UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 28, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California | 77-0059951 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrants telephone number, including area code)
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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Number of shares of the registrants common stock outstanding as of May 18, 2012: 5,356,878,940
FORM 10-Q for the Quarter Ended April 28, 2012
INDEX
2
Item 1. | Financial Statements (Unaudited) |
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
April 28, 2012 |
July 30, 2011 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 6,461 | $ | 7,662 | ||||
Investments |
41,951 | 36,923 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $216 at April 28, 2012 and $204 at July 30, 2011 |
3,980 | 4,698 | ||||||
Inventories |
1,497 | 1,486 | ||||||
Financing receivables, net |
3,709 | 3,111 | ||||||
Deferred tax assets |
2,104 | 2,410 | ||||||
Other current assets |
1,510 | 941 | ||||||
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Total current assets |
61,212 | 57,231 | ||||||
Property and equipment, net |
3,634 | 3,916 | ||||||
Financing receivables, net |
3,518 | 3,488 | ||||||
Goodwill |
17,006 | 16,818 | ||||||
Purchased intangible assets, net |
2,134 | 2,541 | ||||||
Other assets |
3,650 | 3,101 | ||||||
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TOTAL ASSETS |
$ | 91,154 | $ | 87,095 | ||||
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Short-term debt |
$ | 83 | $ | 588 | ||||
Accounts payable |
903 | 876 | ||||||
Income taxes payable |
453 | 120 | ||||||
Accrued compensation |
2,626 | 3,163 | ||||||
Deferred revenue |
8,568 | 8,025 | ||||||
Other current liabilities |
4,491 | 4,734 | ||||||
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Total current liabilities |
17,124 | 17,506 | ||||||
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Long-term debt |
16,286 | 16,234 | ||||||
Income taxes payable |
1,698 | 1,191 | ||||||
Deferred revenue |
4,080 | 4,182 | ||||||
Other long-term liabilities |
588 | 723 | ||||||
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Total liabilities |
39,776 | 39,836 | ||||||
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Commitments and contingencies (Note 12) |
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Equity: |
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Cisco shareholders equity: |
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Preferred stock, no par value: 5 shares authorized; none issued and outstanding |
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Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 5,383 and 5,435 shares issued and outstanding at April 28, 2012 and July 30, 2011, respectively |
39,510 | 38,648 | ||||||
Retained earnings |
10,869 | 7,284 | ||||||
Accumulated other comprehensive income |
978 | 1,294 | ||||||
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Total Cisco shareholders equity |
51,357 | 47,226 | ||||||
Noncontrolling interests |
21 | 33 | ||||||
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Total equity |
51,378 | 47,259 | ||||||
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TOTAL LIABILITIES AND EQUITY |
$ | 91,154 | $ | 87,095 | ||||
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See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
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NET SALES: |
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Product |
$ | 9,106 | $ | 8,669 | $ | 27,176 | $ | 25,605 | ||||||||
Service |
2,482 | 2,197 | 7,195 | 6,418 | ||||||||||||
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Total net sales |
11,588 | 10,866 | 34,371 | 32,023 | ||||||||||||
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COST OF SALES: |
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Product |
3,563 | 3,437 | 10,776 | 10,068 | ||||||||||||
Service |
856 | 770 | 2,471 | 2,280 | ||||||||||||
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Total cost of sales |
4,419 | 4,207 | 13,247 | 12,348 | ||||||||||||
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GROSS MARGIN |
7,169 | 6,659 | 21,124 | 19,675 | ||||||||||||
OPERATING EXPENSES: |
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Research and development |
1,358 | 1,430 | 4,072 | 4,339 | ||||||||||||
Sales and marketing |
2,383 | 2,446 | 7,230 | 7,292 | ||||||||||||
General and administrative |
562 | 466 | 1,611 | 1,376 | ||||||||||||
Amortization of purchased intangible assets |
96 | 103 | 292 | 419 | ||||||||||||
Restructuring and other charges |
20 | 31 | 225 | 31 | ||||||||||||
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Total operating expenses |
4,419 | 4,476 | 13,430 | 13,457 | ||||||||||||
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OPERATING INCOME |
2,750 | 2,183 | 7,694 | 6,218 | ||||||||||||
Interest income |
161 | 161 | 483 | 477 | ||||||||||||
Interest expense |
(151 | ) | (153 | ) | (449 | ) | (480 | ) | ||||||||
Other income, net |
19 | 12 | 45 | 143 | ||||||||||||
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Interest and other income, net |
29 | 20 | 79 | 140 | ||||||||||||
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INCOME BEFORE PROVISION FOR INCOME TAXES |
2,779 | 2,203 | 7,773 | 6,358 | ||||||||||||
Provision for income taxes |
614 | 396 | 1,649 | 1,100 | ||||||||||||
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NET INCOME |
$ | 2,165 | $ | 1,807 | $ | 6,124 | $ | 5,258 | ||||||||
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Net income per share: |
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Basic |
$ | 0.40 | $ | 0.33 | $ | 1.14 | $ | 0.95 | ||||||||
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Diluted |
$ | 0.40 | $ | 0.33 | $ | 1.13 | $ | 0.94 | ||||||||
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Shares used in per-share calculation: |
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Basic |
5,388 | 5,508 | 5,383 | 5,545 | ||||||||||||
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Diluted |
5,456 | 5,537 | 5,418 | 5,596 | ||||||||||||
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Cash dividends declared per common share |
$ | 0.08 | $ | 0.06 | $ | 0.20 | $ | 0.06 | ||||||||
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See Notes to Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine Months Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
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Cash flows from operating activities: |
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Net income |
$ | 6,124 | $ | 5,258 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation, amortization and other |
1,816 | 1,813 | ||||||
Share-based compensation expense |
1,032 | 1,237 | ||||||
Provision for doubtful accounts |
20 | (1 | ) | |||||
Deferred income taxes |
75 | (37 | ) | |||||
Excess tax benefits from share-based compensation |
(57 | ) | (65 | ) | ||||
Net gains on investments |
(38 | ) | (185 | ) | ||||
Change in operating assets and liabilities, net of effects of acquisitions and divestitures: |
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Accounts receivable |
660 | 603 | ||||||
Inventories |
(113 | ) | (105 | ) | ||||
Financing receivables, net |
(737 | ) | (1,089 | ) | ||||
Other assets |
(495 | ) | 190 | |||||
Accounts payable |
34 | (103 | ) | |||||
Income taxes, net |
151 | (192 | ) | |||||
Accrued compensation |
(451 | ) | (265 | ) | ||||
Deferred revenue |
482 | 537 | ||||||
Other liabilities |
(100 | ) | (341 | ) | ||||
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Net cash provided by operating activities |
8,403 | 7,255 | ||||||
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Cash flows from investing activities: |
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Purchases of investments |
(32,690 | ) | (30,303 | ) | ||||
Proceeds from sales of investments |
19,591 | 14,942 | ||||||
Proceeds from maturities of investments |
7,930 | 14,134 | ||||||
Acquisition of property and equipment |
(830 | ) | (930 | ) | ||||
Acquisition of businesses, net of cash and cash equivalents acquired |
(333 | ) | (266 | ) | ||||
Purchases of investments in privately held companies |
(299 | ) | (179 | ) | ||||
Return of investments in privately held companies |
212 | 93 | ||||||
Other |
175 | 48 | ||||||
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Net cash used in investing activities |
(6,244 | ) | (2,461 | ) | ||||
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Cash flows from financing activities: |
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Issuances of common stock |
1,115 | 1,516 | ||||||
Repurchases of common stock |
(2,868 | ) | (5,564 | ) | ||||
Short-term borrowings, maturities less than 90 days, net |
(505 | ) | 392 | |||||
Issuances of debt, maturities greater than 90 days |
| 4,109 | ||||||
Repayments of debt, maturities greater than 90 days |
| (3,000 | ) | |||||
Excess tax benefits from share-based compensation |
57 | 65 | ||||||
Dividends paid |
(1,076 | ) | (329 | ) | ||||
Other |
(83 | ) | 71 | |||||
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Net cash used in financing activities |
(3,360 | ) | (2,740 | ) | ||||
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Net (decrease) increase in cash and cash equivalents |
(1,201 | ) | 2,054 | |||||
Cash and cash equivalents, beginning of period |
7,662 | 4,581 | ||||||
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Cash and cash equivalents, end of period |
$ | 6,461 | $ | 6,635 | ||||
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Cash paid for: |
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Interest |
$ | 561 | $ | 658 | ||||
Income taxes |
$ | 1,424 | $ | 1,328 |
See Notes to Consolidated Financial Statements.
5
CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
(Unaudited)
Nine Months Ended April 28, 2012 |
Shares of Common Stock |
Common Stock and Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Total
Cisco Shareholders Equity |
Noncontrolling Interests |
Total Equity |
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BALANCE AT JULY 30, 2011 |
5,435 | $ | 38,648 | $ | 7,284 | $ | 1,294 | $ | 47,226 | $ | 33 | $ | 47,259 | |||||||||||||||
Net income |
6,124 | 6,124 | 6,124 | |||||||||||||||||||||||||
Change in: |
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Unrealized gains and losses on investments, net |
19 | 19 | (12 | ) | 7 | |||||||||||||||||||||||
Derivative instruments |
(39 | ) | (39 | ) | (39 | ) | ||||||||||||||||||||||
Cumulative translation adjustment and other |
(296 | ) | (296 | ) | (296 | ) | ||||||||||||||||||||||
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Comprehensive income (loss) |
5,808 | (12 | ) | 5,796 | ||||||||||||||||||||||||
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Issuance of common stock |
110 | 1,115 | 1,115 | 1,115 | ||||||||||||||||||||||||
Repurchase of common stock |
(162 | ) | (1,257 | ) | (1,463 | ) | (2,720 | ) | (2,720 | ) | ||||||||||||||||||
Cash dividends declared |
(1,076 | ) | (1,076 | ) | (1,076 | ) | ||||||||||||||||||||||
Tax effects from employee stock incentive plans |
(36 | ) | (36 | ) | (36 | ) | ||||||||||||||||||||||
Purchase acquisitions |
8 | 8 | 8 | |||||||||||||||||||||||||
Share-based compensation expense |
1,032 | 1,032 | 1,032 | |||||||||||||||||||||||||
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BALANCE AT APRIL 28, 2012 |
5,383 | $ | 39,510 | $ | 10,869 | $ | 978 | $ | 51,357 | $ | 21 | $ | 51,378 | |||||||||||||||
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Nine Months Ended April 30, 2011 |
Shares of Common Stock |
Common Stock and Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Total
Cisco Shareholders Equity |
Noncontrolling Interests |
Total Equity |
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BALANCE AT JULY 31, 2010 |
5,655 | $ | 37,793 | $ | 5,851 | $ | 623 | $ | 44,267 | $ | 18 | $ | 44,285 | |||||||||||||||
Net income |
5,258 | 5,258 | 5,258 | |||||||||||||||||||||||||
Change in: |
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Unrealized gains and losses on investments |
153 | 153 | 25 | 178 | ||||||||||||||||||||||||
Derivative instruments |
37 | 37 | 37 | |||||||||||||||||||||||||
Cumulative translation adjustment and other |
494 | 494 | 494 | |||||||||||||||||||||||||
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Comprehensive income |
5,942 | 25 | 5,967 | |||||||||||||||||||||||||
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Issuance of common stock |
110 | 1,516 | 1,516 | 1,516 | ||||||||||||||||||||||||
Repurchase of common stock |
(264 | ) | (1,879 | ) | (3,563 | ) | (5,442 | ) | (5,442 | ) | ||||||||||||||||||
Cash dividends declared |
(329 | ) | (329 | ) | (329 | ) | ||||||||||||||||||||||
Tax effects from employee stock incentive plans |
(40 | ) | (40 | ) | (40 | ) | ||||||||||||||||||||||
Purchase acquisitions |
12 | 12 | 12 | |||||||||||||||||||||||||
Share-based compensation expense |
1,237 | 1,237 | 1,237 | |||||||||||||||||||||||||
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BALANCE AT APRIL 30, 2011 |
5,501 | $ | 38,639 | $ | 7,217 | $ | 1,307 | $ | 47,163 | $ | 43 | $ | 47,206 | |||||||||||||||
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In September 2001, the Companys Board of Directors authorized a stock repurchase program. As of April 28, 2012, the Companys Board of Directors had authorized an aggregate repurchase of up to $82 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 13 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impact on Cisco shareholders equity are summarized in the following table (in millions):
Shares of Common Stock |
Common Stock and Additional Paid-In Capital |
Retained Earnings |
Total Cisco Shareholders Equity |
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Repurchases of common stock under the repurchase program |
3,631 | $ | 16,248 | $ | 58,085 | $ | 74,333 |
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
The fiscal year for Cisco Systems, Inc. (the Company or Cisco) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2012 and fiscal 2011 are each 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis. Beginning in fiscal 2012, the Company is organized into the following three geographic segments: the Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC). In fiscal 2011, the Company was organized into four geographic segments, which consisted of United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. As a result of this geographic segment change in fiscal 2012, countries within the former Emerging Markets segment were consolidated into either EMEA or the Americas segment depending on their respective geographic locations. The Company has reclassified the geographic segment data for the prior period to conform to the current periods presentation.
The accompanying financial data as of April 28, 2012 and for the three and nine months ended April 28, 2012 and April 30, 2011 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The July 30, 2011 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended July 30, 2011.
The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates (SOFTBANK) as the Company is the primary beneficiary. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Companys equity in the equity section of the Consolidated Balance Sheets. SOFTBANKs share of the earnings in the venture fund is not presented separately in the Consolidated Statements of Operations and is included in other income, net, as this amount is not material for any of the fiscal periods presented. In addition, for the Companys investment in Insieme Networks, Inc. (see Note 12), the loss attributable to the noncontrolling interests is not presented separately in the Consolidated Statements of Operations as this amount is not material for the periods presented.
In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly each of the statement of financial position as of April 28, 2012; the results of operations for the three and nine months ended April 28, 2012 and April 30, 2011; and the statement of cash flows and equity for the nine months ended April 28, 2012 and April 30, 2011, as applicable, have been made. The results of operations for the three and nine months ended April 28, 2012 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
In addition to the geographic segment change referred to above, certain other reclassifications have been made to prior period amounts in order to conform to the current periods presentation.
The Company has evaluated subsequent events through the date that the financial statements were issued.
7
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. | Summary of Significant Accounting Policies |
New Accounting Update Recently Adopted
In May 2011, the Financial Accounting Standards Board (FASB) issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards (IFRS). This accounting standard update became effective for the Company beginning in the third quarter of fiscal 2012. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 9.
Recent Accounting Standards or Updates Not Yet Effective
In June 2011, the FASB issued an accounting standard update to provide guidance on increasing the prominence of items reported in other comprehensive income. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This accounting standard update is effective for the Company beginning in the first quarter of fiscal 2013, and it will result in changes in the Companys financial statement presentation.
In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2013, and early adoption is permitted.
In December 2011, the FASB issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the applicable disclosures required by this accounting standard update.
3. | Business Combinations |
(a) Acquisition Summary
The Company completed 5 business combinations during the nine months ended April 28, 2012. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
Shares Issued | Purchase Consideration |
Net Liabilities Assumed |
Purchased Intangible Assets |
Goodwill | ||||||||||||||||
Lightwire, Inc. |
| $ | 239 | $ | (15 | ) | $ | 97 | $ | 157 | ||||||||||
All others |
| 122 | (21 | ) | 84 | 59 | ||||||||||||||
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Total acquisitions |
| $ | 361 | $ | (36 | ) | $ | 181 | $ | 216 | ||||||||||
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The Company acquired Lightwire, Inc. (Lightwire) in the third quarter of fiscal 2012. With its acquisition of Lightwire, a developer of advanced optical interconnect technology for high-speed networking applications, the Company aims to develop and deliver cost-effective, high-speed networks with the next generation of optical connectivity.
The total purchase consideration related to the Companys business combinations completed during the nine months ended April 28, 2012 consisted of either cash consideration or cash consideration along with vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations were immaterial. Total transaction costs related to the Companys business combination activities were $9 million and $10 million for the nine months ended April 28, 2012 and April 30, 2011, respectively. These transaction costs were expensed as incurred as general and administrative (G&A) expenses.
8
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company continues to evaluate certain assets and liabilities related to business combinations completed during the recent periods. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill.
The goodwill generated from the Companys business combinations completed during the nine months ended April 28, 2012 is primarily related to expected synergies. The goodwill is not deductible for U.S. federal income tax purposes.
The Consolidated Financial Statements include the operating results of each business combination from the date of acquisition. Pro forma results of operations for the acquisitions completed during the nine months ended April 28, 2012 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Companys financial results.
(b) Pending Acquisition of NDS Group Limited
On March 15, 2012, the Company entered into a definitive agreement to acquire NDS Group Limited (NDS), a leading provider of video software and content security solutions that enable service providers and media companies to securely deliver and monetize new video entertainment experiences. NDS uses the combination of a software platform and services to create differentiated video offerings for service providers that enable subscribers to intuitively view, search and navigate digital content anytime, anywhere and on any device.
The acquisition of NDS is expected to complement and accelerate the delivery of Cisco Videoscape, Ciscos comprehensive platform that enables service providers and media companies to deliver next-generation entertainment experiences. With the NDS acquisition, the Company aims to broaden its opportunities in the service provider market, and to expand its reach into emerging markets such as China and India, where NDS has an established customer footprint.
Under the terms of the agreement, Cisco will pay total consideration of approximately $5 billion, which includes the assumption of debt and retention-based incentives, to acquire all of the business and operations of NDS. The acquisition has been approved by the boards of directors of both companies. The acquisition is expected to close during the second half of calendar year 2012 and is subject to customary closing conditions, including regulatory review in the United States and elsewhere.
4. | Goodwill and Purchased Intangible Assets |
(a) Goodwill
Beginning in fiscal 2012, the Companys reportable segments were changed to the following segments: the Americas, EMEA, and APJC. As a result, the Company reallocated the goodwill at July 30, 2011 to these reportable segments. The following table presents the goodwill allocated to the Companys reportable segments as of and during the nine months ended April 28, 2012 (in millions):
Balance at | Balance at | |||||||||||||||
July 30, 2011 | Acquisitions | Other | April 28, 2012 | |||||||||||||
Americas |
$ | 11,627 | $ | 124 | $ | (2 | ) | $ | 11,749 | |||||||
EMEA |
3,272 | 57 | (26 | ) | 3,303 | |||||||||||
APJC |
1,919 | 35 | | 1,954 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,818 | $ | 216 | $ | (28 | ) | $ | 17,006 | |||||||
|
|
|
|
|
|
|
|
In the table above, the column entitled Other primarily includes foreign currency translation and purchase accounting adjustments.
9
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) Purchased Intangible Assets
The following table presents details of the Companys intangible assets acquired through business combinations completed during the nine months ended April 28, 2012 (in millions, except years):
FINITE LIVES | INDEFINITE LIVES |
|||||||||||||||||||||||||||||||
TECHNOLOGY | CUSTOMER RELATIONSHIPS |
OTHER | IN-PROCESS RESEARCH & DEVELOPMENT |
TOTAL | ||||||||||||||||||||||||||||
Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | Amount | |||||||||||||||||||||||||
Lightwire, Inc. |
5.0 | $ | 97 | | $ | | | $ | | $ | | $ | 97 | |||||||||||||||||||
All others |
3.6 | 84 | | | | | | 84 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 181 | | $ | | | $ | | $ | | $ | 181 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
The following tables present details of the Companys purchased intangible assets (in millions):
April 28, 2012 | Gross | Accumulated Amortization |
Net | |||||||||
Purchased intangible assets with finite lives: |
||||||||||||
Technology |
$ | 2,240 | $ | (802 | ) | $ | 1,438 | |||||
Customer relationships |
2,263 | (1,587 | ) | 676 | ||||||||
Other |
121 | (109 | ) | 12 | ||||||||
|
|
|
|
|
|
|||||||
Total purchased intangible assets with finite lives |
4,624 | (2,498 | ) | 2,126 | ||||||||
In-process research & development, with indefinite lives |
8 | | 8 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,632 | $ | (2,498 | ) | $ | 2,134 | |||||
|
|
|
|
|
|
July 30, 2011 | Gross | Accumulated Amortization |
Net | |||||||||
Purchased intangible assets with finite lives: |
||||||||||||
Technology |
$ | 1,961 | $ | (561 | ) | $ | 1,400 | |||||
Customer relationships |
2,277 | (1,346 | ) | 931 | ||||||||
Other |
123 | (91 | ) | 32 | ||||||||
|
|
|
|
|
|
|||||||
Total purchased intangible assets with finite lives |
4,361 | (1,998 | ) | 2,363 | ||||||||
In-process research & development, with indefinite lives |
178 | | 178 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,539 | $ | (1,998 | ) | $ | 2,541 | |||||
|
|
|
|
|
|
Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses.
10
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the amortization of purchased intangible assets (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
April 28, 2012 | April 30, 2011 | April 28, 2012 | April 30, 2011 | |||||||||||||
Amortization of purchased intangible assets: |
||||||||||||||||
Cost of sales |
$ | 108 | $ | 110 | $ | 303 | $ | 387 | ||||||||
Operating expenses: |
||||||||||||||||
Amortization of purchased intangible assets |
96 | 103 | 292 | 419 | ||||||||||||
Restructuring and other charges |
| 8 | | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 204 | $ | 221 | $ | 595 | $ | 814 | ||||||||
|
|
|
|
|
|
|
|
There were no impairment charges related to purchased intangible assets during the three and nine months ended April 28, 2012. Amortization of purchased intangible assets for the three and nine months ended April 30, 2011 included impairment charges of $9 million and $164 million, respectively. The $164 million in impairment charges consisted of $64 million of charges to product cost of sales, $92 million of charges to amortization of purchased intangibles and $8 million of charges to restructuring and other charges. These impairment charges were primarily due to declines in estimated fair value resulting from reductions in expected future cash flows associated with certain of the Companys consumer products and were categorized as follows: $97 million in technology assets, $40 million in customer relationships, and $27 million in other purchased intangible assets.
The estimated future amortization expense of purchased intangible assets with finite lives as of April 28, 2012 is as follows (in millions):
Fiscal Year |
Amount | |||
2012 (remaining three months) |
$ | 199 | ||
2013 |
699 | |||
2014 |
512 | |||
2015 |
438 | |||
2016 |
211 | |||
Thereafter |
67 | |||
|
|
|||
Total |
$ | 2,126 | ||
|
|
11
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. | Restructuring and Other Charges |
In fiscal 2011, the Company initiated a number of key, targeted actions to address several areas in its business model. These actions are intended to simplify and focus the Companys organization and operating model; align the Companys cost structure given transitions in the marketplace; divest or exit underperforming operations; and deliver value to the Companys shareholders. The Company is taking these actions to align its business based on its five foundational priorities: leadership in its core business (routing, switching, and associated services), which includes comprehensive security and mobility solutions; collaboration; data center virtualization and cloud; video; and architectures for business transformation.
Pursuant to the restructuring that the Company announced in July 2011, the Company has incurred cumulative charges of $946 million (included as part of the charges discussed below). The Company expects that the total pre-tax charges pursuant to these restructuring actions will be approximately $1 billion and it expects the remaining charges to be incurred in the fourth quarter of fiscal 2012. The following table summarizes the activities related to the restructuring and other charges since the Companys July 2011 announcement related to the realignment and restructuring of the Companys business as well as certain consumer product lines as announced during April 2011 (in millions):
Voluntary Early Retirement Program |
Employee Severance |
Goodwill Intangible Assets |
Other | Total | ||||||||||||||||
Charges in fiscal 2011 |
$ | 453 | $ | 247 | $ | 71 | $ | 28 | $ | 799 | ||||||||||
Cash payments |
(436 | ) | (13 | ) | | | (449 | ) | ||||||||||||
Non-cash items |
| | (71 | ) | (17 | ) | (88 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of July 30, 2011 |
17 | 234 | | 11 | 262 | |||||||||||||||
Charges |
| 195 | | 30 | 225 | |||||||||||||||
Cash payments |
(17 | ) | (380 | ) | | (16 | ) | (413 | ) | |||||||||||
Non-cash items |
| | | (19 | ) | (19 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of April 28, 2012 |
$ | | $ | 49 | $ | | $ | 6 | $ | 55 | ||||||||||
|
|
|
|
|
|
|
|
|
|
During the three months ended April 28, 2012, the Company incurred restructuring charges of $20 million. During the nine months ended April 28, 2012, the Company incurred total restructuring charges of $225 million consisting of $195 million of employee severance charges and $30 million of other restructuring charges. The employee severance charges consisted of $233 million of charges primarily related to impacted employees in the Companys international locations, partially offset by a reduction of $38 million related to a change in estimate regarding certain employee severance charges recorded in the fourth quarter of fiscal 2011. Other charges incurred during the nine months ended April 28, 2012 were primarily for the consolidation of excess facilities, as well as an incremental charge related to the sale of the Companys Juarez, Mexico manufacturing operations, which sale was completed in the first quarter of fiscal 2012.
During the three and nine months ended April 30, 2011, the Company recorded restructuring charges of approximately $120 million in connection with restructuring related to the Companys consumer product lines, most notably exiting the Flip Video camera product line, which were recorded in cost of sales and not included in the preceding table.
12
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. | Balance Sheet Details |
The following tables provide details of selected balance sheet items (in millions):
April 28, 2012 |
July 30, 2011 |
|||||||
Inventories: |
||||||||
Raw materials |
$ | 114 | $ | 219 | ||||
Work in process |
37 | 52 | ||||||
Finished goods: |
||||||||
Distributor inventory and deferred cost of sales |
629 | 631 | ||||||
Manufactured finished goods |
437 | 331 | ||||||
|
|
|
|
|||||
Total finished goods |
1,066 | 962 | ||||||
|
|
|
|
|||||
Service-related spares |
202 | 182 | ||||||
Demonstration systems |
78 | 71 | ||||||
|
|
|
|
|||||
Total |
$ | 1,497 | $ | 1,486 | ||||
|
|
|
|
|||||
Property and equipment, net: |
||||||||
Land, buildings, and building & leasehold improvements |
$ | 4,547 | $ | 4,760 | ||||
Computer equipment and related software |
1,454 | 1,429 | ||||||
Production, engineering, and other equipment |
5,286 | 5,093 | ||||||
Operating lease assets (1) |
291 | 293 | ||||||
Furniture and fixtures |
489 | 491 | ||||||
|
|
|
|
|||||
12,067 | 12,066 | |||||||
Less accumulated depreciation and amortization (1) |
(8,433 | ) | (8,150 | ) | ||||
|
|
|
|
|||||
Total |
$ | 3,634 | $ | 3,916 | ||||
|
|
|
|
|||||
(1) Accumulated depreciation related to operating lease assets was $176 and $169 as of April 28, 2012 and July 30, 2011, respectively. |
|
|||||||
Other assets: |
||||||||
Deferred tax assets |
$ | 2,063 | $ | 1,864 | ||||
Investments in privately held companies |
841 | 796 | ||||||
Other |
746 | 441 | ||||||
|
|
|
|
|||||
Total |
$ | 3,650 | $ | 3,101 | ||||
|
|
|
|
|||||
Deferred revenue: |
||||||||
Service |
$ | 8,778 | $ | 8,521 | ||||
Product: |
||||||||
Unrecognized revenue on product shipments and other deferred revenue |
2,943 | 3,003 | ||||||
Cash receipts related to unrecognized revenue from two-tier distributors |
927 | 683 | ||||||
|
|
|
|
|||||
Total product deferred revenue |
3,870 | 3,686 | ||||||
|
|
|
|
|||||
Total |
$ | 12,648 | $ | 12,207 | ||||
|
|
|
|
|||||
Reported as: |
||||||||
Current |
$ | 8,568 | $ | 8,025 | ||||
Noncurrent |
4,080 | 4,182 | ||||||
|
|
|
|
|||||
Total |
$ | 12,648 | $ | 12,207 | ||||
|
|
|
|
13
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. | Financing Receivables and Guarantees |
(a) Financing Receivables
Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Companys and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.
A summary of the Companys financing receivables is presented as follows (in millions):
April 28, 2012 |
Lease Receivables |
Loan Receivables |
Financed
Service Contracts & Other |
Total
Financing Receivables |
||||||||||||
Gross |
$ | 3,406 | $ | 1,827 | $ | 2,628 | $ | 7,861 | ||||||||
Unearned income |
(253 | ) | | | (253 | ) | ||||||||||
Allowance for credit loss |
(252 | ) | (118 | ) | (11 | ) | (381 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,901 | $ | 1,709 | $ | 2,617 | $ | 7,227 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reported as: |
||||||||||||||||
Current |
$ | 1,192 | $ | 1,029 | $ | 1,488 | $ | 3,709 | ||||||||
Noncurrent |
1,709 | 680 | 1,129 | 3,518 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,901 | $ | 1,709 | $ | 2,617 | $ | 7,227 | ||||||||
|
|
|
|
|
|
|
|
July 30, 2011 |
Lease Receivables |
Loan Receivables |
Financed
Service Contracts & Other |
Total
Financing Receivables |
||||||||||||
Gross |
$ | 3,111 | $ | 1,468 | $ | 2,637 | $ | 7,216 | ||||||||
Unearned income |
(250 | ) | | | (250 | ) | ||||||||||
Allowance for credit loss |
(237 | ) | (103 | ) | (27 | ) | (367 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,624 | $ | 1,365 | $ | 2,610 | $ | 6,599 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reported as: |
||||||||||||||||
Current |
$ | 1,087 | $ | 673 | $ | 1,351 | $ | 3,111 | ||||||||
Noncurrent |
1,537 | 692 | 1,259 | 3,488 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,624 | $ | 1,365 | $ | 2,610 | $ | 6,599 | ||||||||
|
|
|
|
|
|
|
|
As of April 28, 2012 and July 30, 2011, the deferred service revenue related to the financed service contracts and other was $1,888 million and $2,044 million, respectively.
Contractual maturities of the gross lease receivables at April 28, 2012 are summarized as follows (in millions):
Fiscal Year |
Amount | |||
2012 (remaining three months) |
$ | 430 | ||
2013 |
1,290 | |||
2014 |
908 | |||
2015 |
514 | |||
2016 |
217 | |||
Thereafter |
47 | |||
|
|
|||
Total |
$ | 3,406 | ||
|
|
Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.
14
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) Credit Quality of Financing Receivables
Financing receivables categorized by the Companys internal credit risk rating as of April 28, 2012 and July 30, 2011 are summarized as follows (in millions):
INTERNAL CREDIT
RISK RATING |
||||||||||||||||||||||||
April 28, 2012 |
1 to 4 | 5 to 6 | 7 and Higher | Total | Residual Value |
Gross Receivables, Net of Unearned Income |
||||||||||||||||||
Lease receivables |
$ | 1,535 | $ | 1,302 | $ | 26 | $ | 2,863 | $ | 290 | $ | 3,153 | ||||||||||||
Loan receivables |
830 | 942 | 55 | 1,827 | | 1,827 | ||||||||||||||||||
Financed service contracts & other |
1,593 | 977 | 58 | 2,628 | | 2,628 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,958 | $ | 3,221 | $ | 139 | $ | 7,318 | $ | 290 | $ | 7,608 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
INTERNAL CREDIT
RISK RATING |
||||||||||||||||||||||||
July 30, 2011 |
1 to 4 | 5 to 6 | 7 and Higher | Total | Residual Value |
Gross Receivables, Net of Unearned Income |
||||||||||||||||||
Lease receivables |
$ | 1,249 | $ | 1,275 | $ | 41 | $ | 2,565 | $ | 296 | $ | 2,861 | ||||||||||||
Loan receivables |
662 | 767 | 39 | 1,468 | | 1,468 | ||||||||||||||||||
Financed service contracts & other |
1,623 | 958 | 56 | 2,637 | | 2,637 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,534 | $ | 3,000 | $ | 136 | $ | 6,670 | $ | 296 | $ | 6,966 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other. Effective in the second quarter of fiscal 2012, the Company combined its financing receivables into a single class as the two prior classes, Established Markets and Growth Markets, now exhibit similar risk characteristics as reflected by the Companys historical losses. The Company has reclassified applicable financing receivables data for the prior periods presented to conform to the current periods presentation. In addition, effective in the second quarter of fiscal 2012, the Company also refined its methodology for calculating its allowance for financing receivables as discussed under (c) below, Allowance for Credit Loss Rollforward.
The Companys internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment-grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings and constitute a relatively small portion of the Companys financing receivables.
In circumstances when collectability is not deemed reasonably assured, the associated revenue is deferred in accordance with the Companys revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of April 28, 2012 and July 30, 2011 were $2,484 million and $2,793 million, respectively, and they were associated with financing receivables (net of unearned income) of $7,608 million and $6,966 million as of their respective period ends. The losses that the Company has incurred historically as well as in the periods presented with respect to its financing receivables have been immaterial and consistent with the performance of an investment-grade portfolio. The Company did not modify any financing receivables during the periods presented.
15
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables present the aging analysis of financing receivables as of April 28, 2012 and July 30, 2011 (in millions):
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED) |
||||||||||||||||||||||||||||||||
April 28, 2012 |
31-60 | 61-90 | 91+ | Total Past Due |
Current | Gross Receivables, Net of Unearned Income |
Non- Accrual Financing Receivables |
Impaired Financing Receivables |
||||||||||||||||||||||||
Lease receivables |
$ | 134 | $ | 76 | $ | 221 | $ | 431 | $ | 2,722 | $ | 3,153 | $ | 21 | $ | 13 | ||||||||||||||||
Loan receivables |
14 | 10 | 6 | 30 | 1,797 | 1,827 | 9 | 8 | ||||||||||||||||||||||||
Financed service contracts & other |
101 | 70 | 435 | 606 | 2,022 | 2,628 | 14 | 8 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 249 | $ | 156 | $ | 662 | $ | 1,067 | $ | 6,541 | $ | 7,608 | $ | 44 | $ | 29 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED) |
||||||||||||||||||||||||||||||||
July 30, 2011 |
31-60 | 61-90 | 91+ | Total Past Due |
Current | Gross Receivables, Net of Unearned Income |
Non- Accrual Financing Receivables |
Impaired Financing Receivables |
||||||||||||||||||||||||
Lease receivables |
$ | 89 | $ | 35 | $ | 152 | $ | 276 | $ | 2,585 | $ | 2,861 | $ | 34 | $ | 24 | ||||||||||||||||
Loan receivables |
8 | 7 | 21 | 36 | 1,432 | 1,468 | 4 | 4 | ||||||||||||||||||||||||
Financed service contracts & other |
68 | 33 | 265 | 366 | 2,271 | 2,637 | 17 | 6 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 165 | $ | 75 | $ | 438 | $ | 678 | $ | 6,288 | $ | 6,966 | $ | 55 | $ | 34 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables are presented by contract and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The preceding aging tables exclude pending adjustments on billed tax assessment in certain international markets. The balances of either unbilled or current financing receivables included in the category of greater than 90 days past due for lease receivables, loan receivables, and financed service contracts and other were, respectively, $184 million, $2 million, and $371 million as of April 28, 2012; and were, respectively, $116 million, $15 million, and $230 million as of July 30, 2011.
As of April 28, 2012, the Company had financing receivables of $99 million, net of unbilled or current receivables from the same contract, that were in the category for greater than 90 days past due but remained on accrual status. Such balance was $50 million as of July 30, 2011. A financing receivable may be placed on non-accrual status earlier if, in managements opinion, a timely collection of the full principal and interest becomes uncertain.
16
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(c) Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
Allowance for Credit Loss |
Lease Receivables |
Loan Receivables |
Financed Service Contracts & Other |
Total | ||||||||||||
BALANCE AT JULY 30, 2011 |
$ | 237 | $ | 103 | $ | 27 | $ | 367 | ||||||||
Provisions |
2 | 5 | 2 | 9 | ||||||||||||
Foreign exchange and other |
(6 | ) | (5 | ) | | (11 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT OCTOBER 29, 2011 |
233 | 103 | 29 | 365 | ||||||||||||
Provisions |
18 | 4 | (18 | ) | 4 | |||||||||||
Foreign exchange and other |
(1 | ) | 3 | (2 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT JANUARY 28, 2012 |
250 | 110 | 9 | 369 | ||||||||||||
Provisions |
3 | 7 | 2 | 12 | ||||||||||||
Write-offs, net of recoveries |
(1 | ) | | | (1 | ) | ||||||||||
Foreign exchange and other |
| 1 | | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT APRIL 28, 2012 |
$ | 252 | $ | 118 | $ | 11 | $ | 381 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross receivables net of unearned income, as of April 28, 2012 |
$ | 3,153 | $ | 1,827 | $ | 2,628 | $ | 7,608 |
Allowance for Credit Loss |
Lease Receivables |
Loan Receivables |
Financed Service Contracts & Other |
Total | ||||||||||||
BALANCE AT JULY 31, 2010 |
$ | 207 | $ | 73 | $ | 21 | $ | 301 | ||||||||
Provisions |
6 | (15 | ) | 3 | (6 | ) | ||||||||||
Write offs, net of recoveries |
(1 | ) | | (1 | ) | (2 | ) | |||||||||
Foreign exchange and other |
20 | 22 | | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT OCTOBER 30, 2010 |
232 | 80 | 23 | 335 | ||||||||||||
Provisions |
15 | 24 | 4 | 43 | ||||||||||||
Foreign exchange and other |
(14 | ) | (20 | ) | | (34 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT JANUARY 29, 2011 |
233 | 84 | 27 | 344 | ||||||||||||
Provisions |
3 | 26 | (2 | ) | 27 | |||||||||||
Write-offs, net of recoveries |
(5 | ) | (2 | ) | (1 | ) | (8 | ) | ||||||||
Foreign exchange and other |
5 | 3 | 1 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
BALANCE AT APRIL 30, 2011 |
$ | 236 | $ | 111 | $ | 25 | $ | 372 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross receivables net of unearned income, as of April 30, 2011 |
$ | 2,648 | $ | 1,373 | $ | 2,495 | $ | 6,516 |
When determining the allowances for credit loss, financing receivables are evaluated on an individual or a collective basis. When evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis, the Company considers historical experience, credit quality, age of the receivable balances, and economic conditions that may affect a customers ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, are assessed at the customer level and will be fully reserved. Typically, the Company considers receivables with a risk rating of 8 or higher to be impaired. Financing receivables that were individually evaluated for impairment during the periods presented were not material and therefore are not presented separately in the preceding tables.
The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. Effective at the beginning of the second quarter of fiscal 2012, the Company refined its methodology for determining the portion of its allowance for credit loss that is evaluated on a collective basis. The refinement consists of more systematically giving effect to economic conditions, concentration of risk and correlation. The Company also began to use expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default. Previously the Company used only historical loss rates published by the same third-party credit-rating agency. These refinements are intended to better identify changes in macroeconomic conditions and credit risk. There was not a material change to the Companys total allowance for credit loss related to financing receivables as a result of these methodology refinements. See the Companys Annual Report on Form 10-K for the fiscal year ended July 30, 2011 for a discussion of the methodology applied in previous periods.
17
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(d) Financing Guarantees
In the ordinary course of business, the Company provides financing guarantees for various third-party financing arrangements extended to channel partners and end-user customers. Payments under these financing guarantee arrangements were not material for the periods presented.
Channel Partner Financing Guarantees The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $5.2 billion and $4.4 billion for the three months ended April 28, 2012 and April 30, 2011, respectively. The volume of channel partner financing was $15.9 billion and $13.4 billion for the nine months ended April 28, 2012 and April 30, 2011, respectively. The balance of the channel partner financing subject to guarantees was $1.3 billion as of April 28, 2012 and $1.4 billion as of July 30, 2011.
End-User Financing Guarantees The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans that typically have terms of up to three years. The volume of financing provided by third parties for leases and loans which the Company had provided guarantees was $99 million and $45 million for the three months ended April 28, 2012 and April 30, 2011, respectively, and was $194 million and $153 million for the nine months ended April 28, 2012 and April 30, 2011, respectively.
Financing Guarantee Summary The aggregate amount of financing guarantees outstanding at April 28, 2012 and July 30, 2011, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):
April 28, 2012 |
July 30, 2011 |
|||||||
Maximum potential future payments relating to financing guarantees: |
||||||||
Channel partner |
$ | 283 | $ | 336 | ||||
End user |
258 | 277 | ||||||
|
|
|
|
|||||
Total |
$ | 541 | $ | 613 | ||||
|
|
|
|
|||||
Deferred revenue associated with financing guarantees: |
||||||||
Channel partner |
$ | (209 | ) | $ | (248 | ) | ||
End user |
(224 | ) | (248 | ) | ||||
|
|
|
|
|||||
Total |
$ | (433 | ) | $ | (496 | ) | ||
|
|
|
|
|||||
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue |
$ | 108 | $ | 117 | ||||
|
|
|
|
8. | Investments |
(a) Summary of Available-for-Sale Investments
The following tables summarize the Companys available-for-sale investments (in millions):
April 28, 2012 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. government securities |
$ | 25,118 | $ | 41 | $ | (2 | ) | $ | 25,157 | |||||||
U.S. government agency securities |
6,884 | 24 | | 6,908 | ||||||||||||
Non-U.S. government and agency securities |
2,219 | 8 | | 2,227 | ||||||||||||
Corporate debt securities |
6,080 | 57 | (6 | ) | 6,131 | |||||||||||
Asset-backed securities |
16 | | (2 | ) | 14 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed income securities |
40,317 | 130 | (10 | ) | 40,437 | |||||||||||
Publicly traded equity securities |
826 | 692 | (4 | ) | 1,514 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 41,143 | $ | 822 | $ | (14 | ) | $ | 41,951 | |||||||
|
|
|
|
|
|
|
|
18
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
July 30, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. government securities |
$ | 19,087 | $ | 52 | $ | | $ | 19,139 | ||||||||
U.S. government agency securities |
8,742 | 35 | (1 | ) | 8,776 | |||||||||||
Non-U.S. government and agency securities |
3,119 | 14 | (1 | ) | 3,132 | |||||||||||
Corporate debt securities |
4,333 | 65 | (4 | ) | 4,394 | |||||||||||
Asset-backed securities |
120 | 5 | (4 | ) | 121 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed income securities |
35,401 | 171 | (10 | ) | 35,562 | |||||||||||
Publicly traded equity securities |
734 | 639 | (12 | ) | 1,361 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 36,135 | $ | 810 | $ | (22 | ) | $ | 36,923 | |||||||
|
|
|
|
|
|
|
|
U.S. government agency securities include corporate debt securities that are guaranteed by the Federal Deposit Insurance Corporation (FDIC) while non-U.S. government and agency securities include agency and corporate debt securities that are guaranteed by non-U.S. governments.
(b) Gains and Losses on Available-for-Sale Investments
The following table presents the gross realized gains and gross realized losses related to the Companys available-for-sale investments (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
|||||||||||||
Gross realized gains |
$ | 118 | $ | 107 | $ | 542 | $ | 272 | ||||||||
Gross realized losses |
(88 | ) | (58 | ) | (466 | ) | (116 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 30 | $ | 49 | $ | 76 | $ | 156 | ||||||||
|
|
|
|
|
|
|
|
The following table presents the realized net gains (losses) related to the Companys available-for-sale investments (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
|||||||||||||
Net gains on investments in publicly traded equity securities |
$ | 15 | $ | 42 | $ | 30 | $ | 72 | ||||||||
Net gains on investments in fixed income securities |
15 | 7 | 46 | 84 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 30 | $ | 49 | $ | 76 | $ | 156 | ||||||||
|
|
|
|
|
|
|
|
Impairment charges on available-for-sale investments were not material for the periods presented.
The following table summarizes the activity related to credit losses for fixed income securities (in millions):
Nine Months Ended |
April 28, 2012 | April 30, 2011 | ||||||
Balance at beginning of period |
$ | (23 | ) | $ | (95 | ) | ||
Sales of other-than-temporarily impaired fixed income securities |
22 | 52 | ||||||
|
|
|
|
|||||
Balance at end of period |
$ | (1 | ) | $ | (43 | ) | ||
|
|
|
|
19
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at April 28, 2012 and July 30, 2011 (in millions):
UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
April 28, 2012 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||
U.S. government securities |
$ | 6,756 | $ | (2 | ) | $ | | $ | | $ | 6,756 | $ | (2 | ) | ||||||||||
Corporate debt securities |
1,718 | (6 | ) | 21 | | 1,739 | (6 | ) | ||||||||||||||||
Asset-backed securities |
| | 14 | (2 | ) | 14 | (2 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed income securities |
8,474 | (8 | ) | 35 | (2 | ) | 8,509 | (10 | ) | |||||||||||||||
Publicly traded equity securities |
42 | (4 | ) | 1 | | 43 | (4 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 8,516 | $ | (12 | ) | $ | 36 | $ | (2 | ) | $ | 8,552 | $ | (14 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
July 30, 2011 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||
U.S. government agency securities |
$ | 2,310 | $ | (1 | ) | $ | | $ | | $ | 2,310 | $ | (1 | ) | ||||||||||
Non-U.S. government and agency securities |
875 | (1 | ) | | | 875 | (1 | ) | ||||||||||||||||
Corporate debt securities |
548 | (2 | ) | 56 | (2 | ) | 604 | (4 | ) | |||||||||||||||
Asset-backed securities |
| | 105 | (4 | ) | 105 | (4 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed income securities |
3,733 | (4 | ) | 161 | (6 | ) | 3,894 | (10 | ) | |||||||||||||||
Publicly traded equity securities |
112 | (12 | ) | | | 112 | (12 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,845 | $ | (16 | ) | $ | 161 | $ | (6 | ) | $ | 4,006 | $ | (22 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of April 28, 2012, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of April 28, 2012, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three and nine months ended April 28, 2012.
The Company has evaluated its publicly traded equity securities as of April 28, 2012 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Companys intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
(c) Maturities of Fixed Income Securities
The following table summarizes the maturities of the Companys fixed income securities at April 28, 2012 (in millions):
Amortized Cost | Fair Value | |||||||
Less than 1 year |
$ | 18,983 | $ | 19,005 | ||||
Due in 1 to 2 years |
13,046 | 13,091 | ||||||
Due in 2 to 5 years |
8,175 | 8,226 | ||||||
Due after 5 years |
113 | 115 | ||||||
|
|
|
|
|||||
Total |
$ | 40,317 | $ | 40,437 | ||||
|
|
|
|
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
20
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(d) Securities Lending
The Company periodically engages in securities lending activities with certain of its available-for-sale investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for the nine months ended April 28, 2012 was approximately $0.4 billion. The average daily balance of securities lending for the nine months ended April 30, 2011 was approximately $1.9 billion. The Company requires collateral equal to at least 102% of the fair market value of the loaned security in the form of cash or liquid, high-quality assets. The Company engages in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify the Company against any collateral losses. The Company did not experience any losses in connection with the secured lending of securities during the periods presented. As of April 28, 2012 and July 30, 2011, the Company had no outstanding securities lending transactions.
9. | Fair Value |
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability.
(a) Fair Value Hierarchy
The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
21
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of April 28, 2012 and July 30, 2011 were as follows (in millions):
APRIL 28, 2012 | JULY 30, 2011 | |||||||||||||||||||||||||||||||
FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Balance |
Level 1 | Level 2 | Level 3 | Total Balance |
|||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Cash equivalents: |
||||||||||||||||||||||||||||||||
Money market funds |
$ | 4,293 | $ | | $ | | $ | 4,293 | $ | 5,852 | $ | | $ | | $ | 5,852 | ||||||||||||||||
U.S. government agency securities |
| | | | | 1 | | 1 | ||||||||||||||||||||||||
Corporate debt securities |
| 12 | | 12 | | | | | ||||||||||||||||||||||||
Available-for-sale investments: |
||||||||||||||||||||||||||||||||
U.S. government securities |
| 25,157 | | 25,157 | | 19,139 | | 19,139 | ||||||||||||||||||||||||
U.S. government agency securities |
| 6,908 | | 6,908 | | 8,776 | | 8,776 | ||||||||||||||||||||||||
Non-U.S. government and agency securities |
| 2,227 | | 2,227 | | 3,132 | | 3,132 | ||||||||||||||||||||||||
Corporate debt securities |
| 6,131 | | 6,131 | | 4,394 | | 4,394 | ||||||||||||||||||||||||
Asset-backed securities |
| 14 | | 14 | | | 121 | 121 | ||||||||||||||||||||||||
Publicly traded equity securities |
1,514 | | | 1,514 | 1,361 | | | 1,361 | ||||||||||||||||||||||||
Derivative assets |
| 233 | 1 | 234 | | 220 | 2 | 222 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 5,807 | $ | 40,682 | $ | 1 | $ | 46,490 | $ | 7,213 | $ | 35,662 | $ | 123 | $ | 42,998 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||
Derivative liabilities |
$ | | $ | 22 | $ | | $ | 22 | $ | | $ | 24 | $ | | $ | 24 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | | $ | 22 | $ | | $ | 22 | $ | | $ | 24 | $ | | $ | 24 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 fixed income securities are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Companys derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.
Level 3 assets include certain derivative instruments, the values of which are determined based on discounted cash flow models using inputs that the Company could not corroborate with market data. The asset-backed securities were reclassified from Level 3 to Level 2 at January 28, 2012, the end of the Companys fiscal second quarter, as circumstances indicated an increase in market activity and related market observable data is available for such financial assets.
The following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended April 28, 2012 and April 30, 2011 (in millions):
Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
Balance at July 30, 2011 |
$ | 121 | $ | 2 | $ | 123 | ||||||
Total gains and losses (realized and unrealized): |
||||||||||||
Included in other income, net |
3 | | 3 | |||||||||
Included in other comprehensive income |
(3 | ) | | (3 | ) | |||||||
Sales |
(14 | ) | (1 | ) | (15 | ) | ||||||
Transfer into Level 2 |
(107 | ) | | (107 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at April 28, 2012 |
$ | | $ | 1 | $ | 1 | ||||||
|
|
|
|
|
|
22
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
Balance at July 31, 2010 |
$ | 149 | $ | 3 | $ | 152 | ||||||
Total gains and losses (realized and unrealized): |
||||||||||||
Included in other income, net |
3 | | 3 | |||||||||
Included in operating expense |
| (1 | ) | (1 | ) | |||||||
Included in other comprehensive income |
(1 | ) | | (1 | ) | |||||||
Sales and maturities |
(21 | ) | | (21 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at April 30, 2011 |
$ | 130 | $ | 2 | $ | 132 | ||||||
|
|
|
|
|
|
|||||||
Losses attributable to assets still held as of April 30, 2011 |
$ | | $ | (1 | ) | $ | (1 | ) |
(c) Assets Measured at Fair Value on a Nonrecurring Basis
The following tables present the Companys financial instruments and nonfinancial assets that were measured at fair value on a nonrecurring basis during the indicated periods and the related recognized gains and losses for the periods (in millions):
FAIR VALUE MEASUREMENTS | ||||||||||||||||||||||||
Net Carrying Value as of April 28, 2012 |
Level 1 | Level 2 | Level 3 | Total Losses for the Three Months Ended April 28, 2012 |
Total Gains (Losses) for the Nine Months Ended April 28, 2012 |
|||||||||||||||||||
Investments in privately held companies |
$ | 17 | $ | | $ | | $ | 17 | $ | (15 | ) | $ | (17 | ) | ||||||||||
Property held for sale |
$ | 52 | $ | | $ | | $ | 52 | (76 | ) | (192 | ) | ||||||||||||
Gains on assets no longer held as of April 28, 2012 |
| 14 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total losses for nonrecurring measurements |
$ | (91 | ) | $ | (195 | ) | ||||||||||||||||||
|
|
|
|
FAIR VALUE MEASUREMENTS | ||||||||||||||||||||||||
Net Carrying Value as of April 30, 2011 |
Level 1 | Level 2 | Level 3 | Total Losses for the Three Months Ended April 30, 2011 |
Total Losses for the Nine Months Ended April 30, 2011 |
|||||||||||||||||||
Investments in privately held companies |
$ | 11 | $ | | $ | | $ | 11 | $ | (1 | ) | $ | (6 | ) | ||||||||||
Purchased intangible assets |
$ | | $ | | $ | | $ | | (9 | ) | (164 | ) | ||||||||||||
|
|
|
|
|||||||||||||||||||||
Total losses for nonrecurring measurements |
$ | (10 | ) | $ | (170 | ) | ||||||||||||||||||
|
|
|
|
The assets in the preceding tables were measured at fair value due to events or circumstances the Company identified as having significant impact on their fair value during the respective periods. To arrive at the valuation of these assets, the Company considers any significant changes in the financial metrics and economic variables and also uses third-party valuation reports to assist in the valuation as necessary.
The fair value measurement of the impaired investments was classified as Level 3 because significant unobservable inputs were used in the valuation due to the absence of quoted market prices and inherent lack of liquidity. Significant unobservable inputs, which included financial metrics of comparable private and public companies, financial condition and near-term prospects of the investees, recent financing activities of the investee, and the investees capital structure as well as other economic variables, reflected the assumptions market participants would use in pricing these assets. The impairment charges, representing the difference between the cost and the fair value as a result of the evaluation, were recorded to other income, net.
The fair value of purchased intangible assets measured at fair value on a nonrecurring basis was categorized as Level 3 due to the use of significant unobservable inputs in the valuation. Significant unobservable inputs that were used included expected revenues and net income related to the assets and the expected life of the assets. The difference between the estimated fair value and the carrying value of the assets was recorded as an impairment charge. For the three and nine months ended April 30, 2011, such impairment charges were recorded in operating expenses and cost of sales as appropriate.
23
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The fair value of property held for sale was measured with the assistance of third-party valuation models that used comparable property values in less active markets. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation report. The impairment charges as a result of the valuations, which represented the difference between the fair value and the carrying amount of the assets held for sale, were included in G&A expenses.
(d) Other Fair Value Disclosures
As of April 28, 2012, the carrying value of the Companys investments in privately held companies that were accounted for under the cost method was $245 million. It was not practicable to estimate the fair value of this portfolio.
The fair value of the Companys short-term loan receivables and financed service contracts approximates their carrying value due to their short duration.
The aggregate carrying value of the Companys long-term loan receivables and financed service contracts and other as of April 28, 2012 was $1.8 billion with an estimated fair value that approximates the carrying value. The Company uses significant unobservable inputs in determining the discounted cash flows for the assets to estimate the fair value of its long-term loan receivables and financed service contracts and therefore they are categorized as Level 3.
As of April 28, 2012, the fair value of the Companys long-term debt was $18.2 billion with a carrying amount of $16.3 billion. The fair value of the long-term debt is determined based on observable market prices in a less active market and is categorized as Level 2 in the fair value hierarchy.
10. | Borrowings |
(a) Short-Term Debt
The following table summarizes the Companys short-term debt (in millions, except percentages):
April 28, 2012 | July 30, 2011 | |||||||||||||||
Amount | Weighted-Average Interest Rate |
Amount | Weighted-Average Interest Rate |
|||||||||||||
Commercial paper |
$ | | | $ | 500 | 0.14 | % | |||||||||
Other notes and borrowings |
83 | 5.88 | % | 88 | 4.59 | % | ||||||||||
|
|
|
|
|||||||||||||
Total short-term debt |
$ | 83 | $ | 588 | ||||||||||||
|
|
|
|
In fiscal 2011, the Company established a short-term debt financing program of up to $3.0 billion through the issuance of commercial paper notes. The Company uses the proceeds from the issuance of commercial paper notes for general corporate purposes. The Company had no commercial paper outstanding as of April 28, 2012.
Other notes and borrowings in the preceding table consist of notes and credit facilities established with a number of financial institutions that are available to certain foreign subsidiaries of the Company. These notes and credit facilities are subject to various terms and foreign currency market interest rates pursuant to individual financial arrangements between the financing institution and the applicable foreign subsidiary.
As of April 28, 2012, the estimated fair value of the short-term debt approximates its carrying value due to the short maturities.
24
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) Long-Term Debt
The following table summarizes the Companys long-term debt (in millions, except percentages):
April 28, 2012 | July 30, 2011 | |||||||||||||||
Amount | Effective Rate | Amount | Effective Rate | |||||||||||||
Senior Notes: |
||||||||||||||||
Floating-rate notes, due 2014 |
$ | 1,250 | 0.82 | % | $ | 1,250 | 0.60 | % | ||||||||
1.625% fixed-rate notes, due 2014 |
2,000 | 0.80 | % | 2,000 | 0.58 | % | ||||||||||
2.90% fixed-rate notes, due 2014 |
500 | 3.11 | % | 500 | 3.11 | % | ||||||||||
5.50% fixed-rate notes, due 2016 |
3,000 | 3.17 | % | 3,000 | 3.06 | % | ||||||||||
3.15% fixed-rate notes, due 2017 |
750 | 1.04 | % | 750 | 0.81 | % | ||||||||||
4.95% fixed-rate notes, due 2019 |
2,000 | 5.08 | % | 2,000 | 5.08 | % | ||||||||||
4.45% fixed-rate notes, due 2020 |
2,500 | 4.50 | % | 2,500 | 4.50 | % | ||||||||||
5.90% fixed-rate notes, due 2039 |
2,000 | 6.11 | % | 2,000 | 6.11 | % | ||||||||||
5.50% fixed-rate notes, due 2040 |
2,000 | 5.67 | % | 2,000 | 5.67 | % | ||||||||||
|
|
|
|
|||||||||||||
Total |
16,000 | 16,000 | ||||||||||||||
Other long-term debt |
10 | 0.19 | % | | | |||||||||||
Unaccreted discount |
(70 | ) | (73 | ) | ||||||||||||
Hedge accounting adjustment |
346 | 307 | ||||||||||||||
|
|
|
|
|||||||||||||
Total long-term debt |
$ | 16,286 | $ | 16,234 | ||||||||||||
|
|
|
|
To achieve its interest rate risk management objectives, the Company entered into interest rate swaps with an aggregate notional amount of $4.25 billion designated as fair value hedges of certain fixed-rate senior notes. In effect, these swaps convert the fixed interest rates of the fixed-rate notes to floating interest rates based on the London InterBank Offered Rate (LIBOR). The gains and losses related to changes in the fair value of the interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest rates. See Note 11.
The effective rates for the fixed-rate debt include the interest on the notes, the accretion of the discount, and, if applicable, adjustments related to hedging. Interest is payable semiannually on each class of the senior fixed-rate notes and payable quarterly on the floating-rate notes. Each of the senior fixed-rate notes is redeemable by the Company at any time, subject to a make-whole premium.
The senior notes rank at par with the issued commercial paper notes, as well as any other commercial paper notes that may be issued in the future pursuant to the short-term debt financing program, as discussed earlier under Short-Term Debt. As of April 28, 2012, the Company was in compliance with all debt covenants.
Future principal payments for long-term debt as of April 28, 2012 are summarized as follows (in millions):
Fiscal Year |
Amount | |||
2014 |
$ | 3,260 | ||
2015 |
500 | |||
2016 |
3,000 | |||
Thereafter |
9,250 | |||
|
|
|||
Total |
$ | 16,010 | ||
|
|
(c) Credit Facility
On February 17, 2012, the Company entered into a credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on February 17, 2017. Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50%, Bank of Americas prime rate as announced from time to time, or one-month LIBOR plus 1.00%, or (ii) LIBOR plus a margin that is based on the Companys senior debt credit ratings as published by Standard & Poors Financial Services, LLC and Moodys Investors Service, Inc. The credit agreement requires the Company to comply with certain covenants, including that it maintains an interest coverage ratio as defined in the agreement. As of April 28, 2012, the Company was in compliance with all such required covenants, and the Company had not borrowed any funds under the credit facility.
25
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company may also, upon the agreement of either the then-existing lenders or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $2.0 billion and/or extend the expiration date of the credit facility up to February 17, 2019.
This credit facility replaces the Companys prior credit facility that was entered into on August 17, 2007, which was terminated in connection with its entering into the new credit facility.
11. | Derivative Instruments |
(a) Summary of Derivative Instruments
The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate, interest rate, and equity price risks. The Companys primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates, interest rates, and equity prices. The Companys derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
The fair values of the Companys derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded are summarized as follows (in millions):
DERIVATIVE ASSETS |
DERIVATIVE LIABILITIES |
|||||||||||||||||||
Balance Sheet Line Item |
April 28, 2012 |
July 30, 2011 | Balance Sheet Line Item |
April 28, 2012 |
July 30, 2011 | |||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||
Foreign currency derivatives |
Other current assets | $ | 15 | $ | 67 | Other current liabilities | $ | 10 | $ | 12 | ||||||||||
Interest rate derivatives |
Other assets | 206 | 146 | Other long-term liabilities | | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 221 | $ | 213 | $ | 10 | $ | 12 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||
Foreign currency derivatives |
Other current assets | $ | 12 | $ | 7 | Other current liabilities | $ | 12 | $ | 12 | ||||||||||
Equity derivatives |
Other assets | 1 | 2 | Other long-term liabilities | | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
13 | 9 | 12 | 12 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 234 | $ | 222 | $ | 22 | $ | 24 | ||||||||||||
|
|
|
|
|
|
|
|
The effects of the Companys cash flow hedging instruments on other comprehensive income (OCI) and the Consolidated Statements of Operations are summarized as follows (in millions):
Three Months Ended |
GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES (EFFECTIVE PORTION) |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME (EFFECTIVE PORTION) |
||||||||||||||||
Derivatives Designated as Cash Flow Hedging Instruments |
April 28, 2012 | April 30, 2011 | Line Item in Statements of Operations |
April 28, 2012 | April 30, 2011 | |||||||||||||
Foreign currency derivatives |
$ | 11 | $ | 51 | Operating expenses | $ | (15 | ) | $ | 28 | ||||||||
Cost of sales-service | (4 | ) | 5 | |||||||||||||||
Interest rate derivatives |
| | Interest expense | 1 | 1 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 11 | $ | 51 | $ | (18 | ) | $ | 34 | |||||||||
|
|
|
|
|
|
|
|
26
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Nine Months Ended |
GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES (EFFECTIVE PORTION) |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME (EFFECTIVE PORTION) |
||||||||||||||||
Derivatives Designated as Cash |
April 28, 2012 | April 30, 2011 | Line Item in Statements of Operations |
April 28, 2012 | April 30, 2011 | |||||||||||||
Foreign currency derivatives |
$ | (83 | ) | $ | 96 | Operating expenses | $ | (37 | ) | $ | 51 | |||||||
Cost of sales-service | (8 | ) | 9 | |||||||||||||||
Interest rate derivatives |
| | Interest expense | 1 | 1 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | (83 | ) | $ | 96 | $ | (44 | ) | $ | 61 | ||||||||
|
|
|
|
|
|
|
|
During the three and nine months ended April 28, 2012 and April 30, 2011, the amounts recognized in earnings on derivative instruments designated as cash flow hedges related to the ineffective portion were not material, and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of April 28, 2012, the Company estimates that approximately $21 million of net derivative losses related to its cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months.
The effect on the Consolidated Statements of Operations of derivative instruments designated as fair value hedges and the underlying hedged items is summarized as follows (in millions):
Three Months Ended |
GAINS (LOSSES) ON DERIVATIVE INSTRUMENTS |
GAINS (LOSSES) RELATED TO HEDGED ITEMS |
||||||||||||||||
Derivatives Designated as Fair Value Hedging Instruments |
Line Item in Statements of Operations |
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
|||||||||||||
Interest rate derivatives |
Interest expense | $ | (16 | ) | $ | 26 | $ | 16 | $ | (27 | ) |
Nine Months Ended |
GAINS (LOSSES) ON DERIVATIVE INSTRUMENTS |
GAINS (LOSSES) RELATED TO HEDGED ITEMS |
||||||||||||||||
Derivatives Designated as Fair Value Hedging Instruments |
Line Item in Statements of Operations |
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
|||||||||||||
Interest rate derivatives |
Interest expense | $ | 60 | $ | 3 | $ | (62 | ) | $ | (4 | ) |
The Company did not exclude, from the assessment of hedge effectiveness in the preceding tables, any component of the changes in fair value of the derivative instruments designated as fair value hedges.
The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as follows (in millions):
GAINS (LOSSES) FOR THE THREE MONTHS ENDED |
GAINS (LOSSES) FOR THE NINE MONTHS ENDED |
|||||||||||||||||
Derivatives Not Designated as Hedging Instruments |
Line Item in Statements of Operations |
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
|||||||||||||
Foreign currency derivatives |
Other income, net | $ | 20 | $ | 114 | $ | (125 | ) | $ | 244 | ||||||||
Total return swaps-deferred compensation |
Cost of sales | 1 | | 4 | | |||||||||||||
Operating expenses | 6 | 13 | (4 | ) | 37 | |||||||||||||
Equity derivatives |
Other income, net | 7 | 8 | (4 | ) | 16 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 34 | $ | 135 | $ | (129 | ) | $ | 297 | |||||||||
|
|
|
|
|
|
|
|
27
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The notional amounts of the Companys outstanding derivatives are summarized as follows (in millions):
April 28, 2012 |
July 30, 2011 |
|||||||
Derivatives designated as hedging instruments: |
||||||||
Foreign currency derivativescash flow hedges |
$ | 1,550 | $ | 3,433 | ||||
Interest rate derivatives |
4,250 | 4,250 | ||||||
Net investment hedging instruments |
66 | 73 | ||||||
Derivatives not designated as hedging instruments: |
||||||||
Foreign currency derivatives |
4,839 | 4,565 | ||||||
Total return swaps- deferred compensation |
278 | 262 | ||||||
|
|
|
|
|||||
Total |
$ | 10,983 | $ | 12,583 | ||||
|
|
|
|
(b) Foreign Currency Exchange Risk
The Company conducts business globally in numerous currencies. Therefore, it is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The Company does not enter into such contracts for trading purposes.
The Company hedges forecasted foreign currency transactions related to certain operating expenses and service cost of sales with currency options and forward contracts. These currency option and forward contracts, designated as cash flow hedges, generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of the derivatives. The effective portion of the derivative instruments gain or loss is initially reported as a component of accumulated other comprehensive income (AOCI) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. During the periods presented, the Company did not discontinue any cash flow hedges for which it was probable that a forecasted transaction would not occur.
The Company enters into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings, investments, and payables. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are included in other income, net, and substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity.
The Company hedges certain net investments in its foreign subsidiaries with forward contracts, which generally have maturities of up to six months. The Company recognized losses of $6 million in OCI for the effective portion of its net investment hedges for the nine months ended April 28, 2012 and there were no such gains or loses for the three months ended April 28, 2012. Such losses for the nine months ended April 30, 2011 were $9 million.
(c) Interest Rate Risk
Interest Rate Derivatives, Investments The Companys primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of April 28, 2012 and July 30, 2011 the Company did not have any outstanding interest rate derivatives related to its fixed income securities.
Interest Rate Derivatives Designated as Fair Value Hedge, Long-Term Debt In fiscal 2011, the Company entered into interest rate swaps designated as fair value hedges related to fixed-rate senior notes that were issued in March 2011 and are due in 2014 and 2017. In fiscal 2010, the Company entered into interest rate swaps designated as fair value hedges for a portion of senior fixed-rate notes that were issued in 2006 and are due in 2016. Under these interest rate swaps, the Company receives fixed-rate interest payments and makes interest payments based on LIBOR plus a fixed number of basis points. The effect of such swaps is to convert the fixed interest rates of the senior fixed-rate notes to floating interest rates based on LIBOR. The gains and losses related to changes in the fair value of the interest rate swaps are included in interest expense and substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest rates. The fair value of the interest rate swaps was reflected in other assets.
28
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(d) Equity Price Risk
The Company may hold equity securities for strategic purposes or to diversify its overall investment portfolio. The publicly traded equity securities in the Companys portfolio are subject to price risk. To manage its exposure to changes in the fair value of certain equity securities, the Company may enter into equity derivatives that are designated as fair value hedges. The changes in the value of the hedging instruments are included in other income, net, and offset the change in the fair value of the underlying hedged investment. In addition, the Company periodically manages the risk of its investment portfolio by entering into equity derivatives that are not designated as accounting hedges. The changes in the fair value of these derivatives were also included in other income, net. The Company did not have any equity derivatives outstanding related to its investment portfolio at April 28, 2012 and July 30, 2011.
The Company is also exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Although not designated as accounting hedges, the Company utilizes derivatives such as total return swaps to economically hedge this exposure.
(e) Credit-Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that have provisions requiring the Company and the counterparty to maintain a specified credit rating from certain credit rating agencies. If the Companys or the counterpartys credit rating falls below a specified credit rating, either party has the right to request collateral on the derivatives net liability position. Such provisions did not affect the Companys financial position as of April 28, 2012 and July 30, 2011.
12. | Commitments and Contingencies |
(a) Operating Leases
The Company leases office space in several U.S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, China, Germany, India, Israel, Italy, Japan, Norway, and the United Kingdom. The Company also leases equipment and vehicles. Future minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of April 28, 2012 are as follows (in millions):
Fiscal Year |
Amount | |||
2012 (remaining three months) |
$ | 94 | ||
2013 |
311 | |||
2014 |
241 | |||
2015 |
198 | |||
2016 |
110 | |||
Thereafter |
353 | |||
|
|
|||
Total |
$ | 1,307 | ||
|
|
(b) Purchase Commitments with Contract Manufacturers and Suppliers
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by the Company or that establish the parameters defining the Companys requirements. A significant portion of the Companys reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Companys requirements based on its business needs prior to firm orders being placed. As of April 28, 2012 and July 30, 2011, the Company had total purchase commitments for inventory of $4,369 million and $4,313 million, respectively.
The Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of the Companys excess and obsolete inventory. As of April 28, 2012 and July 30, 2011, the liability for these purchase commitments was $173 million and $168 million, respectively, and was included in other current liabilities.
29
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(c) Other Commitments
In connection with the Companys business combinations and asset purchases, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $12 million and $18 million during the three months ended April 28, 2012 and April 30, 2011, respectively and $40 million and $113 million during the nine months ended April 28, 2012 and April 30, 2011, respectively. As of April 28, 2012, the Company estimated that future compensation expense and contingent consideration of up to $786 million may be required to be recognized pursuant to the applicable business combination and asset purchase agreements, which included the $750 million milestone payments related to Insieme as discussed below.
The Company also has certain funding commitments, primarily related to its investments in privately held companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones and some of which are required to be funded on demand. The funding commitments were $136 million and $192 million as of April 28, 2012 and July 30, 2011, respectively.
(d) Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers. These privately held companies and customers may be considered to be variable interest entities. The Company evaluates on an ongoing basis its investments in these privately held companies and its customer financings, and it has determined that as of April 28, 2012 there were no material unconsolidated variable interest entities.
VCE Joint Venture VCE is a joint venture that the Company formed in fiscal 2010 with EMC Corporation (EMC), with investments from VMware, Inc. (VMware) and Intel Corporation. VCE helps organizations leverage best-in-class technologies and disciplines from Cisco, EMC, and VMware to enable the transformation to cloud computing.
As of April 28, 2012, the Companys cumulative gross investment in VCE was approximately $322 million, inclusive of accrued interest, and its ownership percentage was approximately 35%. During the nine months ended April 28, 2012, the Company invested approximately $211 million in VCE. The Company accounts for its investment in VCE under the equity method, and accordingly its carrying value in VCE as of April 28, 2012 was $123 million, reflecting its cumulative share of VCEs losses, which were included in other income, net. Over the next 12 months, as VCE scales its operations, the Company expects that it will make additional investments in VCE and may incur additional losses proportionate with the Companys share.
From time to time, EMC and Cisco may enter into guarantee agreements on behalf of VCE to indemnify third parties, such as customers, for monetary damages. Such guarantees were not material as of April 28, 2012.
Insieme Networks, Inc. In the third quarter of fiscal 2012, the Company made an investment in Insieme Networks, Inc. (Insieme), an early-stage company focused on research and development in the data center market. This investment includes $100 million of funding and a license to certain of the Companys technology. As a result of this investment, the Company owns approximately 90% of Insieme and has consolidated the results of Insieme in its Consolidated Financial Statements beginning in the third quarter of fiscal 2012. The net loss attributable to the noncontrolling interests was not presented separately in the Consolidated Statements of Operations due to the amount being immaterial.
In connection with this investment, the Company and Insieme have entered into an option agreement that provides the Company with the right to purchase the remaining interests in Insieme. In addition, the noncontrolling interest holders can require the Company to purchase their shares upon the occurrence of certain events. If the Company acquires the remaining interests of Insieme, the noncontrolling interest holders are eligible to receive two milestone payments, which will be determined using agreed-upon formulas based on revenue for certain of Insiemes products. The Company will begin recognizing the amounts due under the milestone payments when it is determined that such payments are probable of being earned, which may be in fiscal 2014. When such a determination is made, the milestone payments will then be recorded as compensation expense by the Company based on an estimate of the fair value of the amounts probable of being earned, pursuant to a vesting schedule. Subsequent changes to the fair value of the amounts probable of being earned and the continued vesting will result in adjustments to the recorded compensation expense. The maximum amount that could be recorded as compensation expense by the Company is approximately $750 million. The milestone payments, if earned, are expected to be paid primarily during fiscal 2016 and fiscal 2017.
30
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(e) Product Warranties and Guarantees
The following table summarizes the activity related to product warranty liability during the nine months ended April 28, 2012 and April 30, 2011 (in millions):
Nine Months Ended | ||||||||
April 28, 2012 | April 30, 2011 | |||||||
Balance at beginning of period |
$ | 342 | $ | 360 | ||||
Provision for warranties issued |
474 | 330 | ||||||
Payments |
(426 | ) | (356 | ) | ||||
|
|
|
|
|||||
Balance at end of period |
$ | 390 | $ | 334 | ||||
|
|
|
|
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The Companys products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime warranty.
In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Companys Amended and Restated Bylaws contain similar indemnification obligations to the Companys agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Companys limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Companys operating results, financial position, or cash flows.
The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other end-user customers. See Note 7. The Companys other guarantee arrangements as of April 28, 2012 and July 30, 2011 that were subject to recognition and disclosure requirements were not material.
(f) Legal Proceedings
Brazilian authorities have investigated the Companys Brazilian subsidiary and certain of its current and former employees, as well as a Brazilian importer of the Companys products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer. Brazilian tax authorities have assessed claims against the Companys Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes and related penalties. In addition to claims asserted during prior fiscal years by Brazilian federal tax authorities, tax authorities from the Brazilian state of Sao Paulo asserted similar claims on the same legal basis during the second quarter of fiscal 2011.
The asserted claims by Brazilian federal tax authorities are for calendar years 2003 through 2007 and the asserted claims by the tax authorities from the state of Sao Paulo are for calendar years 2005 through 2007. The total asserted claims by Brazilian state and federal tax authorities aggregated to approximately $429 million for the alleged evasion of import taxes, approximately $1.0 billion for interest, and approximately $2.0 billion for various penalties, all determined using an exchange rate as of April 28, 2012. The Company has completed a thorough review of the matter and believes the asserted tax claims against it are without merit, and the Company is defending the claims vigorously. While the Company believes there is no legal basis for its alleged liability, due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims asserting joint liability with the importer, the Company is unable to determine the likelihood of an unfavorable outcome against it and is unable to reasonably estimate a range of loss, if any. The Company does not expect a final judicial determination for several years.
On March 31, 2011 and April 12, 2011, purported shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The lawsuits have been consolidated, and an amended consolidated complaint was filed on December 2, 2011. The consolidated action is purportedly brought on behalf of purchasers of the Companys publicly traded securities between February 3, 2010 and May 11, 2011. Plaintiffs allege that defendants made false and misleading statements, purport to assert claims for violations of the federal securities laws, and seek unspecified compensatory damages and other relief. The Company believes the claims are without merit and intends to defend the actions vigorously. While the Company believes there is no legal basis for liability, due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate a range of loss, if any, at this time.
31
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Beginning on April 8, 2011, a number of purported shareholder derivative lawsuits were filed in both the United States District Court for the Northern District of California and the California Superior Court for the County of Santa Clara against the Companys Board of Directors and several of its officers. The federal lawsuits have been consolidated in the Northern District of California. Plaintiffs in both the federal and state derivative actions allege that the Board allowed certain officers to make allegedly false and misleading statements. The complaint includes claims for violation of the federal securities laws, breach of fiduciary duties, waste of corporate assets, unjust enrichment, and violations of the California Corporations Code. The complaint seeks compensatory damages, disgorgement, and other relief.
In addition, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
13. | Shareholders Equity |
(a) Stock Repurchase Program
In September 2001, the Companys Board of Directors authorized a stock repurchase program. As of April 28, 2012, the Companys Board of Directors had authorized an aggregate repurchase of up to $82 billion of common stock under this program, and the remaining authorized repurchase amount was $7.7 billion with no termination date. A summary of the stock repurchase activity under the stock repurchase program, reported based on the trade date, is summarized as follows (in millions, except per-share amounts):
Shares Repurchased |
Weighted- Average Price per Share |
Amount Repurchased |
||||||||||
Cumulative balance at July 30, 2011 |
3,478 | $ | 20.64 | $ | 71,773 | |||||||
Repurchase of common stock under the stock repurchase program |
153 | 16.66 | 2,560 | |||||||||
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Cumulative balance at April 28, 2012 |
3,631 | $ | 20.47 | $ | 74,333 | |||||||
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The purchase price for the shares of the Companys stock repurchased is reflected as a reduction to shareholders equity. The Company is required to allocate the purchase price of the repurchased shares as (i) a reduction to retained earnings and (ii) a reduction of common stock and additional paid-in capital. Issuance of common stock and the tax benefit related to employee stock incentive plans are recorded as an increase to common stock and additional paid-in capital.
(b) Cash Dividends on Shares of Common Stock
During the nine months ended April 28, 2012, the Company paid cash dividends of $0.20 per common share, or $1.1 billion, on the Companys outstanding common stock.
(c) Other Repurchases of Common Stock
For the nine months ended April 28, 2012 and April 30, 2011, the Company repurchased approximately 10 million and 8 million shares of common stock, or $160 million and $152 million respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock or stock units.
32
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(d) Comprehensive Income
The components of comprehensive income for the three and nine months ended April 28, 2012 and April 30, 2011 are as follows (in millions):
Three Months Ended | Nine Months Ended | |||||||||||||||
April 28, 2012 |
April 30, 2011 |
April 28, 2012 |
April 30, 2011 |
|||||||||||||
Net income |
$ | 2,165 | $ | 1,807 | $ | 6,124 | $ | 5,258 | ||||||||
Other comprehensive income: |
||||||||||||||||
Change in unrealized gains and losses on investments, net of tax benefit (expense) of $(55) and $(12), for the three and nine months ended April 28, 2012, respectively, and $(34) and $(81) for the corresponding periods of fiscal 2011, respectively |
80 | 62 | 7 | 178 | ||||||||||||
Change in derivative instruments, net of tax (expense) of $(1) for the three and nine months ended April 30, 2011 |
29 | 18 | (39 | ) | 37 | |||||||||||
Change in cumulative translation adjustment and other, net of tax benefit (expense) of $(1) and $30, for the three and nine months ended April 28, 2012, respectively, and $(17) and $(32) for the corresponding periods of fiscal 2011, respectively |
21 | 249 | (296 | ) | 494 | |||||||||||
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|
|
|
|
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Other comprehensive income (loss), net of tax |
130 | 329 | (328 | ) | 709 | |||||||||||
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|
|
|
|
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Comprehensive income |
2,295 | 2,136 | 5,796 | 5,967 | ||||||||||||
Comprehensive (income) loss attributable to noncontrolling interests |
(2 | ) | 2 | 12 | (25 | ) | ||||||||||
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Comprehensive income attributable to Cisco Systems, Inc. |
$ | 2,293 | $ | 2,138 | $ | 5,808 | $ | 5,942 | ||||||||
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|
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The components of AOCI, net of tax, are summarized as follows (in millions): |
|
|||||||||||||||
April 28, 2012 |
July 30, 2011 |
|||||||||||||||
Net unrealized gains on investments |
$ | 506 | $ | 487 | ||||||||||||
Net unrealized (losses) gains on derivative instruments |
(33 | ) | 6 | |||||||||||||
Cumulative translation adjustment and other |
505 | 801 | ||||||||||||||
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|
|
|
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Total |
$ | 978 |