Dell Working Capital Solution

Dell's DSI about half the level of its competitors. leading to huge savings in working capital Jan-95 Dell Compaq

Inventory to cover 32 days of Sales 73 days of Sales

Addnl. Inventory reqd. by Dell at Compaq's DSI of 73: 1995 Dell's COS 2,737 7.60 311.71 Addnl. Inventory

312 M 20 M increase in PBT leading to Conservation of Capital

Low component inventory reduces obsolescence risk and lowers inventory cost. Value of inventory reduces 30% p.a.

Lower inventory losses imply higher profits. Compaq had to market both new & older systems. Older systems were discounted, leading to cannibalization of sales of new systems. Dell able to grow sales by offering faster systems at prices of competitors' slower machines. Component shortages had order backlogs, leading to cancellation of some orders. Overall, rapid technological changes in industry made advantages of Dell's approach outweigh the disadvantages.

Dell

Compaq 20.30% Inventory as % of COS 6.090% Inventory loss as % of COS Addnl. Contribution to Profit for Dell due to lower component inventory & effect of price 78.8 reductions

10.71% 3.212%

ower machines.

approach outweigh the disadvantages.

Incremental Sales in 1996 Addnl. Operating Assets (32%) (Total Assets - ST Invest.)

In USD M 1,821 582

5296 52% 4.29% 227

Forecasted 1996 Balance Sheet (In USD M) 1995 Actual Y.E. Jan 29, 1995 % 0f 1995 Sales Current Assets: Cash ST Investments A/R, net Inventories Other Total Current Assets P, P & E, net Other Total Assets Addnl. Funding Needed Current Liabilities: A/P Accrued & Other Liabilities Total Current Liabilities Long Term Debt Other Liabilities Total Liabilities Stockholders' Equity: Preferred Stock Common Stock Retained Earnings Other Total Stockholders' Equity

43 484 538 293 112 1,470 117 7 1,594

1.24% 13.93% 15.48% 8.43% 3.22% 42.30% 3.37% 0.20% 45.87% 31.94%

403 349 752 113 77 942

11.60% 10.04% 21.64% 3.25% 2.22% 27.11%

120 242 311 -21 652 1,594

18.76% 45.87%

As of 1995, Dell would be projected to be able to grow at 52% without increasing its leverage and Actual 1996 Balance Sheet Compared to Projections Y.E. Jan 28, 1996 Current Assets: Cash ST Investments A/R, net Inventories Other Total Current Assets P, P & E, net Other 29% Total Assets

55 591 726 429 156 1,957 179 12 2,148

Forecast for 1996 Fixed Liabilities 66 484 820 447 171 1,987 178 11 2,176

Addnl. Funding Needed Current Liabilities: A/P Accrued & Other Liabilities Total Current Liabilities Long Term Debt Other Liabilities Total Liabilities

354

466 473 939 113 123 1,175

403 349 752 113 77 942

Stockholders' Equity: Preferred Stock 6 Common Stock 430 Retained Earnings 570 Other -33 49 Total Stockholders' Equity 973 879 Common stock to employees 2,148 2,176 5.10% 45 227 Dell internally funded a 52% growth in sales largely by increasing its asset efficiency and profitab

of Sales in 1996, as compare

additional equity issued

924 49

Growth in 1996 sales Actual net profit margin in 1995

4.29% 1995 Actual Net Profit Margin 227 Projected Net Profit for 1996 227

2,176 Forecast for 1996 with Actual 1996 Sales Fixed Liabilities Prop. Liabilities

1,692 582

66 484 820 447 171 1,987 178 11 2,176 354

66 484 820 447 171 1,987 178 11 2,176 (80)

403 349 752 113 77 942

614 532 1,146 113 117 1,376

879 2,176

879 2,176

582 (80)

211

-

ithout increasing its leverage and issuing further equity shares.

Variance

Y.E. Jan 28, 1996

-11 107 -94 -18 -15 (30) 1 1 (28)

55 542 726 429 156 1,957 179 12 2,148

Forecast for 1996 Proportional Liabilities 66 484 820 447 171 1,987 178 11 2,176

Variance

-11 58 -94 -18 -15 -30 1 1 -28

-135

(80)

63 124 187 46 233

466 473 939 113 123 1175

614 532 1146 113 117 1376

-148 -59 -207 0 6 -201

94 (28)

6 430 570 -33 973 2148

879 2,176

94 (28)

ng its asset efficiency and profitability. Total Operating assets at 29% 5.1% vs. 4.3% of Sales in 1996, as compared to projected 32%

5.14% NP Margin 1996 20.15% GP Margin 1996 21.24% GP Margin 1995

17.7%

973

107

135

582 447

58 Extra Actual Funding in 1996

forecast vs. actuals -67

63 124

505 Total Increase in Funding in 1996 over 1995

46

45

272 Increase in Equity w/o 49 -22

Addnl. Sales Addnl. Operating assets

2,648 779

Forecasted 1997 Balance Sheet (In USD M) 1996 Actual

Y.E. Jan 28, 1996

% 0f 1996 Sales

Current Assets: Total Assets Addnl. Funding Needed

2,148

41% 29.40%

2,148

41%

Current Liabilities:

To fund the shortfall of 984 M 44 days of sales through increased asset efficiency, Dell needs 56 days of COGS Current CCC 40 days CCC has to become negative to fund the shortfall of 984 M HOW? Savings from Hypothetical WC improvements DSI 1997 Projected Hypothetical improvements * Daily Savings Annual Savings Total Savings in USD M

DSO 14

27

17 17.6 299.55 983

15 22.1 331.00 904

Improvement in Profitability in 1997 can also eliminate the shortfall of 984 M - 1% increase in margin will inc Margin improvements reduce the required working capital improvements as above - A combination of both seems to be the only reasonable alternative to fund the shortfall. Repurchase of Stock indicates under valuation in the market and leads to increase in value. Actual profit margin 1997

Actual 1997 CCC

13

6.68% ST Inv. Increased to 1237 M from 5 LT debt reduced to 18 M from 113 M Common stock reduced from 430 M Inventories 251 M 903 M A/C Rec., 1040 M A/c payab 37

408 Projected 1997 Net Profit 5.1% Daily COGS 17.6 56 Forecast for 1997 with a 50% Sales Increase Debt repaid & $500 Equity Fixed Liabilities Prop. Liabilities Buyback 779

DPO

2,927 371

2,927 (161)

2,927 984

2,927

2,927

2,927

CCC 53

-12

20 17.6 352.42

% increase in margin will increase net income by 79 M. ove - A combination of both profitability & WC improvements

ase in value.

7759 M sales, 518 M v. Increased to 1237 M from 591 M bt reduced to 18 M from 113 M mon stock reduced from 430 M to 195 M tories 251 M A/C Rec., 1040 M A/c payable 54

(4)