shares outstanding.

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended August 1, 2003 and August 2, 2002, and illustrates the effect on net income and earnings per share as if Dell had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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Under SFAS No. 123, the value of each option is estimated on the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of freely traded options. Similar to other option pricing models, it requires the input of highly subjective assumptions, including stock price volatility. Because (1) Dell’s employee stock options have characteristics significantly different from those of traded options and (2) changes in the subjective input assumptions can materially affect the estimated fair value, management’s opinion is that the existing option pricing models (including Black-Scholes) do not provide a reliable measure of the fair value of Dell’s stock options.

Dell excludes equity instruments from the calculation of diluted weighted average shares outstanding if the effect of including such instruments is antidilutive. Accordingly, certain employee stock options and equity put contracts (for the fiscal 2003 periods only) have been excluded from the calculation of diluted weighted average shares. These shares totaled 121 million and 197 million for the second quarter of fiscal 2004 and 2003, respectively, and 150 million and 197 million during the six months ended August 1, 2003 and August 2, 2002, respectively.

NOTE 4 — COMPREHENSIVE INCOME

Dell’s comprehensive income is comprised of net income, foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments related to foreign currency hedging, and unrealized gains and losses on marketable securities classified as available-for-sale. Comprehensive income for the three and six months ended August 1, 2003 and August 2, 2002, was as follows:

NOTE 5 — SEGMENT INFORMATION

Dell conducts operations worldwide and is primarily managed on a geographic basis, with those geographic segments being the Americas, Europe, and Asia Pacific-Japan regions. The Americas region, which is based in Round Rock, Texas, covers the United States, Canada, South America, and Latin America. Dell has two reportable segments within the Americas: Business and U.S. Consumer. The Americas Business segment includes sales to commercial, government, and education customers. The European region, which is based in Bracknell, England, covers the European countries and also some countries in the Middle East and Africa. The Asia Pacific-Japan region covers the Pacific Rim, including Australia and New Zealand, and is based in

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The table below presents information about Dell’s reportable segments for the three and six month periods ended August 1, 2003 and August 2, 2002:

Changes in Dell’s aggregate product warranty liability are presented in the following table:

Dell Financial Services

Dell is currently a partner in Dell Financial Services L.P. (“DFS”), a joint venture with CIT Group Inc. (“CIT”). The joint venture allows Dell to provide customers with various financing alternatives and asset management services as a part of the total service package offered to the customer. CIT, as a financial services company, provides the financing for the transaction between DFS and the customer.

In general, DFS facilitates customer financing transactions through either loan or lease financing. For customers who desire loan financing, Dell sells equipment directly to customers who, in turn, enter into loans with DFS to finance their purchases. Dell recognized revenue on loan financing transactions of $704 million

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Dell also receives a referral fee from DFS for introducing customers to DFS for financing alternatives. Such fees are included in net revenue and were $25 million and $10 million for the second quarter of fiscal 2004 and 2003, respectively, and $55 million and $22 million during the six month periods ended August 1, 2003 and August 2, 2002, respectively. Neither CIT nor DFS have any recourse or rights of return to Dell, except that end-user customers may return equipment pursuant to Dell’s standard return policy.

In accordance with the partnership agreement between Dell and CIT, losses generated by DFS are allocated to CIT. Net income generated by DFS is allocated 70% to Dell and 30% to CIT, after CIT has recovered any cumulative losses. Although Dell has a 70% equity interest in DFS, because the company cannot and has not exercised control over DFS, the investment has historically been accounted for under the equity method. Dell’s share of DFS’s net income is reflected in investment and other income, net, and totaled $0.7 million of pretax earnings during both the second quarter of fiscal 2004 and 2003, and $2.7 million and $1.0 million during the six months ended August 1, 2003 and August 2, 2002, respectively. If DFS is terminated with a cumulative deficit, Dell is not obligated to fund any losses. Dell’s investment balance in DFS at August 1, 2003 was $57 million.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities (“VIEs”). FIN 46 requires that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should be consolidated in the entity’s financial statements. As a result of FIN 46, Dell has concluded that DFS is a VIE and Dell is the primary beneficiary of DFS’s cash flows. Accordingly, Dell will consolidate DFS beginning in the third quarter of fiscal 2004. The consolidation will not alter the partnership agreement or risk sharing between Dell and CIT. During the term of the agreement, CIT will remain a funding partner and is responsible for net losses incurred by DFS. Dell is currently evaluating the financial impact of consolidating DFS, but does not expect the event to have a material impact on its consolidated results of operations or financial position.

Master Lease Facilities

Dell has maintained master lease facilities which provide the company with the ability to lease certain real property, buildings, and equipment that will be constructed or acquired. These leases have historically been accounted for as operating leases by Dell. During the second quarter of fiscal 2004, Dell paid approximately $190 million to acquire a portion of the assets covered by its master lease facilities. Subsequent to the second quarter of fiscal 2004, Dell paid approximately $446 million to purchase the remaining assets covered by its master lease facilities.

In January 2003, the SEC issued a final rule requiring enhanced disclosure of material off-balance sheet transactions, arrangements, and other relationships with unconsolidated entities. The rule also requires a tabular disclosure of future payments due under contractual commitments. The disclosure requirements will become effective for Dell’s fiscal 2004 Annual Report on Form 10-K. Dell does not expect this pronouncement to have a material impact on its consolidated results of operations or financial position.

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Statements in this Report that relate to future results and events are based on Dell’s current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. For a discussion of factors affecting Dell’s business and prospects, see “Item 1 — Business — Factors Affecting Dell’s Business and Prospects” in Dell’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003.

All percentage amounts and ratios were calculated using the underlying data in thousands. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. All market share references included in this discussion are according to IDC.

Second Quarter Overview

During the second quarter of fiscal 2004, Dell’s performance continued to outpace the industry. Dell increased its worldwide share by 2.6 points year-over-year and strengthened its position as the world’s No. 1 supplier of personal computing systems. Year-over-year net unit shipments increased 27% during the current quarter, with net revenue increasing 16% to $9.8 billion, while operating expenses reached a record low 9.6% of net revenue. Conversely, over the same period industry revenue growth was estimated to be relatively flat (excluding Dell). Dell also delivered strong liquidity with cash flows from operations of $1.6 billion during the six months ended August 1, 2003 and ended the quarter with cash, cash equivalents, and investments totaling a company record $10.6 billion. Dell’s low-cost structure and efficient direct-to-customer model has enabled Dell to consistently achieve market share growth while maximizing operating profitability.

During the second quarter of fiscal 2004, Dell continued to focus on standards-based technologies and utilized its direct-to-customer model to drive down costs through efficient supply chain management. Dell’s model inherently provides cost advantages in manufacturing, operations, and its supply chain, a competitive advantage that many companies have tried to duplicate. The direct-to-customer model also provides Dell with a constant flow of information about trends in customers’ plans and requirements. These trends have shown an increased use of standards-based technologies as well as a push towards standardization of services. Unlike proprietary technologies promoted by some of Dell’s top competitors, standards-based technologies provide customers with flexibility and choice while allowing their purchasing decisions to be based on performance, cost, and customer service. This is a trend that favors Dell’s ability to drive for profitable share growth and extend further into the enterprise, which includes servers, storage, networking products, and workstations.

Although the current competitive and macro-economic environment remains challenging, overall technology spending has shown signs of stabilization with the market producing its fourth consecutive quarter of modest year-over-year unit growth (including Dell). By maintaining a strategy of profitable market share growth with a focus on improving overall profitability, management believes that Dell will continue to outperform the industry.

Results of Operations

The following table summarizes the results of Dell’s operations for the three and six months ended August 1, 2003 and August 2, 2002:

Net Revenue

Net revenue was $9.8 billion for the second quarter of fiscal 2004, an increase of $1.3 billion from the same quarter last year. Net revenue increased to $19.3 billion for the six months ended August 1, 2003, from

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Consolidated year-over-year net unit shipments increased 27% during the quarter while the industry increased only 6% (excluding Dell). However, net unit growth was partially offset by a 9% decrease in average revenue per-unit sold for both the three and six months ended August 1, 2003, as compared to the same periods last year. This decline resulted primarily from an increased competitive pricing environment while declines in component costs began to moderate. Dell’s general practice is to aggressively pass on declines in costs to its customers in order to add customer value while increasing market share.

Despite the intensified pricing environment, Dell has outperformed the market by increasing year-over-year market share while improving operating profitability. Dell will continue to adjust its pricing as necessary in response to future competitive and economic conditions.

The following table summarizes Dell’s net revenue by geographic region:

Americas — During the current quarter, Dell extended its No. 1 market share position by 4 points in the U.S. and the Americas overall. Year-over-year net revenue increased 12% and 13% during the three and six months ended August 1, 2003, respectively. The increase in revenue was broad-based but primarily led by growth in notebooks of 16% during the current quarter and enterprise systems of 24% during the six months ended August 1, 2003.

In the Americas Business segment, year-over-year net revenue increased 9% and 11% during the three and six months ended August 1, 2003, respectively. Enterprise provided the majority of the growth, with servers contributing approximately one-third of the revenue increase during both the three and six months ended August 1, 2003.

In the U.S. Consumer segment, year-over-year net revenue grew 28% during the current quarter and 24% for the six months ended August 1, 2003 as Dell’s market share gains continued to outpace the industry. Dell produced strong year-over-year net unit growth in notebooks during the current quarter of 70%; however, this growth was partially offset by a decline in average revenue per-unit sold.

Europe — Dell continued its strong performance in Europe by increasing year-over-year market share during the current quarter by 1.6 points, strengthening its No. 2 overall market share position. Net unit shipments grew year-over-year by 31% during the current quarter and increased across all product lines. Net revenue during both the three and six months ended August 1, 2003 increased 22% year-over-year, including combined net revenue growth of 23% in the focus countries of United Kingdom, France, and Germany during the current quarter.

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Asia Pacific-Japan — Dell generated year-over-year market share gains during the current quarter of 2.1 points with net unit growth of 46% in a market that increased only 7% (excluding Dell). Net revenue growth during the three and six months ended August 1, 2003 was broad based and increased year-over-year by 29% and 31%, respectively. This increase included combined net revenue growth of 31% in the focus countries of Japan and China during the current quarter.

Gross Margin

Gross margin as a percentage of net revenue improved to 18.2% during the second quarter of fiscal 2004, as compared to 17.9% in the second quarter of fiscal 2003. Gross margin was 18.3% for the six months ended August 1, 2003 and 17.6% during the same period last year. The year-over-year improvement was primarily driven by Dell’s cost savings initiatives. However, Dell experienced a slight year-over-year decline in gross margin as a percentage of net revenue in Asia Pacific-Japan and Americas, mainly due to the increased competitive pricing environment. This decline was more than offset by improved gross margins in Europe.

As part of management’s focus on improving margins, Dell remains committed to reducing costs through four primary cost reduction initiatives: manufacturing costs, warranty costs, structural or design costs, and overhead or operating expenses. These cost savings initiatives also include providing certain customer technical support and back-office functions from low-cost sites as well as driving more efficient processes and tools globally.

Based on the industry, economic, and other factors discussed above, Dell currently expects the component cost and competitive pricing environment will continue to be challenging. Management believes that the strength of Dell’s direct-to-customer business model, as well as its strong liquidity position, makes Dell better positioned than its competitors to continue profitable market share growth in any business climate.

Operating Expenses

The following table presents certain information regarding Dell’s operating expenses during the periods indicated:

During the current quarter, Dell achieved record low operating expenses as a percentage of net revenue of 9.6%, compared to 9.9% in the same quarter last year. The decrease was primarily a result of previously referred to cost reduction initiatives.

Selling, general and administrative — During the three and six months ended August 1, 2003, selling, general and administrative expenses increased in absolute dollars when compared to the same periods last year. This increase was commensurate with the corresponding increase in net revenue as Dell continues to invest in global expansion efforts as part of its strategy to profitably gain market share. However, due to strong revenue growth Dell was able to achieve lower selling, general and administrative expenses as a percentage of net revenue of 8.4% during the second quarter of fiscal 2004, down from 8.6% in the second quarter of fiscal 2003.

Research, development and engineering — Dell continues to invest in research, development and engineering activities to develop and introduce new products and to support its continued goal of improving and developing efficient procurement, manufacturing, and distribution processes. Research, development and engineering expenses during the three and six months ended August 1, 2003 increased slightly year-over-year but decreased slightly as a percentage of net revenue. Dell expects to continue to invest in research, development and engineering activity, with an increasing emphasis on enterprise products, including servers and storage. As of August 1, 2003, Dell had received 918 U.S. patents and applied for an additional 582 patents.

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Investment and Other Income, net

Investment and other income, net, remained relatively flat during the three and six months ended August 1, 2003, compared to the same periods last year, and primarily includes interest income and expense, gains and losses from the sale of investments, and foreign exchange transaction gains and losses. For the second quarter of fiscal 2004 and 2003, investment and other income, net, was $47 million and $49 million, respectively. For the six months ended August 1, 2003 and August 2, 2002, investment and other income, net, was $90 million and $97 million, respectively.

Income Taxes

Dell’s effective tax rate was 30% for the second quarter of fiscal 2004, as compared to 31% for the same quarter last year. For the six month periods ended August 1, 2003 and August 2, 2002, Dell’s effective tax rate was 30%. Differences between the effective tax rate and the U.S. federal statutory rate of 35% principally result from Dell’s geographical distribution of taxable income and losses and from differences between book and tax treatment of certain items. Dell expects that its effective tax rate may decrease slightly to approximately 29%, as its business outside the U.S. in lower tax jurisdictions continues to expand and become an increasing portion of operating profits.

Liquidity and Capital Resources

Liquidity

The following table summarizes the results of Dell’s statement of cash flows for the six months ended August 1, 2003 and August 2, 2002:

Cash provided by operating activities during the six months ended August 1, 2003 was $1.6 billion, as compared to $1.4 billion for the same period last year. Cash flows from operating activities resulted primarily from net income and represents Dell’s principal source of cash. In addition to net income, operating cash flows have historically been impacted by improvement in Dell’s cash conversion cycle and, to a lesser extent, income tax benefits that result from the exercise of employee stock options.

Cash used in investing activities for the six months ended August 1, 2003 was $695 million, as compared to $429 million for the same period last year. Cash used in investing activities principally consists of net purchases of investments and capital expenditures for property, plant and equipment. The increase during the six months ended August 1, 2003, when compared to the same period last year, was primarily due to the purchase of $190 million of assets that were held in master lease facilities and previously classified as operating leases.

Cash used in financing activities during the six months ended August 1, 2003 was $677 million, as compared to $1.1 billion during the same period last year. Financing activities primarily consist of the purchase of Dell stock, partially offset by the issuance of common stock under employee stock option plans. The decrease during the six months ended August 1, 2003, compared to the same period last year, was due to an increase in the number of shares issued as a result of the exercise of stock options, combined with a decrease in the aggregate value of common stock repurchased by Dell.

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The following table presents selected financial statistics and information: