Edgar Filing: CISCO SYSTEMS, INC.

Document

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 29, 2017



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 18, 2017: 5,000,054,399

____________________________________

Table of Contents

Cisco Systems, Inc.

Form 10-Q for the Quarter Ended April 29, 2017

INDEX



		Page
Part I	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets at April 29, 2017 and July 30, 2016	3
	Consolidated Statements of Operations for the Three and Nine Months Ended April 29, 2017 and April 30, 2016	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended April 29, 2017 and April 30, 2016	5
	Consolidated Statements of Cash Flows for the Nine Months Ended April 29, 2017 and April 30, 2016	6
	Consolidated Statements of Equity for the Nine Months Ended April 29, 2017 and April 30, 2016	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	75
Item 4.	Controls and Procedures	77
Part II.	Other Information	78
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	79
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
Item 3.	Defaults Upon Senior Securities	96
Item 4.	Mine Safety Disclosures	96
Item 5.	Other Information	96
Item 6.	Exhibits	96
	Signature	97

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 29, 2017			July 30, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	8,116		$	7,631
Investments	59,858			58,125
Accounts receivable, net of allowance for doubtful accounts of $213 at April 29, 2017 and $249 at July 30, 2016	4,635			5,847
Inventories	1,366			1,217
Financing receivables, net	4,639			4,272
Other current assets	1,348			1,627
Total current assets	79,962			78,719
Property and equipment, net	3,395			3,506
Financing receivables, net	4,568			4,158
Goodwill	29,516			26,625
Purchased intangible assets, net	2,704			2,501
Deferred tax assets	4,351			4,299
Other assets	1,454			1,844
TOTAL ASSETS	$	125,950		$	121,652
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt	$	4,248		$	4,160
Accounts payable	1,219			1,056
Income taxes payable	20			517
Accrued compensation	2,825			2,951
Deferred revenue	10,344			10,155
Other current liabilities	4,062			6,072
Total current liabilities	22,718			24,911
Long-term debt	28,222			24,483
Income taxes payable	1,168			925
Deferred revenue	6,978			6,317
Other long-term liabilities	1,482			1,431
Total liabilities	60,568			58,067
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; 4,998 and 5,029 shares issued and outstanding at April 29, 2017 and July 30, 2016, respectively	45,003			44,516
Retained earnings	20,721			19,396
Accumulated other comprehensive income (loss)	(342		)	(326		)
Total Cisco shareholders’ equity	65,382			63,586
Noncontrolling interests	—			(1		)
Total equity	65,382			63,585
TOTAL LIABILITIES AND EQUITY	$	125,950		$	121,652

See Notes to Consolidated Financial Statements.

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per-share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	April 29, 2017			April 30, 2016			April 29, 2017			April 30, 2016
REVENUE:
Product	$	8,885		$	8,875		$	26,678		$	27,702
Service	3,055			3,125			9,194			8,907
Total revenue	11,940			12,000			35,872			36,609
COST OF SALES:
Product	3,405			3,214			10,113			10,547
Service	1,017			1,065			3,081			3,077
Total cost of sales	4,422			4,279			13,194			13,624
GROSS MARGIN	7,518			7,721			22,678			22,985
OPERATING EXPENSES:
Research and development	1,507			1,626			4,560			4,695
Sales and marketing	2,226			2,447			6,866			7,176
General and administrative	487			566			1,498			1,281
Amortization of purchased intangible assets	59			81			201			221
Restructuring and other charges	70			17			614			255
Total operating expenses	4,349			4,737			13,739			13,628
OPERATING INCOME	3,169			2,984			8,939			9,357
Interest income	354			270			978			732
Interest expense	(219		)	(175		)	(639		)	(496		)
Other income (loss), net	(113		)	4			(171		)	(67		)
Interest and other income (loss), net	22			99			168			169
INCOME BEFORE PROVISION FOR INCOME TAXES	3,191			3,083			9,107			9,526
Provision for income taxes	676			734			1,922			1,600
NET INCOME	$	2,515		$	2,349		$	7,185		$	7,926

Net income per share:
Basic	$	0.50		$	0.47		$	1.43		$	1.57
Diluted	$	0.50		$	0.46		$	1.42		$	1.56
Shares used in per-share calculation:
Basic	5,005			5,032			5,015			5,060
Diluted	5,045			5,065			5,056			5,095

Cash dividends declared per common share	$	0.29		$	0.26		$	0.81		$	0.68

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 29, 2017		April 30, 2016		April 29, 2017			April 30, 2016
Net income	$	2,515	$	2,349	$	7,185		$	7,926
Available-for-sale investments:
Change in net unrealized gains and losses, net of tax benefit (expense) of $(25) and $129 for the three and nine months ended April 29, 2017, respectively, and $(146) and $59 for the corresponding periods of fiscal 2016, respectively	229		217		(168		)	(95		)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $(32) and $(38) for the three and nine months ended April 29, 2017, respectively, and $(2) and $(9) for the corresponding periods of fiscal 2016, respectively	44		4		53			17
	273		221		(115		)	(78		)
Cash flow hedging instruments:
Change in unrealized gains and losses, net of tax benefit (expense) of $(5) and $(1) for the three and nine months ended April 29, 2017, respectively, and $(2) and $2 for the corresponding periods of fiscal 2016, respectively	20		19		(24		)	(1		)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $(2) and $(5) for the three and nine months ended April 29, 2017, respectively, and $(2) and $(4) for the corresponding periods of fiscal 2016, respectively	25		7		61			13
	45		26		37			12
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $(6) and $(7) for the three and nine months ended April 29, 2017, respectively, and $(9) and $(43) for the corresponding periods of fiscal 2016, respectively	134		326		63			(231		)
Other comprehensive income (loss)	452		573		(15		)	(297		)
Comprehensive income	2,967		2,922		7,170			7,629
Comprehensive (income) loss attributable to noncontrolling interests	7		7		(1		)	9
Comprehensive income attributable to Cisco Systems, Inc.	$	2,974	$	2,929	$	7,169		$	7,638

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 29, 2017			April 30, 2016
Cash flows from operating activities:
Net income	$	7,185		$	7,926
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and other	1,708			1,546
Share-based compensation expense	1,124			1,101
Provision for receivables	20			(27		)
Deferred income taxes	(125		)	229
Excess tax benefits from share-based compensation	(125		)	(103		)
(Gains) losses on divestitures, investments and other, net	156			(279		)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable	1,253			1,412
Inventories	(149		)	189
Financing receivables	(773		)	(296		)
Other assets	140			(94		)
Accounts payable	149			(114		)
Income taxes, net	(112		)	(723		)
Accrued compensation	(154		)	(318		)
Deferred revenue	592			7
Other liabilities	(1,014		)	(704		)
Net cash provided by operating activities	9,875			9,752
Cash flows from investing activities:
Purchases of investments	(35,562		)	(36,366		)
Proceeds from sales of investments	24,414			23,806
Proceeds from maturities of investments	8,390			11,790
Acquisition of businesses, net of cash and cash equivalents acquired	(3,211		)	(3,161		)
Proceeds from business divestiture	—			372
Purchases of investments in privately held companies	(172		)	(202		)
Return of investments in privately held companies	168			74
Acquisition of property and equipment	(756		)	(880		)
Proceeds from sales of property and equipment	6			11
Other	35			(195		)
Net cash used in investing activities	(6,688		)	(4,751		)
Cash flows from financing activities:
Issuances of common stock	418			771
Repurchases of common stock—repurchase program	(2,516		)	(3,154		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(497		)	(469		)
Short-term borrowings, original maturities less than 90 days, net	2,000			(4		)
Issuances of debt	6,232			6,978
Repayments of debt	(4,151		)	(3,863		)
Excess tax benefits from share-based compensation	125			103
Dividends paid	(4,063		)	(3,441		)
Other	(250		)	96
Net cash used in financing activities	(2,702		)	(2,983		)
Net increase in cash and cash equivalents	485			2,018
Cash and cash equivalents, beginning of period	7,631			6,877
Cash and cash equivalents, end of period	$	8,116		$	8,895

Supplemental cash flow information:
Cash paid for interest	$	727		$	691
Cash paid for income taxes, net	$	2,159		$	2,093

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 30, 2016	5,029		$	44,516		$	19,396		$	(326	)	$	63,586		$	(1	)	$	63,585
Net income						7,185						7,185						7,185
Other comprehensive income (loss)									(16		)	(16		)	1			(15		)
Issuance of common stock	65		418									418						418
Repurchase of common stock	(80	)	(708		)	(1,797		)				(2,505		)				(2,505		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(16	)	(497		)							(497		)				(497		)
Cash dividends declared ($0.81 per common share)						(4,063		)				(4,063		)				(4,063		)
Tax effects from employee stock incentive plans			(34		)							(34		)				(34		)
Share-based compensation			1,138									1,138						1,138
Purchase acquisitions and other			170									170						170
BALANCE AT APRIL 29, 2017	4,998		$	45,003		$	20,721		$	(342	)	$	65,382		$	—		$	65,382



	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						7,926						7,926						7,926
Other comprehensive income (loss)									(288		)	(288		)	(9		)	(297		)
Issuance of common stock	87		771									771						771
Repurchase of common stock	(120	)	(1,036		)	(2,082		)				(3,118		)				(3,118		)
Shares repurchased for tax withholdings on vesting of restricted stock units	(18	)	(469		)							(469		)				(469		)
Cash dividends declared ($0.68 per common share)						(3,441		)				(3,441		)				(3,441		)
Tax effects from employee stock incentive plans			32									32						32
Share-based compensation			1,101									1,101						1,101
Purchase acquisitions and other			146									146						146
BALANCE AT APRIL 30, 2016	5,034		$	44,137		$	18,448		$	(227	)	$	62,358		$	—		$	62,358

Supplemental Information

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of April 29, 2017, the Company’s Board of Directors had authorized an aggregate repurchase of up to $112 billion of common stock under this program with no termination date. For additional information regarding stock repurchase, see Note 13 to the Consolidated Financial Statements. 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	4,671	$	24,603	$	74,499	$	99,102

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 2017 is a 52-week fiscal year, and fiscal 2016 was a 53-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 April 29, 2017 and for the three and nine months ended April 29, 2017 and April 30, 2016 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 30, 2016 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 30, 2016.

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 April 29, 2017; the results of operations and the statements of comprehensive income for the three and nine months ended April 29, 2017 and April 30, 2016; and the statements of cash flows and equity for the nine months ended April 29, 2017 and April 30, 2016, as applicable, have been made. The results of operations for the three and nine months ended April 29, 2017 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

Consolidation of Certain Types of Legal Entities 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 became effective for the Company beginning in the first quarter of fiscal 2017. The application of this accounting standard update did not have any impact on the Company's Consolidated Balance Sheet or Statement of Operations upon adoption, but the Company has provided additional disclosures in Note 8 pursuant to this accounting standard update.

(b) Recent Accounting Standards or Updates Not Yet Effective

Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update related to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, 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 in retained earnings as of the date of adoption ("modified retrospective basis"). Early adoption is permitted, but no earlier than fiscal 2018. The Company expects to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2019, and it is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Financial Instruments 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.

Leases In February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2020 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

Share-Based Compensation In March 2016, the FASB issued an accounting standard update that impacts the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the Consolidated Statements of Cash Flows. The accounting standard will be effective for the Company beginning the first quarter of fiscal 2018, and early adoption is permitted. The Company does not expect that this accounting standard update will have a material impact on its Consolidated Financial Statements.

Credit Losses of Financial Instruments In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a modified retrospective basis, and early adoption in fiscal 2020 is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

Classification of Cash Flow Elements In August 2016, the FASB issued an accounting standard update related to the classification of certain cash receipts and cash payments on the statement of cash flows. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Statements of Cash Flows.

Income Taxes on Intra-Entity Transfers of Assets In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax consequences of intra-entity transfers of assets (other than inventory) at the transaction date. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

Restricted Cash in Statement of Cash Flow In November 2016, the FASB issued an accounting standard update that provides guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 using a retrospective transition method to each period presented, and early adoption is permitted. The Company does not expect that this accounting standard update will have a material impact on its Consolidated Statements of Cash Flows.

Definition of a Business In January 2017, the FASB issued an accounting standard update that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a prospective basis. The impact of this accounting standard update will be fact dependent, but the Company expects that some transactions that were previously accounted for as business combinations or disposal transactions will be accounted for as asset purchases or asset sales under the accounting standard update.

Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued an accounting standard update that removes Step 2 of the goodwill impairment test, which requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a prospective basis, and early adoption is permitted. The Company does not expect that this accounting standard update will impact its Consolidated Financial Statements.

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


3.	Acquisitions and Divestitures

The Company completed four acquisitions during the nine months ended April 29, 2017. A summary of the allocation of the total purchase consideration is presented as follows (in millions):



	Purchase Consideration		Net Tangible Assets Acquired (Liabilities Assumed)			Purchased Intangible Assets		Goodwill
CloudLock	$	249	$	—		$	36	$	213
AppDynamics	3,258		(175		)	785		2,648
Others (two in total)	9		—			5		4
Total	$	3,516	$	(175	)	$	826	$	2,865

On March 17, 2017, the Company completed its acquisition of privately held AppDynamics, Inc. ("AppDynamics"), an application intelligence software company. AppDynamics's cloud application and business monitoring platform is designed to enable companies to improve application and business performance. With the AppDynamics acquisition, the Company seeks to provide end-to-end visibility and intelligence from the customer's network through to the application. Product revenue from the AppDynamics acquisition has been included in the Company's Other product category.

On August 1, 2016, the Company completed its acquisition of privately held CloudLock Inc. ("CloudLock"), a provider of cloud security that specializes in cloud access security broker technology that provides enterprises with visibility and analytics around user behavior and sensitive data in cloud services. Revenue from the CloudLock acquisition has been included in the Company's Security product category.

The total purchase consideration related to the Company’s acquisitions completed during the nine months ended April 29, 2017 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these acquisitions was approximately $135 million. Total transaction costs related to the Company’s acquisition activities were $7 million and $29 million for the nine months ended April 29, 2017 and April 30, 2016, 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 nine months ended April 29, 2017 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 nine months ended April 29, 2017 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.

Pending Acquisition of Viptela On May 1, 2017, the Company announced its intent to acquire privately held Viptela, Inc. ("Viptela"), a software-defined wide area network (SD-WAN) company. Under the terms of the agreement, the Company will pay approximately $610 million in cash and assumed equity awards to acquire Viptela. The acquisition is expected to close in the second half of calendar 2017.

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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 29, 2017 (in millions):



	Balance at						Balance at
	July 30, 2016		Acquisitions		Other		April 29, 2017
Americas	$	16,529	$	1,986	$	13	$	18,528
EMEA	6,269		724		8		7,001
APJC	3,827		155		5		3,987
Total	$	26,625	$	2,865	$	26	$	29,516

“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 nine months ended April 29, 2017 (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
CloudLock	6.0	$	32	4.0	$	3	1.5	$	1	$	—	$	36
AppDynamics	4.0	525		7.0	235		2.3	25		—		785
Others (two in total)	3.0	5		0.0	—		0.0	—		—		5
Total		$	562		$	238		$	26	$	—	$	826

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



April 29, 2017	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	3,345	$	(1,485	)	$	1,860
Customer relationships	1,353		(714		)	639
Other	82		(31		)	51
Total purchased intangible assets with finite lives	4,780		(2,230		)	2,550
In-process research and development, with indefinite lives	154		—			154
Total	$	4,934	$	(2,230	)	$	2,704



July 30, 2016	Gross		Accumulated Amortization			Net
Purchased intangible assets with finite lives:
Technology	$	3,038	$	(1,391	)	$	1,647
Customer relationships	1,793		(1,203		)	590
Other	85		(43		)	42
Total purchased intangible assets with finite lives	4,916		(2,637		)	2,279
In-process research and development, with indefinite lives	222		—			222
Total	$	5,138	$	(2,637	)	$	2,501

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

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Impairment charges related to purchased intangible assets for the three and nine months ended April 29, 2017 were zero and $42 million, respectively. Impairment charges were primarily as a result of declines in estimated fair values of certain purchased intangible assets resulting from the reduction or elimination of expected future cash flows associated with certain of the Company’s technology and IPR&D intangible assets. Of these impairment charges, $38 million was recorded to restructuring and other charges in connection with the Company's decision to exit certain product lines, and the corresponding elimination of future associated cash flows. Impairment charges related to purchased intangible assets for the three and nine months ended April 30, 2016 were $7 million and $44 million, respectively.

The following table presents the amortization of purchased intangible assets, including impairment charges (in millions):



	Three Months Ended				Nine Months Ended
	April 29, 2017		April 30, 2016		April 29, 2017		April 30, 2016
Amortization of purchased intangible assets:
Cost of sales	$	141	$	134	$	394	$	419
Operating expenses
Amortization of purchased intangible assets	59		81		201		221
Restructuring and other charges	—		—		38		—
Total	$	200	$	215	$	633	$	640

The estimated future amortization expense of purchased intangible assets with finite lives as of April 29, 2017 is as follows (in millions):



Fiscal Year	Amount
2017 (remaining three months)	$	211
2018	770
2019	681
2020	462
2021	266
Thereafter	160
Total	$	2,550

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


5.	Restructuring and Other Charges

In August 2016, the Company announced a restructuring plan (the "Fiscal 2017 Plan") in order to reinvest in its key priority areas in which up to 5,500 employees would be impacted, with estimated pretax charges of approximately $700 million. In May 2017, the Company extended the Fiscal 2017 Plan to include an additional 1,100 employees with $150 million of estimated additional pretax charges. The Company's estimated aggregate pretax charges of approximately $850 million under the Fiscal 2017 Plan consist primarily of severance and other one-time termination benefits, and other associated costs. These charges are primarily cash-based, and the Company expects the Fiscal 2017 Plan to be substantially completed by the end of the first quarter of fiscal 2018. The Company has incurred net charges of $70 million and $17 million for the three months ended April 29, 2017 and April 30, 2016, respectively, and $614 million and $253 million, net of a $2 million credit to cost of sales for the nine months ended April 29, 2017 and April 30, 2016, respectively.

In connection with a restructuring action announced in August 2014 (the “Fiscal 2015 Plan”), the Company incurred cumulative charges of approximately $756 million. The Company completed the Fiscal 2015 Plan in fiscal 2016.

The following tables summarize the activities related to the restructuring and other charges (in millions):



	FISCAL 2015 PLAN						FISCAL 2017 PLAN
	Employee Severance			Other			Employee Severance			Other			Total
Liability as of July 30, 2016	$	21		$	24		$	—		$	—		$	45
Charges	—			—			510			104			614
Cash payments	(14		)	(5		)	(449		)	(21		)	(489		)
Non-cash items	(4		)	(9		)	(3		)	(48		)	(64		)
Liability as of April 29, 2017	$	3		$	10		$	58		$	35		$	106



	FISCAL 2015 AND PRIOR PLANS
	Employee Severance			Other			Total
Liability as of July 25, 2015	$	60		$	29		$	89
Charges	224			31			255
Cash payments	(238		)	(13		)	(251		)
Non-cash items	—			(21		)	(21		)
Liability as of April 30, 2016	$	46		$	26		$	72

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


6.	Balance Sheet Details

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



	April 29, 2017		July 30, 2016
Inventories:
Raw materials	$	209	$	91
Finished goods:
Distributor inventory and deferred cost of sales	515		457
Manufactured finished goods	332		415
Total finished goods	847		872
Service-related spares	286		236
Demonstration systems	24		18
Total	$	1,366	$	1,217



Property and equipment, net:
Gross property and equipment:
Land, buildings, and building and leasehold improvements	$	4,848		$	4,778
Computer equipment and related software	1,266			1,288
Production, engineering, and other equipment	5,701			5,658
Operating lease assets	322			296
Furniture and fixtures	567			543
Total gross property and equipment	12,704			12,563
Less: accumulated depreciation and amortization	(9,309		)	(9,057		)
Total	$	3,395		$	3,506



Deferred revenue:
Service	$	10,532	$	10,621
Product:
Deferred revenue related to recurring software and subscription businesses	4,352		3,308
Deferred revenue related to two-tier distributors	311		377
Other product deferred revenue	2,127		2,166
Total product deferred revenue	6,790		5,851
Total	$	17,322	$	16,472
Reported as:
Current	$	10,344	$	10,155
Noncurrent	6,978		6,317
Total	$	17,322	$	16,472

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CISCO SYSTEMS, INC.

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, software, and 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 29, 2017	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	2,792		$	2,659		$	4,096		$	9,547
Residual value	175			—			—			175
Unearned income	(146		)	—			—			(146		)
Allowance for credit loss	(220		)	(117		)	(32		)	(369		)
Total, net	$	2,601		$	2,542		$	4,064		$	9,207
Reported as:
Current	$	1,257		$	1,224		$	2,158		$	4,639
Noncurrent	1,344			1,318			1,906			4,568
Total, net	$	2,601		$	2,542		$	4,064		$	9,207



July 30, 2016	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Gross	$	3,272		$	2,135		$	3,370		$	8,777
Residual value	202			—			—			202
Unearned income	(174		)	—			—			(174		)
Allowance for credit loss	(230		)	(97		)	(48		)	(375		)
Total, net	$	3,070		$	2,038		$	3,322		$	8,430
Reported as:
Current	$	1,490		$	988		$	1,794		$	4,272
Noncurrent	1,580			1,050			1,528			4,158
Total, net	$	3,070		$	2,038		$	3,322		$	8,430

As of April 29, 2017 and July 30, 2016, the deferred service revenue related to "Financed Service Contracts and Other" was $1,965 million and $1,716 million, respectively.

Future minimum lease payments to the Company on lease receivables as of April 29, 2017 are summarized as follows (in millions):



Fiscal Year	Amount
2017 (remaining three months)	$	350
2018	1,227
2019	704
2020	361
2021	135
Thereafter	15
Total	$	2,792

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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


(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 April 29, 2017 and July 30, 2016 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
April 29, 2017	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,404	$	1,161	$	81	$	2,646
Loan receivables	1,493		990		176		2,659
Financed service contracts and other	2,771		1,305		20		4,096
Total	$	5,668	$	3,456	$	277	$	9,401



	INTERNAL CREDIT RISK RATING
July 30, 2016	1 to 4		5 to 6		7 and Higher		Total
Lease receivables	$	1,703	$	1,294	$	101	$	3,098
Loan receivables	986		967		182		2,135
Financed service contracts and other	2,077		1,271		22		3,370
Total	$	4,766	$	3,532	$	305	$	8,603

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 29, 2017 and July 30, 2016 were $2,362 million and $2,112 million, respectively, and they were associated with total financing receivables before allowances for credit loss of $9,576 million and $8,805 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 April 29, 2017 and July 30, 2016 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
April 29, 2017	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	131	$	110	$	275	$	516	$	2,130	$	2,646	$	52	$	52
Loan receivables	31		28		61		120		2,539		2,659		59		59
Financed service contracts and other	244		129		425		798		3,298		4,096		31		11
Total	$	406	$	267	$	761	$	1,434	$	7,967	$	9,401	$	142	$	122



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 30, 2016	31-60		61-90		91+		Total Past Due		Current		Total		Nonaccrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	111	$	25	$	251	$	387	$	2,711	$	3,098	$	60	$	60
Loan receivables	30		9		37		76		2,059		2,135		42		42
Financed service contracts and other	213		152		565		930		2,440		3,370		30		10
Total	$	354	$	186	$	853	$	1,393	$	7,210	$	8,603	$	132	$	112

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $318 million and $670 million as of April 29, 2017 and July 30, 2016, respectively.

As of April 29, 2017, the Company had financing receivables of $425 million, net of unbilled or current receivables, 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 $144 million as of July 30, 2016.


(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 29, 2017	Lease Receivables			Loan Receivables		Financed Service Contracts and Other			Total
Allowance for credit loss as of January 28, 2017	$	225		$	106	$	47		$	378
Provisions	3			10		(14		)	(1		)
Recoveries (write-offs), net	(8		)	—		(1		)	(9		)
Foreign exchange and other	—			1		—			1
Allowance for credit loss as of April 29, 2017	$	220		$	117	$	32		$	369



	CREDIT LOSS ALLOWANCES
Nine months ended April 29, 2017	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total
Allowance for credit loss as of July 30, 2016	$	230		$	97		$	48		$	375
Provisions	1			22			(15		)	8
Recoveries (write-offs), net	(10		)	(4		)	(1		)	(15		)
Foreign exchange and other	(1		)	2			—			1
Allowance for credit loss as of April 29, 2017	$	220		$	117		$	32		$	369



	CREDIT LOSS ALLOWANCES
Three months ended April 30, 2016	Lease Receivables			Loan Receivables		Financed Service Contracts and Other		Total
Allowance for credit loss as of January 23, 2016	$	248		$	80	$	37	$	365
Provisions	7			8		2		17
Recoveries (write-offs), net	(6		)	—		—		(6		)
Foreign exchange and other	1			5		1		7
Allowance for credit loss as of April 30, 2016	$	250		$	93	$	40	$	383



	CREDIT LOSS ALLOWANCES
Nine months ended April 30, 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	3			2		7			12
Recoveries (write-offs), net	(10		)	—		(4		)	(14		)
Foreign exchange and other	(2		)	4		1			3
Allowance for credit loss as of April 30, 2016	$	250		$	93	$	40		$	383

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 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 29, 2017 and July 30, 2016, 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 29, 2017			July 30, 2016
Operating lease assets	$	322		$	296
Accumulated depreciation	(187		)	(161		)
Operating lease assets, net	$	135		$	135

Minimum future rentals on noncancelable operating leases as of April 29, 2017 are summarized as follows (in millions):



Fiscal Year	Amount
2017 (remaining three months)	$	53
2018	157
2019	81
2020	23
2021	5
Thereafter	2
Total	$	321

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CISCO SYSTEMS, INC.

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):



April 29, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	20,951	$	4	$	(67	)	$	20,888
U.S. government agency securities	2,233		—		(6		)	2,227
Non-U.S. government and agency securities	721		—		(2		)	719
Corporate debt securities	31,649		145		(160		)	31,634
U.S. agency mortgage-backed securities	2,038		3		(18		)	2,023
Commercial paper	635		—		—			635
Certificates of deposit	26		—		—			26
Total fixed income securities	58,253		152		(253		)	58,152
Publicly traded equity securities	1,177		533		(4		)	1,706
Total ⁽¹⁾	$	59,430	$	685	$	(257	)	$	59,858



July 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Fixed income securities:
U.S. government securities	$	26,473	$	73	$	(2	)	$	26,544
U.S. government agency securities	2,809		8		—			2,817
Non-U.S. government and agency securities	1,096		4		—