Edgar Filing: CISCO SYSTEMS, INC.

10Q- Q3'15

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 April 25, 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 May 15, 2015: 5,085,888,730

____________________________________

Table of Contents

Cisco Systems, Inc.

Form 10-Q for the Quarter Ended April 25, 2015

INDEX



		Page
Part I	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at April 25, 2015 and July 26, 2014	3
	Consolidated Statements of Operations for the Three and Nine Months Ended April 25, 2015 and April 26, 2014	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended April 25, 2015 and April 26, 2014	5
	Consolidated Statements of Cash Flows for the Nine Months Ended April 25, 2015 and April 26, 2014	6
	Consolidated Statements of Equity for the Nine Months Ended April 25, 2015 and April 26, 2014	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	73
Item 4.	Controls and Procedures	75
Part II.	Other Information	75
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	77
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 3.	Defaults Upon Senior Securities	94
Item 4.	Mine Safety Disclosures	94
Item 5.	Other Information	94
Item 6.	Exhibits	95
	Signature	96

Table of Contents

PART I. FINANCIAL INFORMATION



Item 1.	Financial Statements (Unaudited)

CISCO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)



	April 25, 2015		July 26, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	3,870	$	6,726
Investments	50,549		45,348
Accounts receivable, net of allowance for doubtful accounts of $290 at April 25, 2015 and $265 at July 26, 2014	4,889		5,157
Inventories	1,760		1,591
Financing receivables, net	4,248		4,153
Deferred tax assets	2,539		2,808
Other current assets	1,476		1,331
Total current assets	69,331		67,114
Property and equipment, net	3,276		3,252
Financing receivables, net	3,506		3,918
Goodwill	24,398		24,239
Purchased intangible assets, net	2,626		3,280
Other assets	3,075		3,331
TOTAL ASSETS	$	106,212	$	105,134
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	4,418	$	508
Accounts payable	1,118		1,032
Income taxes payable	80		159
Accrued compensation	2,726		3,181
Deferred revenue	9,371		9,478
Other current liabilities	5,532		5,451
Total current liabilities	23,245		19,809
Long-term debt	16,586		20,401
Income taxes payable	1,294		1,851
Deferred revenue	4,810		4,664
Other long-term liabilities	1,444		1,748
Total liabilities	47,379		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; 5,093 and 5,107 shares issued and outstanding at April 25, 2015 and July 26, 2014, respectively	43,133		41,884
Retained earnings	15,503		14,093
Accumulated other comprehensive income	187		677
Total Cisco shareholders’ equity	58,823		56,654
Noncontrolling interests	10		7
Total equity	58,833		56,661
TOTAL LIABILITIES AND EQUITY	$	106,212	$	105,134

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per-share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	April 25, 2015			April 26, 2014			April 25, 2015			April 26, 2014
REVENUE:
Product	$	9,326		$	8,820		$	27,839		$	26,640
Service	2,811			2,725			8,479			8,145
Total revenue	12,137			11,545			36,318			34,785
COST OF SALES:
Product	3,584			3,595			11,309			11,665
Service	1,028			944			3,061			2,756
Total cost of sales	4,612			4,539			14,370			14,421
GROSS MARGIN	7,525			7,006			21,948			20,364
OPERATING EXPENSES:
Research and development	1,547			1,565			4,659			4,701
Sales and marketing	2,449			2,342			7,272			7,030
General and administrative	510			460			1,504			1,426
Amortization of purchased intangible assets	70			71			213			207
Restructuring and other charges	24			26			411			336
Total operating expenses	4,600			4,464			14,059			13,700
OPERATING INCOME	2,925			2,542			7,889			6,664
Interest income	190			170			558			508
Interest expense	(139		)	(146		)	(417		)	(422		)
Other income (loss), net	59			76			238			187
Interest and other income (loss), net	110			100			379			273
INCOME BEFORE PROVISION FOR INCOME TAXES	3,035			2,642			8,268			6,937
Provision for income taxes	598			461			1,606			1,331
NET INCOME	$	2,437		$	2,181		$	6,662		$	5,606

Net income per share:
Basic	$	0.48		$	0.42		$	1.30		$	1.06
Diluted	$	0.47		$	0.42		$	1.29		$	1.06
Shares used in per-share calculation:
Basic	5,102			5,143			5,110			5,271
Diluted	5,148			5,180			5,154			5,311

Cash dividends declared per common share	$	0.21		$	0.19		$	0.59		$	0.53

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	April 25, 2015			April 26, 2014			April 25, 2015			April 26, 2014
Net income	$	2,437		$	2,181		$	6,662		$	5,606
Available-for-sale investments:
Change in net unrealized gains, net of tax benefit (expense) of $(57) and $(34) for the three and nine months ended April 25, 2015, respectively, and $(8) and $(131) for the corresponding periods of fiscal 2014, respectively	72			(8		)	80			209
Net gains reclassified into earnings, net of tax expense of $16 and $42 for the three and nine months ended April 25, 2015, respectively, and $26 and $88 for the corresponding periods of fiscal 2014, respectively	(28		)	(43		)	(78		)	(146		)
	44			(51		)	2			63
Cash flow hedging instruments:
Change in unrealized gains and losses, net of tax benefit (expense) of $0 and $3 for the three and nine months ended April 25, 2015, respectively, and $(1) and $(2) for the corresponding periods of fiscal 2014, respectively	(32		)	13			(160		)	44
Net (gains) losses reclassified into earnings	64			(16		)	94			(44		)
	32			(3		)	(66		)	—
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $14 and $50 for the three and nine months ended April 25, 2015, respectively, and $(5) for each of the corresponding periods of fiscal 2014	(80		)	42			(423		)	27
Other comprehensive income (loss)	(4		)	(12		)	(487		)	90
Comprehensive income	2,433			2,169			6,175			5,696
Comprehensive (income) loss attributable to noncontrolling interests	5			6			(3		)	(1		)
Comprehensive income attributable to Cisco Systems, Inc.	$	2,438		$	2,175		$	6,172		$	5,695

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)



	Nine Months Ended
	April 25, 2015			April 26, 2014
Cash flows from operating activities:
Net income	$	6,662		$	5,606
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and other	1,791			1,811
Share-based compensation expense	1,044			1,009
Provision for receivables	82			48
Deferred income taxes	438			(181		)
Excess tax benefits from share-based compensation	(102		)	(84		)
(Gains) losses on investments and other, net	(231		)	(228		)
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	97			1,064
Inventories	(235		)	(50		)
Financing receivables	36			332
Other assets	(341		)	180
Accounts payable	101			(2		)
Income taxes, net	(511		)	(356		)
Accrued compensation	(324		)	(411		)
Deferred revenue	217			(309		)
Other liabilities	(310		)	291
Net cash provided by operating activities	8,414			8,720
Cash flows from investing activities:
Purchases of investments	(30,617		)	(27,884		)
Proceeds from sales of investments	13,890			14,490
Proceeds from maturities of investments	11,632			12,048
Acquisition of businesses, net of cash and cash equivalents acquired	(238		)	(2,784		)
Purchases of investments in privately held companies	(155		)	(315		)
Return of investments in privately held companies	274			119
Acquisition of property and equipment	(907		)	(950		)
Proceeds from sales of property and equipment	8			168
Other	(115		)	(30		)
Net cash used in investing activities	(6,228		)	(5,138		)
Cash flows from financing activities:
Issuances of common stock	1,584			1,053
Repurchases of common stock—repurchase program	(3,325		)	(7,965		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(415		)	(345		)
Short-term borrowings, original maturities less than 90 days, net	496			(2		)
Issuances of debt	—			8,001
Repayments of debt	(507		)	(3,274		)
Excess tax benefits from share-based compensation	102			84
Dividends paid	(3,017		)	(2,784		)
Other	40			(34		)
Net cash used in financing activities	(5,042		)	(5,266		)
Net decrease in cash and cash equivalents	(2,856		)	(1,684		)
Cash and cash equivalents, beginning of period	6,726			7,925
Cash and cash equivalents, end of period	$	3,870		$	6,241

Supplemental cash flow information:
Cash paid for interest	$	646		$	561
Cash paid for income taxes, net	$	1,680		$	1,868

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in millions, except per-share amounts)

(Unaudited)



Nine Months Ended April 25, 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						6,662						6,662					6,662
Other comprehensive income (loss)									(490		)	(490		)	3		(487		)
Issuance of common stock	123		1,584									1,584					1,584
Repurchase of common stock	(120	)	(994		)	(2,235		)				(3,229		)			(3,229		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(17	)	(415		)							(415		)			(415		)
Cash dividends declared ($0.59 per common share)						(3,017		)				(3,017		)			(3,017		)
Tax effects from employee stock incentive plans			27									27					27
Share-based compensation expense			1,044									1,044					1,044
Purchase acquisitions and other			3									3					3
BALANCE AT APRIL 25, 2015	5,093		$	43,133		$	15,503		$	187		$	58,823		$	10	$	58,833



Nine Months Ended April 26, 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						5,606					5,606					5,606
Other comprehensive income (loss)									89		89			1		90
Issuance of common stock	100		1,053								1,053					1,053
Repurchase of common stock	(359	)	(2,837		)	(5,188		)			(8,025		)			(8,025		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(14	)	(345		)						(345		)			(345		)
Cash dividends declared ($0.53 per common share)						(2,784		)			(2,784		)			(2,784		)
Tax effects from employee stock incentive plans			16								16					16
Share-based compensation expense			1,009								1,009					1,009
Purchase acquisitions and other			48								48					48
BALANCE AT APRIL 26, 2014	5,116		$	41,241		$	13,849		$	697	$	55,787		$	9	$	55,796

Supplemental Information

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of April 25, 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	4,408	$	22,318	$	69,356	$	91,674

See Notes to Consolidated Financial Statements.

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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 April 25, 2015 and for the three and nine months ended April 25, 2015 and April 26, 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 April 25, 2015; the results of operations and statements of comprehensive income for the three and nine months ended April 25, 2015 and April 26, 2014; and the statements of cash flows and equity for the nine months ended April 25, 2015 and April 26, 2014, as applicable, have been made. The results of operations for the three and nine months ended April 25, 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 Financial Accounting Standards Board (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.

In February 2015, the FASB issued an accounting standard update that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

In April 2015, the FASB issued an accounting standard update requiring debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt, consistent with debt discounts. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 on a retrospective basis, with early adoption permitted. The accounting standard update is a change in balance sheet presentation only and is not expected to have a material impact on the Company's Consolidated Financial Statements.


3.	Business Combinations

The Company completed four business combinations during the nine months ended April 25, 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 (three in total)	93		(10		)	46		57
Total	$	242	$	(17	)	$	75	$	184

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 nine months ended April 25, 2015 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations was approximately $5 million. Total transaction costs related to the Company’s business combination activities were $5 million and $7 million for the nine months ended April 25, 2015 and April 26, 2014, respectively. These transaction costs were expensed as incurred in general and administrative expenses ("G&A") 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 nine months ended April 25, 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 nine months ended April 25, 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 nine months ended April 25, 2015 (in millions):



	Balance at July 26, 2014		Acquisitions		Other			Balance at April 25, 2015
Americas	$	15,080	$	99	$	(13	)	$	15,166
EMEA	5,715		67		(7		)	5,775
APJC	3,444		18		(5		)	3,457
Total	$	24,239	$	184	$	(25	)	$	24,398

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 nine months ended April 25, 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 (three in total)	4.7	31		8.1	11		4		46
Total		$	55		$	14	$	6	$	75

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



April 25, 2015	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	3,456	$	(1,742	)	$	1,714
Customer relationships	1,709		(915		)	794
Other	51		(22		)	29
Total purchased intangible assets with finite lives	5,216		(2,679		)	2,537
In-process research and development, with indefinite lives	89		—			89
Total	$	5,305	$	(2,679	)	$	2,626



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				Nine Months Ended
	April 25, 2015		April 26, 2014		April 25, 2015		April 26, 2014
Amortization of purchased intangible assets:
Cost of sales	$	187	$	190	$	618	$	553
Operating expenses	70		71		213		207
Total	$	257	$	261	$	831	$	760

Amortization of purchased intangible assets for the three and nine months ended April 25, 2015 included impairment charges of approximately $1 million and $57 million, respectively. 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 nine months ended April 26, 2014.

The estimated future amortization expense of purchased intangible assets with finite lives as of April 25, 2015 is as follows (in millions):



Fiscal Year	Amount
2015 (remaining three months)	$	223
2016	763
2017	590
2018	448
2019	345
Thereafter	168
Total	$	2,537


5.	Restructuring and Other Charges

Fiscal 2015 Plan

In connection with a restructuring action announced in August 2014 ("Fiscal 2015 Plan"), the Company incurred charges of $24 million and $411 million for the three and nine months ended April 25, 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 $26 million and $336 million were incurred during the three and nine months ended April 26, 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	—			—			405			6			411
Cash payments	(26		)	(10		)	(381		)	(3		)	(420		)
Non-cash items	—			—			(2		)	4			2
Liability as of April 25, 2015	$	14		$	19		$	22		$	7		$	62

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(Unaudited)


6.	Balance Sheet Details

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



	April 25, 2015		July 26, 2014
Inventories:
Raw materials	$	264	$	77
Work in process	2		5
Finished goods:
Distributor inventory and deferred cost of sales	635		595
Manufactured finished goods	547		606
Total finished goods	1,182		1,201
Service-related spares	268		273
Demonstration systems	44		35
Total	$	1,760	$	1,591



Property and equipment, net:
Gross property and equipment:
Land, buildings, and building and leasehold improvements	$	4,465		$	4,468
Computer equipment and related software	1,344			1,425
Production, engineering, and other equipment	5,795			5,756
Operating lease assets	359			362
Furniture and fixtures	498			509
Total gross property and equipment	12,461			12,520
Less: accumulated depreciation and amortization	(9,185		)	(9,268		)
Total	$	3,276		$	3,252



Other assets:
Deferred tax assets	$	1,437	$	1,700
Investments in privately held companies	873		899
Other	765		732
Total	$	3,075	$	3,331



Deferred revenue:
Service	$	9,236	$	9,640
Product:
Unrecognized revenue on product shipments and other deferred revenue	4,258		3,924
Cash receipts related to unrecognized revenue from two-tier distributors	687		578
Total product deferred revenue	4,945		4,502
Total	$	14,181	$	14,142
Reported as:
Current	$	9,371	$	9,478
Noncurrent	4,810		4,664
Total	$	14,181	$	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):



April 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,276		$	1,720		$	3,081		$	8,077
Residual value	226			—			—			226
Unearned income	(190		)	—			—			(190		)
Allowance for credit loss	(242		)	(80		)	(37		)	(359		)
Total, net	$	3,070		$	1,640		$	3,044		$	7,754
Reported as:
Current	$	1,424		$	820		$	2,004		$	4,248
Noncurrent	1,646			820			1,040			3,506
Total, net	$	3,070		$	1,640		$	3,044		$	7,754



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 April 25, 2015 and July 26, 2014, the deferred service revenue related to "Financed Service Contracts and Other" was $1,520 million and $1,843 million, respectively.

Future minimum lease payments at April 25, 2015 are summarized as follows (in millions):



Fiscal Year	Amount
2015 (remaining three months)	$	498
2016	1,349
2017	857
2018	406
2019	146
Thereafter	20
Total	$	3,276

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

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(Unaudited)


(b)	Credit Quality of Financing Receivables

Gross receivables less unearned income categorized by the Company’s internal credit risk rating as of April 25, 2015 and July 26, 2014 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
April 25, 2015	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,590	$	1,371	$	125	$	3,086
Loan receivables	755		816		149		1,720
Financed service contracts and other	1,650		1,371		60		3,081
Total	$	3,995	$	3,558	$	334	$	7,887



	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 April 25, 2015 and July 26, 2014 were $1,900 million and $2,220 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,113 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 April 25, 2015 and July 26, 2014 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
April 25, 2015	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	102	$	48	$	138	$	288	$	2,798	$	3,086	$	38	$	38
Loan receivables	12		15		56		83		1,637		1,720		29		29
Financed service contracts and other	99		88		309		496		2,585		3,081		32		12
Total	$	213	$	151	$	503	$	867	$	7,020	$	7,887	$	99	$	79



	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	$	46	$	202	$	311	$	2,983	$	3,294	$	48	$	41
Loan receivables	3		21		27		51		1,632		1,683		19		19
Financed service contracts and other	268		230		220		718		2,492		3,210		12		9
Total	$	334	$	297	$	449	$	1,080	$	7,107	$	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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(Unaudited)

of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $361 million and $334 million as of April 25, 2015 and July 26, 2014, respectively.

As of April 25, 2015, the Company had financing receivables of $75 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 April 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of January 24, 2015	$	250		$	85		$	40		$	375
Provisions	(4		)	(5		)	(2		)	(11		)
Recoveries (write-offs), net	(1		)	—			—			(1		)
Foreign exchange and other	(3		)	—			(1		)	(4		)
Allowance for credit loss as of April 25, 2015	$	242		$	80		$	37		$	359
Financing receivables as of April 25, 2015 ⁽¹⁾	$	3,312		$	1,720		$	3,081		$	8,113



	CREDIT LOSS ALLOWANCES
Nine Months Ended April 25, 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	25			(15		)	21			31
Recoveries (write-offs), net	(6		)	1			—			(5		)
Foreign exchange and other	(10		)	(4		)	(2		)	(16		)
Allowance for credit loss as of April 25, 2015	$	242		$	80		$	37		$	359



	CREDIT LOSS ALLOWANCES
Three Months Ended April 26, 2014	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of January 25, 2014	$	254		$	98		$	22		$	374
Provisions	(6		)	(10		)	(2		)	(18		)
Recoveries (write-offs), net	(1		)	4			(1		)	2
Foreign exchange and other	2			—			—			2
Allowance for credit loss as of April 26, 2014	$	249		$	92		$	19		$	360
Financing receivables as of April 26, 2014 ⁽¹⁾	$	3,537		$	1,621		$	2,810		$	7,968



	CREDIT LOSS ALLOWANCES
Nine Months Ended April 26, 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	9		5			—			14
Recoveries (write-offs), net	—		4			(1		)	3
Foreign exchange and other	2		(3		)	—			(1		)
Allowance for credit loss as of April 26, 2014	$	249	$	92		$	19		$	360

⁽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 April 25, 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):



	April 25, 2015			July 26, 2014
Operating lease assets	$	359		$	362
Accumulated depreciation	(195		)	(202		)
Operating lease assets, net	$	164		$	160

Minimum future rentals on noncancelable operating leases at April 25, 2015 were approximately $0.1 billion for the remaining three 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):



April 25, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	29,364	$	59	$	(1	)	$	29,422
U.S. government agency securities	3,257		6		(1		)	3,262
Non-U.S. government and agency securities	1,184		2		—			1,186
Corporate debt securities	13,321		86		(13		)	13,394
U.S. agency mortgage-backed securities	1,346		16		—			1,362
Total fixed income securities	48,472		169		(15		)	48,626
Publicly traded equity securities	1,328		598		(3		)	1,923
Total	$	49,800	$	767	$	(18	)	$	50,549

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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						Nine Months Ended
	April 25, 2015			April 26, 2014			April 25, 2015			April 26, 2014
Gross realized gains	$	55		$	75		$	168		$	267
Gross realized losses	(11		)	(6		)	(48		)	(33		)
Total	$	44		$	69		$	120		$	234

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				Nine Months Ended
	April 25, 2015		April 26, 2014		April 25, 2015		April 26, 2014
Net gains on investments in publicly traded equity securities	$	38	$	55	$	94	$	199
Net gains on investments in fixed income securities	6		14		26		35
Total	$	44	$	69	$	120	$	234

There were no impairment charges on available-for-sale investments for the nine months ended April 25, 2015. For the three months ended April 26, 2014, there were no impairment charges on available-for-sale investments. For the