Edgar Filing: CISCO SYSTEMS, INC.

10-Q

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 23, 2016



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 12, 2016: 5,032,121,234

____________________________________

Table of Contents

Cisco Systems, Inc.

Form 10-Q for the Quarter Ended January 23, 2016

INDEX



		Page
Part I	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at January 23, 2016 and July 25, 2015	3
	Consolidated Statements of Operations for the Three and Six Months Ended January 23, 2016 and January 24, 2015	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended January 23, 2016 and January 24, 2015	5
	Consolidated Statements of Cash Flows for the Six Months Ended January 23, 2016 and January 24, 2015	6
	Consolidated Statements of Equity for the Six Months Ended January 23, 2016 and January 24, 2015	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	76
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	94
	Signature	95

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 23, 2016			July 25, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	6,314		$	6,877
Investments	54,061			53,539
Accounts receivable, net of allowance for doubtful accounts of $325 at January 23, 2016 and $302 at July 25, 2015	4,302			5,344
Inventories	1,362			1,627
Financing receivables, net	4,514			4,491
Deferred tax assets	2,834			2,915
Other current assets	1,618			1,490
Total current assets	75,005			76,283
Property and equipment, net	3,386			3,332
Financing receivables, net	3,903			3,858
Goodwill	24,958			24,469
Purchased intangible assets, net	2,322			2,376
Other assets	3,068			3,163
TOTAL ASSETS	$	112,642		$	113,481
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	3,008		$	3,897
Accounts payable	962			1,104
Income taxes payable	370			62
Accrued compensation	2,667			3,049
Deferred revenue	9,796			9,824
Other current liabilities	5,996			5,687
Total current liabilities	22,799			23,623
Long-term debt	21,591			21,457
Income taxes payable	706			1,876
Deferred revenue	5,389			5,359
Other long-term liabilities	1,279			1,459
Total liabilities	51,764			53,774
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; 5,052 and 5,085 shares issued and outstanding at January 23, 2016 and July 25, 2015, respectively	43,857			43,592
Retained earnings	17,821			16,045
Accumulated other comprehensive income (loss)	(807		)	61
Total Cisco shareholders’ equity	60,871			59,698
Noncontrolling interests	7			9
Total equity	60,878			59,707
TOTAL LIABILITIES AND EQUITY	$	112,642		$	113,481

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						Six Months Ended
	January 23, 2016			January 24, 2015			January 23, 2016			January 24, 2015
REVENUE:
Product	$	8,983		$	9,078		$	18,827		$	18,513
Service	2,944			2,858			5,782			5,668
Total revenue	11,927			11,936			24,609			24,181
COST OF SALES:
Product	3,480			3,806			7,333			7,725
Service	1,015			1,040			2,012			2,033
Total cost of sales	4,495			4,846			9,345			9,758
GROSS MARGIN	7,432			7,090			15,264			14,423
OPERATING EXPENSES:
Research and development	1,509			1,529			3,069			3,112
Sales and marketing	2,286			2,308			4,729			4,823
General and administrative	176			490			715			994
Amortization of purchased intangible assets	71			72			140			143
Restructuring and other charges	96			69			238			387
Total operating expenses	4,138			4,468			8,891			9,459
OPERATING INCOME	3,294			2,622			6,373			4,964
Interest income	237			189			462			368
Interest expense	(162		)	(139		)	(321		)	(278		)
Other income (loss), net	(63		)	201			(71		)	179
Interest and other income (loss), net	12			251			70			269
INCOME BEFORE PROVISION FOR INCOME TAXES	3,306			2,873			6,443			5,233
Provision for income taxes	159			476			866			1,008
NET INCOME	$	3,147		$	2,397		$	5,577		$	4,225

Net income per share:
Basic	$	0.62		$	0.47		$	1.10		$	0.83
Diluted	$	0.62		$	0.46		$	1.09		$	0.82
Shares used in per-share calculation:
Basic	5,070			5,117			5,075			5,115
Diluted	5,097			5,160			5,106			5,159

Cash dividends declared per common share	$	0.21		$	0.19		$	0.42		$	0.38

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 23, 2016			January 24, 2015			January 23, 2016			January 24, 2015
Net income	$	3,147		$	2,397		$	5,577		$	4,225
Available-for-sale investments:
Change in net unrealized gains, net of tax benefit (expense) of $149 and $205 for the three and six months ended January 23, 2016, respectively, and $9 and $23 for the corresponding periods of fiscal 2015, respectively	(212		)	30			(312		)	8
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $(7) for each of the three and six months ended January 23, 2016, and $24 and $26 for the corresponding periods of fiscal 2015, respectively	12			(45		)	13			(50		)
	(200		)	(15		)	(299		)	(42		)
Cash flow hedging instruments:
Change in unrealized gains and losses, net of tax benefit (expense) of $0 and $2 for the three and six months ended January 23, 2016, respectively, and $0 and $3 for the corresponding periods of fiscal 2015, respectively	(20		)	(75		)	(22		)	(128		)
Net (gains) losses reclassified into earnings	5			26			8			30
	(15		)	(49		)	(14		)	(98		)
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $5 and $(34) for the three and six months ended January 23, 2016, respectively, and $26 and $36 for the corresponding periods of fiscal 2015, respectively	(341		)	(193		)	(557		)	(343		)
Other comprehensive income (loss)	(556		)	(257		)	(870		)	(483		)
Comprehensive income	2,591			2,140			4,707			3,742
Comprehensive (income) loss attributable to noncontrolling interests	1			(8		)	2			(8		)
Comprehensive income attributable to Cisco Systems, Inc.	$	2,592		$	2,132		$	4,709		$	3,734

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 23, 2016			January 24, 2015
Cash flows from operating activities:
Net income	$	5,577		$	4,225
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and other	1,005			1,229
Share-based compensation expense	706			677
Provision for receivables	31			62
Deferred income taxes	274			385
Excess tax benefits from share-based compensation	(82		)	(83		)
(Gains) losses on divestitures, investments and other, net	(260		)	(182		)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable	988			501
Inventories	153			(340		)
Financing receivables	(171		)	74
Other assets	(181		)	(223		)
Accounts payable	(147		)	(32		)
Income taxes, net	(764		)	(528		)
Accrued compensation	(348		)	(390		)
Deferred revenue	69			26
Other liabilities	(162		)	(27		)
Net cash provided by operating activities	6,688			5,374
Cash flows from investing activities:
Purchases of investments	(19,089		)	(20,061		)
Proceeds from sales of investments	10,247			9,948
Proceeds from maturities of investments	7,955			7,212
Acquisition of businesses, net of cash and cash equivalents acquired	(1,089		)	(217		)
Proceeds from business divestiture	372			—
Purchases of investments in privately held companies	(166		)	(91		)
Return of investments in privately held companies	35			227
Acquisition of property and equipment	(576		)	(550		)
Proceeds from sales of property and equipment	11			5
Other	(87		)	(109		)
Net cash used in investing activities	(2,387		)	(3,636		)
Cash flows from financing activities:
Issuances of common stock	701			1,162
Repurchases of common stock—repurchase program	(2,344		)	(2,196		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(412		)	(369		)
Short-term borrowings, original maturities less than 90 days, net	(4		)	(4		)
Repayments of debt	(862		)	(506		)
Excess tax benefits from share-based compensation	82			83
Dividends paid	(2,133		)	(1,947		)
Other	108			110
Net cash used in financing activities	(4,864		)	(3,667		)
Net decrease in cash and cash equivalents	(563		)	(1,929		)
Cash and cash equivalents, beginning of period	6,877			6,726
Cash and cash equivalents, end of period	$	6,314		$	4,797

Supplemental cash flow information:
Cash paid for interest	$	426		$	383
Cash paid for income taxes, net	$	1,355		$	1,152

See Notes to Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in millions, except per-share amounts)

(Unaudited)



	Shares of Common Stock		Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Cisco Shareholders’ Equity			Non-controlling Interests			Total Equity
BALANCE AT JULY 25, 2015	5,085		$	43,592		$	16,045		$	61		$	59,698		$	9		$	59,707
Net income						5,577						5,577						5,577
Other comprehensive income (loss)									(868		)	(868		)	(2		)	(870		)
Issuance of common stock	76		701									701						701
Repurchase of common stock	(93	)	(801		)	(1,668		)				(2,469		)				(2,469		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(16	)	(412		)							(412		)				(412		)
Cash dividends declared ($0.42 per common share)						(2,133		)				(2,133		)				(2,133		)
Tax effects from employee stock incentive plans			28									28						28
Share-based compensation expense			706									706						706
Purchase acquisitions			43									43						43
BALANCE AT JANUARY 23, 2016	5,052		$	43,857		$	17,821		$	(807	)	$	60,871		$	7		$	60,878



	Shares of Common Stock		Common Stock and Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			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			3									3					3
BALANCE AT JANUARY 24, 2015	5,107		$	42,685		$	14,847		$	186		$	57,718		$	15	$	57,733

Supplemental Information

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of January 23, 2016, 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. On February 10, 2016, the Company's Board of Directors authorized a $15 billion increase to the stock repurchase 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	4,536	$	23,416	$	71,732	$	95,148

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 2016 is a 53-week fiscal year and fiscal 2015 was a 52-week fiscal year. 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 23, 2016 and for the three and six months ended January 23, 2016 and January 24, 2015 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 25, 2015 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 25, 2015.

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 normal recurring adjustments necessary to present fairly the consolidated balance sheet as of January 23, 2016; the results of operations and the statements of comprehensive income for the three and six months ended January 23, 2016 and January 24, 2015; and the statements of cash flows and equity for the six months ended January 23, 2016 and January 24, 2015, as applicable, have been made. The results of operations for the three and six months ended January 23, 2016 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

Recent Accounting Standards or Updates Not Yet Effective In May 2014, the Financial Accounting Standards Board (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, as amended, will be effective for the Company beginning in the first quarter of fiscal 2019. 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 permitted, but no earlier than fiscal 2018. The Company is currently evaluating the timing of its adoption and 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 November 2015, the FASB issued an accounting standard update that requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018, and early adoption is permitted. The accounting standard update is a change in balance sheet presentation only.

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.


3.	Acquisitions and Divestitures

The Company completed seven acquisitions during the six months ended January 23, 2016. 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
MaintenanceNet	$	105	$	(21	)	$	65	$	61
OpenDNS	545		(9		)	61		493
Lancope	410		(34		)	121		323
Others (four in total)	108		(17		)	62		63
Total	$	1,168	$	(81	)	$	309	$	940

On August 6, 2015, the Company completed its acquisition of privately held MaintenanceNet, Inc. ("MaintenanceNet"), a provider of a cloud-based software platform that uses data analytics and automation to manage renewals of recurring customer contracts. This acquisition is a component of the Company's strategy for its Services organization to simplify and digitize its business processes.

On August 26, 2015, the Company completed its acquisition of privately held OpenDNS, Inc. ("OpenDNS"), a provider of advanced threat protection for endpoint devices. With the OpenDNS acquisition, the Company aims to strengthen its security offerings by adding broad visibility and threat intelligence delivered through a software-as-a-service platform. Revenue from the OpenDNS acquisition has been included in the Company's Security product category.

On December 21, 2015, the Company completed its acquisition of privately held Lancope, Inc. ("Lancope"), a provider of network behavior analytics, threat visibility and security intelligence. With the Lancope acquisition, the Company aims to advance its "security everywhere" strategy with an additional capability of network behavior analytics that extend protection further into the network. Revenue from the Lancope acquisition has been included in the Company's Security product category.

The total purchase consideration related to the Company’s acquisitions completed during the six months ended January 23, 2016 consisted of cash consideration and the assumption of vested share-based awards. The total cash and cash equivalents acquired from these business combinations was approximately $10 million. Total transaction costs related to the Company’s acquisition activities were $14 million and $5 million for the six months ended January 23, 2016 and January 24, 2015, 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 acquisitions 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 acquisitions completed during the six months ended January 23, 2016 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 acquisition from the date of acquisition. Pro forma results of operations for the acquisitions completed during the six months ended January 23, 2016 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)

Acquisition of Acano On January 29, 2016, the Company completed its acquisition of privately held Acano Limited ("Acano"), a collaboration infrastructure and conferencing software provider. Under the terms of the agreement, the Company paid approximately $550 million in cash and share-based awards assumed to acquire Acano. With the Acano acquisition, the Company aims to enhance its collaboration strategy to deliver video across both cloud and hybrid environments. Revenue from the Acano acquisition will be included in the Company's Collaboration product category. The Company expects that most of the purchase price will be allocated to goodwill and purchased intangible assets.

Pending Acquisition of Jasper On February 3, 2016, the Company announced its intent to acquire privately held Jasper Technologies, Inc. ("Jasper"), a provider of a cloud-based Internet of Things (IoT) software-as-a-service platform to help enterprises and service providers launch, manage and monetize IoT services on a global scale. Under the terms of the agreement, the Company will pay approximately $1.4 billion in cash and share-based awards assumed to acquire Jasper. With the Jasper acquisition, the Company aims to offer a complete IoT solution that is interoperable across devices and works with IoT service providers, application developers and an ecosystem of partners.

Divestiture of SP Video CPE Business On November 20, 2015, the Company completed the sale of the assets comprising the customer premises equipment portion of its Service Provider Video connected devices business ("SP Video CPE Business") to Technicolor SA. As a result of the transaction, the Company received aggregate consideration of $542 million consisting of $372 million in cash and $170 million in Technicolor stock (as of the divestiture date) and the transaction resulted in a gain of $286 million, net of certain transaction costs incurred in prior periods.


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 23, 2016 (in millions):



	Balance at										Balance at
	July 25, 2015		Acquisitions		Divestiture			Other			January 23, 2016
Americas	$	15,212	$	672	$	(126	)	$	(194	)	$	15,564
EMEA	5,791		195		(12		)	(73		)	5,901
APJC	3,466		73		(3		)	(43		)	3,493
Total	$	24,469	$	940	$	(141	)	$	(310	)	$	24,958

“Other” in the table above primarily consists of foreign currency translation, as well as immaterial purchase accounting adjustments.


(b)	Purchased Intangible Assets

The following table presents details of the Company’s intangible assets acquired through acquisitions completed during the six months ended January 23, 2016 (in millions, except years):



	FINITE LIVES									INDEFINITE LIVES		TOTAL
	TECHNOLOGY			CUSTOMER RELATIONSHIPS			OTHER			IPR&D		TOTAL
	Weighted- Average Useful Life (in Years)	Amount		Weighted- Average Useful Life (in Years)	Amount		Weighted- Average Useful Life (in Years)	Amount		Amount		Amount
MaintenanceNet	5.0	$	50	5.0	$	2	2.0	$	2	$	11	$	65
OpenDNS	5.0	43		7.0	15		1.0	2		1		61
Lancope	5.0	79		6.0	29		3.0	3		10		121
Others (four in total)	4.2	56		6.3	6		0.0	—		—		62
Total		$	228		$	52		$	7	$	22	$	309

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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



January 23, 2016	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	2,842	$	(1,232	)	$	1,610
Customer relationships	1,740		(1,093		)	647
Other	61		(31		)	30
Total purchased intangible assets with finite lives	4,643		(2,356		)	2,287
In-process research and development, with indefinite lives	35		—			35
Total	$	4,678	$	(2,356	)	$	2,322



July 25, 2015	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	3,418	$	(1,818	)	$	1,600
Customer relationships	1,699		(971		)	728
Other	55		(24		)	31
Total purchased intangible assets with finite lives	5,172		(2,813		)	2,359
In-process research and development, with indefinite lives	17		—			17
Total	$	5,189	$	(2,813	)	$	2,376

Purchased intangible assets include intangible assets acquired through acquisitions as well as through direct purchases or licenses. In fiscal 2015, the Company, along with a number of other companies, entered into an agreement to obtain a license to the patents owned by the Rockstar Consortium, and the Company paid approximately $300 million, of which $188 million was expensed to product cost of sales in the first quarter of fiscal 2015 related to the settlement of patent infringement claims, and the remainder was capitalized as an intangible asset to be amortized over its estimated useful life.

Impairment charges related to purchased intangible assets for the three and six months ended January 23, 2016 and January 24, 2015 were approximately $37 million and $56 million, respectively.

The following table presents the amortization of purchased intangible assets (in millions):



	Three Months Ended				Six Months Ended
	January 23, 2016		January 24, 2015		January 23, 2016		January 24, 2015
Amortization of purchased intangible assets:
Cost of sales	$	139	$	242	$	285	$	431
Operating expenses	71		72		140		143
Total	$	210	$	314	$	425	$	574

The estimated future amortization expense of purchased intangible assets with finite lives as of January 23, 2016 is as follows (in millions):



Fiscal Year	Amount
2016 (remaining six months)	$	386
2017	663
2018	519
2019	435
2020	209
Thereafter	75
Total	$	2,287

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5.	Restructuring and Other Charges

Fiscal 2015 Plan The Company announced a restructuring action in August 2014 (the "Fiscal 2015 Plan"), in order to realign its workforce towards key growth areas of its business such as data center, software, security, and cloud. The Company's aggregate pre-tax estimated charges pursuant to the restructuring plan are expected to be approximately $750 million, consisting of severance and other one-time termination benefits and other associated costs, and the Company has incurred cumulative charges of approximately $725 million in connection with this plan, which is substantially complete. The Company incurred charges of $95 million, net of a $1 million credit to cost of sales, and $69 million for the three months ended January 23, 2016 and January 24, 2015, respectively, and $236 million, net of a $2 million credit to cost of sales, and $387 million for the six months ended January 23, 2016 and January 24, 2015, respectively.

Fiscal 2014 Plan In connection with a restructuring action announced in August 2013 (the "Fiscal 2014 Plan"), the Company incurred cumulative charges of approximately $418 million. 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 PLAN						FISCAL 2015 PLAN
	Employee Severance			Other			Employee Severance			Other			Total
Liability as of July 25, 2015	$	11		$	14		$	49		$	15		$	89
Charges	—			—			206			32			238
Cash payments	(10		)	(2		)	(177		)	(8		)	(197		)
Non-cash items	—			—			—			(21		)	(21		)
Liability as of January 23, 2016	$	1		$	12		$	78		$	18		$	109

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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 23, 2016		July 25, 2015
Inventories:
Raw materials	$	99	$	114
Work in process	1		2
Finished goods:
Distributor inventory and deferred cost of sales	564		610
Manufactured finished goods	446		593
Total finished goods	1,010		1,203
Service-related spares	224		258
Demonstration systems	28		50
Total	$	1,362	$	1,627



Property and equipment, net:
Gross property and equipment:
Land, buildings, and building and leasehold improvements	$	4,573		$	4,495
Computer equipment and related software	1,344			1,310
Production, engineering, and other equipment	5,640			5,753
Operating lease assets	324			372
Furniture and fixtures	501			497
Total gross property and equipment	12,382			12,427
Less: accumulated depreciation and amortization	(8,996		)	(9,095		)
Total	$	3,386		$	3,332



Other assets:
Deferred tax assets	$	1,371	$	1,648
Investments in privately held companies	964		897
Other	733		618
Total	$	3,068	$	3,163



Deferred revenue:
Service	$	9,657	$	9,757
Product:
Unrecognized revenue on product shipments and other deferred revenue	4,974		4,766
Cash receipts related to unrecognized revenue from two-tier distributors	554		660
Total product deferred revenue	5,528		5,426
Total	$	15,185	$	15,183
Reported as:
Current	$	9,796	$	9,824
Noncurrent	5,389		5,359
Total	$	15,185	$	15,183

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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 23, 2016	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,176		$	2,177		$	3,405		$	8,758
Residual value	201			—			—			201
Unearned income	(177		)	—			—			(177		)
Allowance for credit loss	(248		)	(80		)	(37		)	(365		)
Total, net	$	2,952		$	2,097		$	3,368		$	8,417
Reported as:
Current	$	1,460		$	978		$	2,076		$	4,514
Noncurrent	1,492			1,119			1,292			3,903
Total, net	$	2,952		$	2,097		$	3,368		$	8,417



July 25, 2015	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,361		$	1,763		$	3,573		$	8,697
Residual value	224			—			—			224
Unearned income	(190		)	—			—			(190		)
Allowance for credit loss	(259		)	(87		)	(36		)	(382		)
Total, net	$	3,136		$	1,676		$	3,537		$	8,349
Reported as:
Current	$	1,468		$	856		$	2,167		$	4,491
Noncurrent	1,668			820			1,370			3,858
Total, net	$	3,136		$	1,676		$	3,537		$	8,349

As of January 23, 2016 and July 25, 2015, the deferred service revenue related to "Financed Service Contracts and Other" was $1,714 million and $1,853 million, respectively.

Future minimum lease payments at January 23, 2016 are summarized as follows (in millions):



Fiscal Year	Amount
2016 (remaining six months)	$	822
2017	1,234
2018	693
2019	316
2020	104
Thereafter	7
Total	$	3,176

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, excluding residual value, less unearned income categorized by the Company’s internal credit risk rating as of January 23, 2016 and July 25, 2015 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
January 23, 2016	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,640	$	1,245	$	114	$	2,999
Loan receivables	1,224		811		142		2,177
Financed service contracts and other	2,156		1,204		45		3,405
Total	$	5,020	$	3,260	$	301	$	8,581



	INTERNAL CREDIT RISK RATING
July 25, 2015	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,688	$	1,342	$	141	$	3,171
Loan receivables	788		823		152		1,763
Financed service contracts and other	2,133		1,389		51		3,573
Total	$	4,609	$	3,554	$	344	$	8,507

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 23, 2016 and July 25, 2015 were $2,097 million and $2,253 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,782 million and $8,731 million as of their respective period ends.

The following tables present the aging analysis of gross receivables, excluding residual value and less unearned income as of January 23, 2016 and July 25, 2015 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
January 23, 2016	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	93	$	41	$	176	$	310	$	2,689	$	2,999	$	71	$	64
Loan receivables	91		40		48		179		1,998		2,177		43		43
Financed service contracts and other	245		45		171		461		2,944		3,405		29		9
Total	$	429	$	126	$	395	$	950	$	7,631	$	8,581	$	143	$	116



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 25, 2015	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	90	$	27	$	185	$	302	$	2,869	$	3,171	$	73	$	73
Loan receivables	21		3		25		49		1,714		1,763		32		32
Financed service contracts and other	396		152		414		962		2,611		3,573		29		9
Total	$	507	$	182	$	624	$	1,313	$	7,194	$	8,507	$	134	$	114

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 $177 million and $496 million as of January 23, 2016 and July 25, 2015, respectively.

As of January 23, 2016, the Company had financing receivables of $187 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 as they are well-secured and in the process of collection. Such balance was $70 million as of July 25, 2015.


(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 23, 2016	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of October 24, 2015	$	255		$	90		$	33		$	378
Provisions	(4		)	(10		)	5			(9		)
Recoveries (write-offs), net	—			—			(1		)	(1		)
Foreign exchange and other	(3		)	—			—			(3		)
Allowance for credit loss as of January 23, 2016	$	248		$	80		$	37		$	365



	CREDIT LOSS ALLOWANCES
Six months ended January 23, 2016	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 25, 2015	$	259		$	87		$	36		$	382
Provisions	(4		)	(6		)	5			(5		)
Recoveries (write-offs), net	(4		)	—			(4		)	(8		)
Foreign exchange and other	(3		)	(1		)	—			(4		)
Allowance for credit loss as of January 23, 2016	$	248		$	80		$	37		$	365



	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



	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

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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 23, 2016 and July 25, 2015, 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 23, 2016			July 25, 2015
Operating lease assets	$	324		$	372
Accumulated depreciation	(181		)	(205		)
Operating lease assets, net	$	143		$	167

Minimum future rentals on noncancelable operating leases at January 23, 2016 were approximately $0.1 billion for the remaining six months of fiscal 2016, $0.1 billion for fiscal 2017, and less than $0.1 billion per year for each of fiscal 2018 through fiscal 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


8.	Investments


(a)	Summary of Available-for-Sale Investments

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



January 23, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	28,242	$	18	$	(16	)	$	28,244
U.S. government agency securities	3,492		3		(2		)	3,493
Non-U.S. government and agency securities	1,152		1		(1		)	1,152
Corporate debt securities	18,410		29		(158		)	18,281
U.S. agency mortgage-backed securities	1,452		9		(1		)	1,460
Total fixed income securities	52,748		60		(178		)	52,630
Publicly traded equity securities	1,318		176		(63		)	1,431
Total	$	54,066	$	236	$	(241	)	$	54,061



July 25, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	29,904	$	41	$	(6	)	$	29,939
U.S. government agency securities	3,662		2		(1		)	3,663
Non-U.S. government and agency securities	1,128		1		(1		)	1,128
Corporate debt securities	15,802		34		(53		)	15,783
U.S. agency mortgage-backed securities	1,456		8		(3		)	1,461
Total fixed income securities	51,952		86		(64		)	51,974
Publicly traded equity securities	1,092		480		(7		)	1,565
Total	$	53,044	$	566	$	(71	)	$	53,539

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 23, 2016

January 24, 2015

January 23, 2016

January 24, 2015

Gross realized gains