Edgar Filing: CISCO SYSTEMS, INC.

10Q- Q2'15

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 January 24, 2015



o	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

(Registrant’s 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 o

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 o

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	o

Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

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 registrant’s common stock outstanding as of February 13, 2015: 5,104,738,671

____________________________________

Table of Contents

Cisco Systems, Inc.

Form 10-Q for the Quarter Ended January 24, 2015

INDEX



		Page
Part I	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at January 24, 2015 and July 26, 2014	3
	Consolidated Statements of Operations for the Three and Six Months Ended January 24, 2015 and January 25, 2014	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended January 24, 2015 and January 25, 2014	5
	Consolidated Statements of Cash Flows for the Six Months Ended January 24, 2015 and January 25, 2014	6
	Consolidated Statements of Equity for the Six Months Ended January 24, 2015 and January 25, 2014	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	74
Part II.	Other Information	74
Item 1.	Legal Proceedings	74
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	91
Item 3.	Defaults Upon Senior Securities	92
Item 4.	Mine Safety Disclosures	92
Item 5.	Other Information	92
Item 6.	Exhibits	92
	Signature	93

Table of Contents

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements (Unaudited)

CISCO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)



	January 24, 2015		July 26, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	4,797	$	6,726
Investments	48,225		45,348
Accounts receivable, net of allowance for doubtful accounts of $270 at January 24, 2015 and $265 at July 26, 2014	4,541		5,157
Inventories	1,890		1,591
Financing receivables, net	4,210		4,153
Deferred tax assets	2,654		2,808
Other current assets	1,565		1,331
Total current assets	67,882		67,114
Property and equipment, net	3,212		3,252
Financing receivables, net	3,549		3,918
Goodwill	24,382		24,239
Purchased intangible assets, net	2,755		3,280
Other assets	3,142		3,331
TOTAL ASSETS	$	104,922	$	105,134
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	855	$	508
Accounts payable	988		1,032
Income taxes payable	—		159
Accrued compensation	2,694		3,181
Deferred revenue	9,369		9,478
Other current liabilities	6,128		5,451
Total current liabilities	20,034		19,809
Long-term debt	19,667		20,401
Income taxes payable	1,433		1,851
Deferred revenue	4,652		4,664
Other long-term liabilities	1,403		1,748
Total liabilities	47,189		48,473
Commitments and contingencies (Note 12)
Equity:
Cisco shareholders’ equity:
Preferred stock, no par value: 5 shares authorized; none issued and outstanding	—		—
Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 5,107 shares issued and outstanding at each of January 24, 2015 and July 26, 2014	42,685		41,884
Retained earnings	14,847		14,093
Accumulated other comprehensive income	186		677
Total Cisco shareholders’ equity	57,718		56,654
Noncontrolling interests	15		7
Total equity	57,733		56,661
TOTAL LIABILITIES AND EQUITY	$	104,922	$	105,134

See Notes to Consolidated Financial Statements.

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per-share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	January 24, 2015			January 25, 2014			January 24, 2015			January 25, 2014
REVENUE:
Product	$	9,078		$	8,423		$	18,513		$	17,820
Service	2,858			2,732			5,668			5,420
Total revenue	11,936			11,155			24,181			23,240
COST OF SALES:
Product	3,806			4,323			7,725			8,070
Service	1,040			881			2,033			1,812
Total cost of sales	4,846			5,204			9,758			9,882
GROSS MARGIN	7,090			5,951			14,423			13,358
OPERATING EXPENSES:
Research and development	1,529			1,412			3,112			3,136
Sales and marketing	2,308			2,277			4,823			4,688
General and administrative	490			451			994			966
Amortization of purchased intangible assets	72			71			143			136
Restructuring and other charges	69			73			387			310
Total operating expenses	4,468			4,284			9,459			9,236
OPERATING INCOME	2,622			1,667			4,964			4,122
Interest income	189			169			368			338
Interest expense	(139		)	(136		)	(278		)	(276		)
Other income (loss), net	201			55			179			111
Interest and other income (loss), net	251			88			269			173
INCOME BEFORE PROVISION FOR INCOME TAXES	2,873			1,755			5,233			4,295
Provision for income taxes	476			326			1,008			870
NET INCOME	$	2,397		$	1,429		$	4,225		$	3,425

Net income per share:
Basic	$	0.47		$	0.27		$	0.83		$	0.64
Diluted	$	0.46		$	0.27		$	0.82		$	0.64
Shares used in per-share calculation:
Basic	5,117			5,294			5,115			5,336
Diluted	5,160			5,327			5,159			5,383

Cash dividends declared per common share	$	0.19		$	0.17		$	0.38		$	0.34

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)



	Three Months Ended						Six Months Ended
	January 24, 2015			January 25, 2014			January 24, 2015			January 25, 2014
Net income	$	2,397		$	1,429		$	4,225		$	3,425
Available-for-sale investments:
Change in net unrealized gains, net of tax benefit (expense) of $9 and $23 for the three and six months ended January 24, 2015, respectively, and $(69) and $(122) for the corresponding periods of fiscal 2014, respectively	30			96			8			217
Net gains reclassified into earnings, net of tax expense of $24 and $26 for the three and six months ended January 24, 2015, respectively, and $31 and $62 for the corresponding periods of fiscal 2014, respectively	(45		)	(51		)	(50		)	(103		)
	(15		)	45			(42		)	114
Cash flow hedging instruments:
Change in unrealized gains and losses, net of tax benefit (expense) of $0 and $3 for the three and six months ended January 24, 2015, respectively, and $1 and $(2) for the corresponding periods of fiscal 2014, respectively	(75		)	(4		)	(128		)	31
Net (gains) losses reclassified into earnings	26			(19		)	30			(28		)
	(49		)	(23		)	(98		)	3
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $26 and $36 for the three and six months ended January 24, 2015, respectively, and $2 and $(1) for the corresponding periods of fiscal 2014, respectively	(193		)	(88		)	(343		)	(15		)
Other comprehensive income (loss)	(257		)	(66		)	(483		)	102
Comprehensive income	2,140			1,363			3,742			3,527
Comprehensive (income) loss attributable to noncontrolling interests	(8		)	(3		)	(8		)	(7		)
Comprehensive income attributable to Cisco Systems, Inc.	$	2,132		$	1,360		$	3,734		$	3,520

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)



	Six Months Ended
	January 24, 2015			January 25, 2014
Cash flows from operating activities:
Net income	$	4,225		$	3,425
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and other	1,224			1,203
Share-based compensation expense	677			656
Provision for receivables	62			56
Deferred income taxes	385			(26		)
Excess tax benefits from share-based compensation	(83		)	(73		)
(Gains) losses on investments and other, net	(182		)	(163		)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable	501			1,134
Inventories	(340		)	(77		)
Financing receivables	74			245
Other assets	(218		)	179
Accounts payable	(32		)	(161		)
Income taxes, net	(528		)	(444		)
Accrued compensation	(390		)	(804		)
Deferred revenue	26			(205		)
Other liabilities	(27		)	577
Net cash provided by operating activities	5,374			5,522
Cash flows from investing activities:
Purchases of investments	(20,061		)	(15,874		)
Proceeds from sales of investments	9,948			9,081
Proceeds from maturities of investments	7,212			7,988
Acquisition of businesses, net of cash and cash equivalents acquired	(217		)	(2,784		)
Purchases of investments in privately held companies	(91		)	(263		)
Return of investments in privately held companies	227			81
Acquisition of property and equipment	(550		)	(577		)
Proceeds from sales of property and equipment	5			164
Other	(109		)	(6		)
Net cash used in investing activities	(3,636		)	(2,190		)
Cash flows from financing activities:
Issuances of common stock	1,162			837
Repurchases of common stock—repurchase program	(2,196		)	(5,680		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(369		)	(309		)
Short-term borrowings, original maturities less than 90 days, net	(4		)	998
Issuances of debt	—			4
Repayments of debt	(506		)	(22		)
Excess tax benefits from share-based compensation	83			73
Dividends paid	(1,947		)	(1,810		)
Other	110			(9		)
Net cash used in financing activities	(3,667		)	(5,918		)
Net decrease in cash and cash equivalents	(1,929		)	(2,586		)
Cash and cash equivalents, beginning of period	6,726			7,925
Cash and cash equivalents, end of period	$	4,797		$	5,339

Supplemental cash flow information:
Cash paid for interest	$	383		$	340
Cash paid for income taxes, net	$	1,152		$	1,340

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in millions, except per-share amounts)

(Unaudited)



Six Months Ended January 24, 2015	Shares of Common Stock		Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Cisco Shareholders’ Equity			Non-controlling Interests		Total Equity
BALANCE AT JULY 26, 2014	5,107		$	41,884		$	14,093		$	677		$	56,654		$	7	$	56,661
Net income						4,225						4,225					4,225
Other comprehensive income (loss)									(491		)	(491		)	8		(483		)
Issuance of common stock	100		1,162									1,162					1,162
Repurchase of common stock	(85	)	(697		)	(1,524		)				(2,221		)			(2,221		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(15	)	(369		)							(369		)			(369		)
Cash dividends declared ($0.38 per common share)						(1,947		)				(1,947		)			(1,947		)
Tax effects from employee stock incentive plans			25									25					25
Share-based compensation expense			677									677					677
Purchase acquisitions and other			3									3					3
BALANCE AT JANUARY 24, 2015	5,107		$	42,685		$	14,847		$	186		$	57,718		$	15	$	57,733



Six Months Ended January 25, 2014	Shares of Common Stock		Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Cisco Shareholders’ Equity			Non-controlling Interests		Total Equity
BALANCE AT JULY 27, 2013	5,389		$	42,297		$	16,215		$	608	$	59,120		$	8	$	59,128
Net income						3,425					3,425					3,425
Other comprehensive income (loss)									95		95			7		102
Issuance of common stock	84		837								837					837
Repurchase of common stock	(269	)	(2,118		)	(3,902		)			(6,020		)			(6,020		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(13	)	(309		)						(309		)			(309		)
Cash dividends declared ($0.34 per common share)						(1,810		)			(1,810		)			(1,810		)
Tax effects from employee stock incentive plans			29								29					29
Share-based compensation expense			656								656					656
Purchase acquisitions and other			46								46					46
BALANCE AT JANUARY 25, 2014	5,191		$	41,438		$	13,928		$	703	$	56,069		$	15	$	56,084

Supplemental Information

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of January 24, 2015, the Company’s Board of Directors had authorized an aggregate repurchase of up to $97 billion of common stock under this program with no termination date. The stock repurchases since the inception of this program and the related impacts 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
Repurchases of common stock under the repurchase program	4,373	$	22,021	$	68,645	$	90,666

See Notes to Consolidated Financial Statements.

Table of Contents

CISCO SYSTEMS, INC.

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 2015 and fiscal 2014 are each 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis in the following three geographic segments: the Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC).

The accompanying financial data as of January 24, 2015 and for the three and six months ended January 24, 2015 and January 25, 2014 has been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. 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 26, 2014 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 Company’s Annual Report on Form 10-K for the fiscal year ended July 26, 2014.

The Company consolidates its investments in a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as this is a variable interest entity and the Company is the primary beneficiary. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Company’s equity in the equity section of the Consolidated Balance Sheets. SOFTBANK’s share of the earnings in the venture fund are not presented separately in the Consolidated Statements of Operations as these amounts are not material for any of the fiscal periods presented.

In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the consolidated balance sheet as of January 24, 2015; the results of operations and statements of comprehensive income for the three and six months ended January 24, 2015 and January 25, 2014; and the statements of cash flows and equity for the six months ended January 24, 2015 and January 25, 2014, as applicable, have been made. The results of operations for the three and six months ended January 24, 2015 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. The Company has evaluated subsequent events through the date that the financial statements were issued.


2.	Recent Accounting Pronouncements


(a)	New Accounting Updates Recently Adopted

In March 2013, the FASB issued an accounting standard update requiring an entity to release into net income the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when as a parent it sells either a part or all of its investment in the foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within the foreign entity. This accounting standard update became effective for the Company beginning in the first quarter of fiscal 2015. The application of this accounting standard update did not have any impact to the Company's Consolidated Financial Statements.

In July 2013, the FASB issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. Under the new standard update, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, is to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. This accounting standard update became effective for the Company beginning in the first quarter of fiscal 2015 and applied prospectively. The application of this accounting standard update did not have a material impact to the Company's Consolidated Financial Statements.

In April 2014, the FASB issued an accounting standard update that changes the criteria for reporting discontinued operations. This accounting standard update raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. The Company adopted this accounting standard update in the second quarter of fiscal 2015, and it did not have any impact upon adoption.

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(b)	Recent Accounting Standards or Updates Not Yet Effective

In May 2014, the FASB issued an accounting standard update related to revenue from contracts with customers, which will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. Early adoption is not permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.


3.	Business Combinations

The Company completed three business combinations during the six months ended January 24, 2015. A summary of the allocation of the total purchase consideration is presented as follows (in millions):



	Purchase Consideration		Net Liabilities Assumed			Purchased Intangible Assets		Goodwill
Metacloud, Inc.	$	149	$	(7	)	$	29	$	127
All others (two in total)	71		(10		)	40		41
Total acquisitions	$	220	$	(17	)	$	69	$	168

On September 29, 2014, the Company completed its acquisition of Metacloud, Inc. ("Metacloud"), a provider of private clouds for global organizations. With its acquisition of Metacloud, the Company aims to advance its Intercloud strategy to deliver a globally distributed, highly secure cloud platform capable of meeting customer demands. Revenue from the Metacloud acquisition has been included in the Company's Service category.

The total purchase consideration related to the Company’s business combinations completed during the six months ended January 24, 2015 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations was approximately $4 million. Total transaction costs related to the Company’s business combination activities were $5 million and $6 million for the six months ended January 24, 2015 and January 25, 2014, respectively. These transaction costs were expensed as incurred in general and administrative (G&A) expenses in the Consolidated Statements of Operations.

The Company’s purchase price allocation for business combinations completed during recent periods is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information, that 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. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.

The goodwill generated from the Company’s business combinations completed during the six months ended January 24, 2015 is primarily related to expected synergies. The goodwill is generally not deductible for 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 six months ended January 24, 2015 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


4.	Goodwill and Purchased Intangible Assets


(a)	Goodwill

The following table presents the goodwill allocated to the Company’s reportable segments as of and during the six months ended January 24, 2015 (in millions):



	Balance at July 26, 2014		Acquisitions		Other			Balance at January 24, 2015
Americas	$	15,080	$	89	$	(13	)	$	15,156
EMEA	5,715		63		(7		)	5,771
APJC	3,444		16		(5		)	3,455
Total	$	24,239	$	168	$	(25	)	$	24,382

The column entitled “Other” primarily includes purchase accounting adjustments.


(b)	Purchased Intangible Assets

The following table presents details of the Company’s intangible assets acquired through business combinations completed during the six months ended January 24, 2015 (in millions, except years):



	FINITE LIVES						INDEFINITE LIVES		TOTAL
	TECHNOLOGY			CUSTOMER RELATIONSHIPS			IPR&D		TOTAL
	Weighted- Average Useful Life (in Years)	Amount		Weighted- Average Useful Life (in Years)	Amount		Amount		Amount
Metacloud, Inc.	3.0	$	24	5.0	$	3	$	2	$	29
All others (two in total)	5.0	25		8.1	11		4		40
Total		$	49		$	14	$	6	$	69

The following tables present details of the Company’s purchased intangible assets (in millions):



January 24, 2015	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	4,020	$	(2,270	)	$	1,750
Customer relationships	1,709		(847		)	862
Other	51		(19		)	32
Total purchased intangible assets with finite lives	5,780		(3,136		)	2,644
In-process research and development, with indefinite lives	111		—			111
Total	$	5,891	$	(3,136	)	$	2,755



July 26, 2014	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	4,100	$	(1,976	)	$	2,124
Customer relationships	1,706		(720		)	986
Other	51		(13		)	38
Total purchased intangible assets with finite lives	5,857		(2,709		)	3,148
In-process research and development, with indefinite lives	132		—			132
Total	$	5,989	$	(2,709	)	$	3,280

Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses.

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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				Six Months Ended
	January 24, 2015		January 25, 2014		January 24, 2015		January 25, 2014
Amortization of purchased intangible assets:
Cost of sales	$	242	$	189	$	431	$	363
Operating expenses	72		71		143		136
Total	$	314	$	260	$	574	$	499

Amortization of purchased intangible assets for the three and six months ended January 24, 2015 included impairment charges of approximately $56 million. The impairment was primarily due to reductions in expected future cash flows related to certain of the Company's technology intangible assets and was recorded as amortization of purchased intangible assets. There were no impairment charges related to purchased intangible assets during the three and six months ended January 25, 2014.

The estimated future amortization expense of purchased intangible assets with finite lives as of January 24, 2015 is as follows (in millions):



Fiscal Year	Amount
2015 (remaining six months)	$	462
2016	734
2017	561
2018	420
2019	317
Thereafter	150
Total	$	2,644


5.	Restructuring and Other Charges

Fiscal 2015 Plan

In connection with a restructuring action announced in August 2014 ("Fiscal 2015 Plan"), the Company incurred cumulative charges of $69 million and $387 million for the three and six months ended January 24, 2015, respectively. The Company estimates that it will recognize aggregate pre-tax charges pursuant to the restructuring action in an amount not expected to exceed $600 million, consisting of severance and other one-time termination benefits and other associated costs. These charges are primarily cash-based and the Company expects the remaining amount to be recognized during the remainder of fiscal 2015.

Fiscal 2014 Plan

In connection with a restructuring action announced in August 2013 ("Fiscal 2014 Plan"), the Company incurred cumulative charges of approximately $418 million, of which $73 million and $310 million were incurred during the three and six months ended January 25, 2014, respectively. The Company completed the Fiscal 2014 Plan at the end of fiscal 2014.

The following table summarizes the activities related to the restructuring and other charges as discussed above (in millions):



	Fiscal 2014 and Prior Plans						Fiscal 2015 Plan
	Employee Severance			Other			Employee Severance			Other			Total
Liability as of July 26, 2014	$	40		$	29		$	—		$	—		$	69
Gross charges in fiscal 2015	—			—			386			1			387
Cash payments	(18		)	—			(347		)	(3		)	(368		)
Non-cash items	—			(8		)	—			2			(6		)
Liability as of January 24, 2015	$	22		$	21		$	39		$	—		$	82

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


6.	Balance Sheet Details

The following tables provide details of selected balance sheet items (in millions):



	January 24, 2015		July 26, 2014
Inventories:
Raw materials	$	265	$	77
Work in process	2		5
Finished goods:
Distributor inventory and deferred cost of sales	733		595
Manufactured finished goods	577		606
Total finished goods	1,310		1,201
Service-related spares	274		273
Demonstration systems	39		35
Total	$	1,890	$	1,591



Property and equipment, net:
Land, buildings, and building and leasehold improvements	$	4,457		$	4,468
Computer equipment and related software	1,417			1,425
Production, engineering, and other equipment	5,745			5,756
Operating lease assets	343			362
Furniture and fixtures	498			509
	12,460			12,520
Less accumulated depreciation and amortization	(9,248		)	(9,268		)
Total	$	3,212		$	3,252



Other assets:
Deferred tax assets	$	1,448	$	1,700
Investments in privately held companies	857		899
Other	837		732
Total	$	3,142	$	3,331



Deferred revenue:
Service	$	9,020	$	9,640
Product:
Unrecognized revenue on product shipments and other deferred revenue	4,276		3,924
Cash receipts related to unrecognized revenue from two-tier distributors	725		578
Total product deferred revenue	5,001		4,502
Total	$	14,021	$	14,142
Reported as:
Current	$	9,369	$	9,478
Noncurrent	4,652		4,664
Total	$	14,021	$	14,142

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(Unaudited)


7.	Financing Receivables and Operating Leases


(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 Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company’s products and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. 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 Company's financing receivables is presented as follows (in millions):



January 24, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,369		$	1,674		$	3,069		$	8,112
Residual value	228			—			—			228
Unearned income	(206		)	—			—			(206		)
Allowance for credit loss	(250		)	(85		)	(40		)	(375		)
Total, net	$	3,141		$	1,589		$	3,029		$	7,759
Reported as:
Current	$	1,462		$	782		$	1,966		$	4,210
Noncurrent	1,679			807			1,063			3,549
Total, net	$	3,141		$	1,589		$	3,029		$	7,759



July 26, 2014	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,532		$	1,683		$	3,210		$	8,425
Residual value	233			—			—			233
Unearned income	(238		)	—			—			(238		)
Allowance for credit loss	(233		)	(98		)	(18		)	(349		)
Total, net	$	3,294		$	1,585		$	3,192		$	8,071
Reported as:
Current	$	1,476		$	728		$	1,949		$	4,153
Noncurrent	1,818			857			1,243			3,918
Total, net	$	3,294		$	1,585		$	3,192		$	8,071

As of January 24, 2015 and July 26, 2014, the deferred service revenue related to "Financed Service Contracts and Other" was $1,530 million and $1,843 million, respectively.

Future minimum lease payments at January 24, 2015 are summarized as follows (in millions):



Fiscal Year	Amount
2015 (remaining six months)	$	883
2016	1,281
2017	753
2018	327
2019	115
Thereafter	10
Total	$	3,369

Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(b)	Credit Quality of Financing Receivables

Gross receivables less unearned income categorized by the Company’s internal credit risk rating as of January 24, 2015 and July 26, 2014 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
January 24, 2015	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,632	$	1,386	$	145	$	3,163
Loan receivables	717		803		154		1,674
Financed service contracts and other	1,647		1,342		80		3,069
Total	$	3,996	$	3,531	$	379	$	7,906



	INTERNAL CREDIT RISK RATING
July 26, 2014	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,615	$	1,538	$	141	$	3,294
Loan receivables	953		593		137		1,683
Financed service contracts and other	1,744		1,367		99		3,210
Total	$	4,312	$	3,498	$	377	$	8,187

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, which consist of the following: lease receivables, loan receivables, and financed service contracts and other.

The Company’s 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.

In circumstances when collectibility is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company’s 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 January 24, 2015 and July 26, 2014 were $1,928 million and $2,220 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,134 million and $8,420 million as of their respective period ends.

The following tables present the aging analysis of gross receivables less unearned income as of January 24, 2015 and July 26, 2014 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
January 24, 2015	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	171	$	63	$	224	$	458	$	2,705	$	3,163	$	53	$	48
Loan receivables	30		42		177		249		1,425		1,674		33		33
Financed service contracts and other	144		135		385		664		2,405		3,069		30		8
Total	$	345	$	240	$	786	$	1,371	$	6,535	$	7,906	$	116	$	89



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 26, 2014	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	63	$	48	$	203	$	314	$	2,980	$	3,294	$	48	$	41
Loan receivables	7		21		28		56		1,627		1,683		19		19
Financed service contracts and other	268		238		221		727		2,483		3,210		12		9
Total	$	338	$	307	$	452	$	1,097	$	7,090	$	8,187	$	79	$	69

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 is 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 balances

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $542 million and $334 million as of January 24, 2015 and July 26, 2014, respectively.

As of January 24, 2015, the Company had financing receivables of $217 million, net of unbilled or current receivables from the same contract, that were in the category of 91 days plus past due but remained on accrual status. Such balance was $78 million as of July 26, 2014. A financing receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.


(c)	Allowance for Credit Loss Rollforward

The allowances for credit loss and the related financing receivables are summarized as follows (in millions):



	CREDIT LOSS ALLOWANCES
Three Months Ended January 24, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other		Total
Allowance for credit loss as of October 25, 2014	$	248		$	84		$	36	$	368
Provisions	7			3			4		14
Recoveries (write-offs), net	(1		)	—			—		(1		)
Foreign exchange and other	(4		)	(2		)	—		(6		)
Allowance for credit loss as of January 24, 2015	$	250		$	85		$	40	$	375
Financing receivables as of January 24, 2015 ⁽¹⁾	$	3,391		$	1,674		$	3,069	$	8,134



	CREDIT LOSS ALLOWANCES
Six Months Ended January 24, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 26, 2014	$	233		$	98		$	18		$	349
Provisions	29			(10		)	23			42
Recoveries (write-offs), net	(5		)	1			—			(4		)
Foreign exchange and other	(7		)	(4		)	(1		)	(12		)
Allowance for credit loss as of January 24, 2015	$	250		$	85		$	40		$	375



	CREDIT LOSS ALLOWANCES
Three Months Ended January 25, 2014	Lease Receivables			Loan Receivables			Financed Service Contracts and Other		Total
Allowance for credit loss as of October 26, 2013	$	237		$	93		$	20	$	350
Provisions	18			9			2		29
Recoveries (write-offs), net	1			—			—		1
Foreign exchange and other	(2		)	(4		)	—		(6		)
Allowance for credit loss as of January 25, 2014	$	254		$	98		$	22	$	374
Financing receivables as of January 25, 2014 ⁽¹⁾	$	3,551		$	1,660		$	2,807	$	8,018



	CREDIT LOSS ALLOWANCES
Six Months Ended January 25, 2014	Lease Receivables		Loan Receivables			Financed Service Contracts and Other		Total
Allowance for credit loss as of July 27, 2013	$	238	$	86		$	20	$	344
Provisions	15		15			2		32
Recoveries (write-offs), net	1		—			—		1
Foreign exchange and other	—		(3		)	—		(3		)
Allowance for credit loss as of January 25, 2014	$	254	$	98		$	22	$	374

⁽¹⁾Total financing receivables before allowance for credit loss.

The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company’s historical experience, credit quality and age

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(Unaudited)

of the receivable balances, and economic conditions that may affect a customer’s 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, will be assessed and fully reserved at the customer level. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.

Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. These balances, as of January 24, 2015 and July 26, 2014, are presented under “(b) Credit Quality of Financing Receivables” above.

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. When evaluating the financing receivables on a collective basis, the Company uses 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, while also systematically giving effect to economic conditions, concentration of risk, and correlation.


(d)	Operating Leases

The Company provides financing of certain equipment through operating leases, and the amounts are included in property and equipment in the Consolidated Balance Sheets. Amounts relating to equipment on operating lease assets and the associated accumulated depreciation are summarized as follows (in millions):



	January 24, 2015			July 26, 2014
Operating lease assets	$	343		$	362
Accumulated depreciation	(195		)	(202		)
Operating lease assets, net	$	148		$	160

Minimum future rentals on noncancelable operating leases at January 24, 2015 were approximately $0.1 billion for the remaining six months of fiscal 2015, $0.2 billion for fiscal 2016, and less than $0.1 billion per year for each of fiscal 2017 through fiscal 2019.


8.	Investments


(a)	Summary of Available-for-Sale Investments

The following tables summarize the Company’s available-for-sale investments (in millions):



January 24, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	30,302	$	53	$	(1	)	$	30,354
U.S. government agency securities	2,324		3		(1		)	2,326
Non-U.S. government and agency securities	1,108		1		—			1,109
Corporate debt securities	11,180		61		(28		)	11,213
U.S. agency mortgage-backed securities	1,360		15		—			1,375
Total fixed income securities	46,274		133		(30		)	46,377
Publicly traded equity securities	1,296		562		(10		)	1,848
Total	$	47,570	$	695	$	(40	)	$	48,225

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(Unaudited)



July 26, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	31,717	$	29	$	(12	)	$	31,734
U.S. government agency securities	1,062		1		—			1,063
Non-U.S. government and agency securities	860		2		(1		)	861
Corporate debt securities	9,092		74		(7		)	9,159
U.S. agency mortgage-backed securities	574		5		—			579
Total fixed income securities	43,305		111		(20		)	43,396
Publicly traded equity securities	1,314		648		(10		)	1,952
Total	$	44,619	$	759	$	(30	)	$	45,348

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 Company’s available-for-sale investments (in millions):



	Three Months Ended						Six Months Ended
	January 24, 2015			January 25, 2014			January 24, 2015			January 25, 2014
Gross realized gains	$	92		$	97		$	113		$	192
Gross realized losses	(23		)	(15		)	(37		)	(27		)
Total	$	69		$	82		$	76		$	165

The following table presents the realized net gains (losses) related to the Company’s available-for-sale investments by security type (in millions):



	Three Months Ended				Six Months Ended
	January 24, 2015		January 25, 2014		January 24, 2015		January 25, 2014
Net gains (losses) on investments in publicly traded equity securities	$	60	$	69	$	56	$	144
Net gains on investments in fixed income securities	9		13		20		21
Total	$	69	$	82	$	76	$	165

There were no impairment charges on available-for-sale investments for the three and six months ended January 24, 2015. For the three and six months ended January 25, 2014, the realized gains related to the Company's available-for-sale investments included impairment charges of $11 million for publicly traded equity securities, which were due to a decline in the fair value of those securities below their cost basis that were determined to be other than temporary.

The following tables present the breakdown of the available-for-sale investments with gro