Quarterly Report

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 28, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 0-18225

 

 

CISCO SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

California   77-0059951

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

170 West Tasman Drive

San Jose, California 95134

(Address of principal executive office and zip code)

(408) 526-4000

(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   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES   x     NO   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x

  Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company  ¨
   

(Do not check if a smaller

reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   x

Number of shares of the registrant’s common stock outstanding as of May 18, 2012: 5,356,878,940

Table of Contents

Cisco Systems, Inc.

FORM 10-Q for the Quarter Ended April 28, 2012

INDEX

 

          Page  

Part I.

   Financial Information      3   

Item 1.

   Financial Statements (Unaudited)      3   
   Consolidated Balance Sheets at April 28, 2012 and July 30, 2011      3   
   Consolidated Statements of Operations for the Three and Nine Months Ended April 28, 2012 and April 30, 2011      4   
   Consolidated Statements of Cash Flows for the Nine Months Ended April 28, 2012 and April 30, 2011      5   
   Consolidated Statements of Equity for the Nine Months Ended April 28, 2012 and April 30, 2011      6   
   Notes to Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      40   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      69   

Item 4.

   Controls and Procedures      71   

Part II.

   Other Information      72   

Item 1.

   Legal Proceedings      72   

Item 1A.

   Risk Factors      73   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      88   

Item 3.

   Defaults Upon Senior Securities      89   

Item 4.

   Mine Safety Disclosures      89   

Item 5.

   Other Information      89   

Item 6.

   Exhibits      89   
   Signature      90   

 

2

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 28,
2012 		     July 30,
2011 		 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 6,461       $ 7,662   

Investments

     41,951         36,923   

Accounts receivable, net of allowance for doubtful accounts of $216 at April 28, 2012 and $204 at July 30, 2011

     3,980         4,698   

Inventories

     1,497         1,486   

Financing receivables, net

     3,709         3,111   

Deferred tax assets

     2,104         2,410   

Other current assets

     1,510         941   
  

 

 

    

 

 

 

Total current assets

     61,212         57,231   

Property and equipment, net

     3,634         3,916   

Financing receivables, net

     3,518         3,488   

Goodwill

     17,006         16,818   

Purchased intangible assets, net

     2,134         2,541   

Other assets

     3,650         3,101   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 91,154       $ 87,095   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Short-term debt

   $ 83       $ 588   

Accounts payable

     903         876   

Income taxes payable

     453         120   

Accrued compensation

     2,626         3,163   

Deferred revenue

     8,568         8,025   

Other current liabilities

     4,491         4,734   
  

 

 

    

 

 

 

Total current liabilities

     17,124         17,506   
  

 

 

    

 

 

 

Long-term debt

     16,286         16,234   

Income taxes payable

     1,698         1,191   

Deferred revenue

     4,080         4,182   

Other long-term liabilities

     588         723   
  

 

 

    

 

 

 

Total liabilities

     39,776         39,836   
  

 

 

    

 

 

 

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; 5,383 and 5,435 shares issued and outstanding at April 28, 2012 and July 30, 2011, respectively

     39,510         38,648   

Retained earnings

     10,869         7,284   

Accumulated other comprehensive income

     978         1,294   
  

 

 

    

 

 

 

Total Cisco shareholders’ equity

     51,357         47,226   

Noncontrolling interests

     21         33   
  

 

 

    

 

 

 

Total equity

     51,378         47,259   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 91,154       $ 87,095   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

3

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per-share amounts)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     April 28,
2012 		    April 30,
2011 		    April 28,
2012 		    April 30,
2011 		 

NET SALES:

        

Product

   $ 9,106      $ 8,669      $ 27,176      $ 25,605   

Service

     2,482        2,197        7,195        6,418   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     11,588        10,866        34,371        32,023   
  

 

 

   

 

 

   

 

 

   

 

 

 

COST OF SALES:

        

Product

     3,563        3,437        10,776        10,068   

Service

     856        770        2,471        2,280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     4,419        4,207        13,247        12,348   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     7,169        6,659        21,124        19,675   

OPERATING EXPENSES:

        

Research and development

     1,358        1,430        4,072        4,339   

Sales and marketing

     2,383        2,446        7,230        7,292   

General and administrative

     562        466        1,611        1,376   

Amortization of purchased intangible assets

     96        103        292        419   

Restructuring and other charges

     20        31       225        31   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,419        4,476        13,430        13,457   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     2,750        2,183        7,694        6,218   

Interest income

     161        161        483        477   

Interest expense

     (151 )     (153 )     (449 )     (480 )

Other income, net

     19        12        45        143   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest and other income, net

     29        20        79        140   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME BEFORE PROVISION FOR INCOME TAXES

     2,779        2,203        7,773        6,358   

Provision for income taxes

     614        396        1,649        1,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 2,165      $ 1,807      $ 6,124      $ 5,258   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.40      $ 0.33      $ 1.14      $ 0.95   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.40      $ 0.33      $ 1.13      $ 0.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in per-share calculation:

        

Basic

     5,388        5,508        5,383        5,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     5,456        5,537        5,418        5,596   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.08      $ 0.06      $ 0.20      $ 0.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

 

     Nine Months Ended  
     April 28,
2012 		    April 30,
2011 		 

Cash flows from operating activities:

    

Net income

   $ 6,124      $ 5,258   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, amortization and other

     1,816        1,813   

Share-based compensation expense

     1,032        1,237   

Provision for doubtful accounts

     20        (1 ) 

Deferred income taxes

     75        (37 )

Excess tax benefits from share-based compensation

     (57 )     (65 )

Net gains on investments

     (38 )     (185 )

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

    

Accounts receivable

     660        603   

Inventories

     (113 )     (105 )

Financing receivables, net

     (737 )     (1,089 )

Other assets

     (495 )      190   

Accounts payable

     34        (103 )

Income taxes, net

     151        (192 )

Accrued compensation

     (451 )     (265 )

Deferred revenue

     482        537   

Other liabilities

     (100 )     (341 )
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,403        7,255   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investments

     (32,690 )     (30,303 )

Proceeds from sales of investments

     19,591        14,942   

Proceeds from maturities of investments

     7,930        14,134   

Acquisition of property and equipment

     (830 )     (930 )

Acquisition of businesses, net of cash and cash equivalents acquired

     (333 )     (266 )

Purchases of investments in privately held companies

     (299 )     (179 ) 

Return of investments in privately held companies

     212        93   

Other

     175        48   
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,244 )     (2,461 )
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuances of common stock

     1,115        1,516   

Repurchases of common stock

     (2,868 )     (5,564 )

Short-term borrowings, maturities less than 90 days, net

     (505 )     392   

Issuances of debt, maturities greater than 90 days

     —          4,109   

Repayments of debt, maturities greater than 90 days

     —          (3,000 )

Excess tax benefits from share-based compensation

     57        65   

Dividends paid

     (1,076 )      (329 ) 

Other

     (83 )      71   
  

 

 

   

 

 

 

Net cash used in financing activities

     (3,360 )     (2,740 )
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (1,201 )      2,054   

Cash and cash equivalents, beginning of period

     7,662        4,581   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 6,461      $ 6,635   
  

 

 

   

 

 

 

Cash paid for:

    

Interest

   $ 561      $ 658   

Income taxes

   $ 1,424      $ 1,328   

See Notes to Consolidated Financial Statements.

 

5

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in millions)

(Unaudited)

 

123456 123456 123456 123456 123456 123456 123456

Nine Months Ended April 28, 2012

  Shares of
Common
Stock 		    Common Stock
and  Additional
Paid-In
Capital 		    Retained
Earnings 		    Accumulated
Other
Comprehensive
Income 		    Total Cisco
Shareholders’
Equity 		    Noncontrolling
Interests 		    Total
Equity 		 

BALANCE AT JULY 30, 2011

    5,435      $ 38,648      $ 7,284      $ 1,294      $ 47,226      $ 33      $ 47,259   

Net income

        6,124          6,124          6,124   

Change in:

             

Unrealized gains and losses on investments, net

          19          19        (12 )          7   

Derivative instruments

          (39 )     (39 )       (39 )

Cumulative translation adjustment and other

          (296 )     (296 )       (296 )
         

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

            5,808        (12 )     5,796   
         

 

 

   

 

 

   

 

 

 

Issuance of common stock

    110        1,115            1,115          1,115   

Repurchase of common stock

    (162 )     (1,257 )     (1,463 )       (2,720 )       (2,720 )

Cash dividends declared

        (1,076 )        (1,076 )        (1,076 )

Tax effects from employee stock incentive plans

      (36 )         (36 )       (36 )

Purchase acquisitions

      8            8          8   

Share-based compensation expense

      1,032            1,032          1,032   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT APRIL 28, 2012

    5,383      $ 39,510      $ 10,869      $    978      $ 51,357      $ 21      $ 51,378   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

123456 123456 123456 123456 123456 123456 123456

Nine Months Ended April 30, 2011

  Shares of
Common
Stock 		    Common Stock
and  Additional
Paid-In
Capital 		    Retained
Earnings 		    Accumulated
Other
Comprehensive
Income 		    Total Cisco
Shareholders’
Equity 		    Noncontrolling
Interests 		    Total
Equity 		 

BALANCE AT JULY 31, 2010

    5,655      $ 37,793      $ 5,851      $    623      $ 44,267      $ 18      $ 44,285   

Net income

        5,258          5,258          5,258   

Change in:

             

Unrealized gains and losses on investments

          153        153        25        178   

Derivative instruments

          37        37           37   

Cumulative translation adjustment and other

          494        494           494   
         

 

 

   

 

 

   

 

 

 

Comprehensive income

            5,942        25        5,967   
         

 

 

   

 

 

   

 

 

 

Issuance of common stock

    110        1,516            1,516          1,516   

Repurchase of common stock

    (264 )      (1,879 )      (3,563 )        (5,442 )        (5,442 ) 

Cash dividends declared

        (329 )        (329 )        (329 ) 

Tax effects from employee stock incentive plans

      (40 )          (40 )        (40 ) 

Purchase acquisitions

      12            12          12   

Share-based compensation expense

      1,237            1,237          1,237   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT APRIL 30, 2011

    5,501      $ 38,639      $ 7,217      $ 1,307      $ 47,163      $ 43      $ 47,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of April 28, 2012, the Company’s Board of Directors had authorized an aggregate repurchase of up to $82 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 13 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impact on Cisco shareholders’ equity are summarized in the following table (in millions):

 

     Shares of
Common
Stock 		     Common Stock
and Additional
Paid-In
Capital 		     Retained
Earnings 		     Total Cisco
Shareholders’
Equity 		 

Repurchases of common stock under the repurchase program

     3,631       $ 16,248       $ 58,085       $ 74,333   

 

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Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The fiscal year for Cisco Systems, Inc. (the “Company” or “Cisco”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2012 and fiscal 2011 are each 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis. Beginning in fiscal 2012, the Company is organized into the following three geographic segments: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific, Japan, and China (“APJC”). In fiscal 2011, the Company was organized into four geographic segments, which consisted of United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. As a result of this geographic segment change in fiscal 2012, countries within the former Emerging Markets segment were consolidated into either EMEA or the Americas segment depending on their respective geographic locations. The Company has reclassified the geographic segment data for the prior period to conform to the current period’s presentation.

The accompanying financial data as of April 28, 2012 and for the three and nine months ended April 28, 2012 and April 30, 2011 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The July 30, 2011 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 30, 2011.

The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as the Company is the primary beneficiary. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Company’s equity in the equity section of the Consolidated Balance Sheets. SOFTBANK’s share of the earnings in the venture fund is not presented separately in the Consolidated Statements of Operations and is included in other income, net, as this amount is not material for any of the fiscal periods presented. In addition, for the Company’s investment in Insieme Networks, Inc. (see Note 12), the loss attributable to the noncontrolling interests is not presented separately in the Consolidated Statements of Operations as this amount is not material for the periods presented.

In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly each of the statement of financial position as of April 28, 2012; the results of operations for the three and nine months ended April 28, 2012 and April 30, 2011; and the statement of cash flows and equity for the nine months ended April 28, 2012 and April 30, 2011, as applicable, have been made. The results of operations for the three and nine months ended April 28, 2012 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

In addition to the geographic segment change referred to above, certain other reclassifications have been made to prior period amounts in order to conform to the current period’s presentation.

The Company has evaluated subsequent events through the date that the financial statements were issued.

 

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Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

2. Summary of Significant Accounting Policies

New Accounting Update Recently Adopted

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This accounting standard update became effective for the Company beginning in the third quarter of fiscal 2012. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 9.

Recent Accounting Standards or Updates Not Yet Effective

In June 2011, the FASB issued an accounting standard update to provide guidance on increasing the prominence of items reported in other comprehensive income. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This accounting standard update is effective for the Company beginning in the first quarter of fiscal 2013, and it will result in changes in the Company’s financial statement presentation.

In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2013, and early adoption is permitted.

In December 2011, the FASB issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the applicable disclosures required by this accounting standard update.

 

3. Business Combinations

(a) Acquisition Summary

The Company completed 5 business combinations during the nine months ended April 28, 2012. A summary of the allocation of the total purchase consideration is presented as follows (in millions):

 

     Shares Issued      Purchase
Consideration 		     Net
Liabilities
Assumed 		    Purchased
Intangible
Assets 		     Goodwill  

Lightwire, Inc.

     —         $ 239       $ (15 )   $ 97       $ 157   

All others

     —           122         (21 )     84         59   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total acquisitions

     —         $ 361       $ (36 )   $ 181       $ 216   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The Company acquired Lightwire, Inc. (“Lightwire”) in the third quarter of fiscal 2012. With its acquisition of Lightwire, a developer of advanced optical interconnect technology for high-speed networking applications, the Company aims to develop and deliver cost-effective, high-speed networks with the next generation of optical connectivity.

The total purchase consideration related to the Company’s business combinations completed during the nine months ended April 28, 2012 consisted of either cash consideration or cash consideration along with vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations were immaterial. Total transaction costs related to the Company’s business combination activities were $9 million and $10 million for the nine months ended April 28, 2012 and April 30, 2011, respectively. These transaction costs were expensed as incurred as general and administrative (G&A) expenses.

 

8

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The Company continues to evaluate certain assets and liabilities related to business combinations completed during the recent periods. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill.

The goodwill generated from the Company’s business combinations completed during the nine months ended April 28, 2012 is primarily related to expected synergies. The goodwill is not deductible for U.S. federal income tax purposes.

The Consolidated Financial Statements include the operating results of each business combination from the date of acquisition. Pro forma results of operations for the acquisitions completed during the nine months ended April 28, 2012 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.

(b) Pending Acquisition of NDS Group Limited

On March 15, 2012, the Company entered into a definitive agreement to acquire NDS Group Limited (“NDS”), a leading provider of video software and content security solutions that enable service providers and media companies to securely deliver and monetize new video entertainment experiences. NDS uses the combination of a software platform and services to create differentiated video offerings for service providers that enable subscribers to intuitively view, search and navigate digital content anytime, anywhere and on any device.

The acquisition of NDS is expected to complement and accelerate the delivery of Cisco Videoscape, Cisco’s comprehensive platform that enables service providers and media companies to deliver next-generation entertainment experiences. With the NDS acquisition, the Company aims to broaden its opportunities in the service provider market, and to expand its reach into emerging markets such as China and India, where NDS has an established customer footprint.

Under the terms of the agreement, Cisco will pay total consideration of approximately $5 billion, which includes the assumption of debt and retention-based incentives, to acquire all of the business and operations of NDS. The acquisition has been approved by the boards of directors of both companies. The acquisition is expected to close during the second half of calendar year 2012 and is subject to customary closing conditions, including regulatory review in the United States and elsewhere.

 

4. Goodwill and Purchased Intangible Assets

(a) Goodwill

Beginning in fiscal 2012, the Company’s reportable segments were changed to the following segments: the Americas, EMEA, and APJC. As a result, the Company reallocated the goodwill at July 30, 2011 to these reportable segments. The following table presents the goodwill allocated to the Company’s reportable segments as of and during the nine months ended April 28, 2012 (in millions):

 

     Balance at                   Balance at  
   July 30, 2011      Acquisitions      Other     April 28, 2012  

Americas

   $ 11,627       $ 124       $ (2 )   $ 11,749   

EMEA

     3,272         57         (26 )     3,303   

APJC

     1,919         35         —          1,954   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 16,818       $ 216       $ (28 )   $ 17,006   
  

 

 

    

 

 

    

 

 

   

 

 

 

In the table above, the column entitled “Other” primarily includes foreign currency translation and purchase accounting adjustments.

 

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(b) Purchased Intangible Assets

The following table presents details of the Company’s intangible assets acquired through business combinations completed during the nine months ended April 28, 2012 (in millions, except years):

 

     FINITE LIVES      INDEFINITE
LIVES 		        
     TECHNOLOGY      CUSTOMER
RELATIONSHIPS 		     OTHER      IN-PROCESS
RESEARCH &
DEVELOPMENT 		     TOTAL  
     Weighted-
Average
Useful Life
(in Years) 		     Amount      Weighted-
Average
Useful Life
(in Years) 		     Amount      Weighted-
Average
Useful Life
(in Years) 		     Amount      Amount      Amount  

Lightwire, Inc.

     5.0       $ 97         —         $ —           —         $ —         $ —         $ 97   

All others

     3.6         84         —           —           —           —           —           84   
     

 

 

       

 

 

       

 

 

    

 

 

    

 

 

 

Total

      $ 181         —         $ —           —         $ —         $ —         $ 181   
     

 

 

       

 

 

       

 

 

    

 

 

    

 

 

 

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

 

April 28, 2012    Gross      Accumulated
Amortization 		    Net  

Purchased intangible assets with finite lives:

       

Technology

   $ 2,240       $ (802 )   $ 1,438   

Customer relationships

     2,263         (1,587 )     676   

Other

     121         (109 )     12   
  

 

 

    

 

 

   

 

 

 

Total purchased intangible assets with finite lives

     4,624         (2,498 )     2,126   

In-process research & development, with indefinite lives

     8         —          8   
  

 

 

    

 

 

   

 

 

 

Total

   $ 4,632       $ (2,498 )   $ 2,134   
  

 

 

    

 

 

   

 

 

 

 

July 30, 2011    Gross      Accumulated
Amortization 		    Net  

Purchased intangible assets with finite lives:

       

Technology

   $ 1,961       $ (561 )   $ 1,400   

Customer relationships

     2,277         (1,346 )     931   

Other

     123         (91 )     32   
  

 

 

    

 

 

   

 

 

 

Total purchased intangible assets with finite lives

     4,361         (1,998 )     2,363   

In-process research & development, with indefinite lives

     178         —          178   
  

 

 

    

 

 

   

 

 

 

Total

   $ 4,539       $ (1,998 )   $ 2,541   
  

 

 

    

 

 

   

 

 

 

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

 

10

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

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

 

    Three Months Ended     Nine Months Ended  
    April 28, 2012     April 30, 2011     April 28, 2012     April 30, 2011  

Amortization of purchased intangible assets:

       

Cost of sales

  $ 108      $ 110      $ 303      $ 387   

Operating expenses:

       

Amortization of purchased intangible assets

    96        103        292        419   

Restructuring and other charges

    —          8        —          8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 204      $ 221      $ 595      $ 814   
 

 

 

   

 

 

   

 

 

   

 

 

 

There were no impairment charges related to purchased intangible assets during the three and nine months ended April 28, 2012. Amortization of purchased intangible assets for the three and nine months ended April 30, 2011 included impairment charges of $9 million and $164 million, respectively. The $164 million in impairment charges consisted of $64 million of charges to product cost of sales, $92 million of charges to amortization of purchased intangibles and $8 million of charges to restructuring and other charges. These impairment charges were primarily due to declines in estimated fair value resulting from reductions in expected future cash flows associated with certain of the Company’s consumer products and were categorized as follows: $97 million in technology assets, $40 million in customer relationships, and $27 million in other purchased intangible assets.

The estimated future amortization expense of purchased intangible assets with finite lives as of April 28, 2012 is as follows (in millions):

 

Fiscal Year

   Amount  

2012 (remaining three months)

   $ 199   

2013

     699   

2014

     512   

2015

     438   

2016

     211   

Thereafter

     67   
  

 

 

 

Total

   $ 2,126   
  

 

 

 

 

11

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

5. Restructuring and Other Charges

In fiscal 2011, the Company initiated a number of key, targeted actions to address several areas in its business model. These actions are intended to simplify and focus the Company’s organization and operating model; align the Company’s cost structure given transitions in the marketplace; divest or exit underperforming operations; and deliver value to the Company’s shareholders. The Company is taking these actions to align its business based on its five foundational priorities: leadership in its core business (routing, switching, and associated services), which includes comprehensive security and mobility solutions; collaboration; data center virtualization and cloud; video; and architectures for business transformation.

Pursuant to the restructuring that the Company announced in July 2011, the Company has incurred cumulative charges of $946 million (included as part of the charges discussed below). The Company expects that the total pre-tax charges pursuant to these restructuring actions will be approximately $1 billion and it expects the remaining charges to be incurred in the fourth quarter of fiscal 2012. The following table summarizes the activities related to the restructuring and other charges since the Company’s July 2011 announcement related to the realignment and restructuring of the Company’s business as well as certain consumer product lines as announced during April 2011 (in millions):

 

     Voluntary Early
Retirement  Program 		    Employee
Severance 		    Goodwill
Intangible
Assets 		    Other     Total  

Charges in fiscal 2011

   $ 453      $ 247      $ 71      $ 28      $ 799   

Cash payments

     (436 )     (13 )     —          —          (449 )

Non-cash items

     —          —          (71 )     (17 )     (88 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of July 30, 2011

     17        234        —          11        262   

Charges

     —          195        —          30        225   

Cash payments

     (17 )     (380 )     —          (16 )     (413 )

Non-cash items

     —          —          —          (19 )     (19 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of April 28, 2012

   $ —        $ 49      $ —        $ 6      $ 55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the three months ended April 28, 2012, the Company incurred restructuring charges of $20 million. During the nine months ended April 28, 2012, the Company incurred total restructuring charges of $225 million consisting of $195 million of employee severance charges and $30 million of other restructuring charges. The employee severance charges consisted of $233 million of charges primarily related to impacted employees in the Company’s international locations, partially offset by a reduction of $38 million related to a change in estimate regarding certain employee severance charges recorded in the fourth quarter of fiscal 2011. Other charges incurred during the nine months ended April 28, 2012 were primarily for the consolidation of excess facilities, as well as an incremental charge related to the sale of the Company’s Juarez, Mexico manufacturing operations, which sale was completed in the first quarter of fiscal 2012.

During the three and nine months ended April 30, 2011, the Company recorded restructuring charges of approximately $120 million in connection with restructuring related to the Company’s consumer product lines, most notably exiting the Flip Video camera product line, which were recorded in cost of sales and not included in the preceding table.

 

12

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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 28,
2012 		    July 30,
2011 		 

Inventories:

    

Raw materials

   $ 114      $ 219   

Work in process

     37        52   

Finished goods:

    

Distributor inventory and deferred cost of sales

     629        631   

Manufactured finished goods

     437        331   
  

 

 

   

 

 

 

Total finished goods

     1,066        962   
  

 

 

   

 

 

 

Service-related spares

     202        182   

Demonstration systems

     78        71   
  

 

 

   

 

 

 

Total

   $ 1,497      $ 1,486   
  

 

 

   

 

 

 

Property and equipment, net:

    

Land, buildings, and building & leasehold improvements

   $ 4,547      $ 4,760   

Computer equipment and related software

     1,454        1,429   

Production, engineering, and other equipment

     5,286        5,093   

Operating lease assets (1)

     291        293   

Furniture and fixtures

     489        491   
  

 

 

   

 

 

 
     12,067        12,066   

Less accumulated depreciation and amortization (1)

     (8,433 )      (8,150 ) 
  

 

 

   

 

 

 

Total

   $ 3,634      $ 3,916   
  

 

 

   

 

 

 

 

(1)         Accumulated depreciation related to operating lease assets was $176 and $169 as of April 28, 2012 and July 30, 2011, respectively.

            

 

Other assets:

    

Deferred tax assets

   $ 2,063      $ 1,864   

Investments in privately held companies

     841        796   

Other

     746        441   
  

 

 

   

 

 

 

Total

   $ 3,650      $ 3,101   
  

 

 

   

 

 

 

Deferred revenue:

    

Service

   $ 8,778      $ 8,521   

Product:

    

Unrecognized revenue on product shipments and other deferred revenue

     2,943        3,003   

Cash receipts related to unrecognized revenue from two-tier distributors

     927        683   
  

 

 

   

 

 

 

Total product deferred revenue

     3,870        3,686   
  

 

 

   

 

 

 

Total

   $ 12,648      $ 12,207   
  

 

 

   

 

 

 

Reported as:

    

Current

   $ 8,568      $ 8,025   

Noncurrent

     4,080        4,182   
  

 

 

   

 

 

 

Total

   $ 12,648      $ 12,207   
  

 

 

   

 

 

 

 

13

Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

7. Financing Receivables and Guarantees

(a) Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.

A summary of the Company’s financing receivables is presented as follows (in millions):

 

April 28, 2012

   Lease
Receivables 		    Loan
Receivables 		    Financed Service
Contracts & Other 		    Total  Financing
Receivables 		 

Gross

   $ 3,406      $ 1,827      $ 2,628      $ 7,861   

Unearned income

     (253 )     —          —          (253 )

Allowance for credit loss

     (252 )     (118 )     (11 )     (381 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

   $ 2,901      $ 1,709      $ 2,617      $ 7,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reported as:

        

Current

   $ 1,192      $ 1,029      $ 1,488      $ 3,709   

Noncurrent

     1,709        680        1,129        3,518   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

   $ 2,901      $ 1,709      $ 2,617      $ 7,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

July 30, 2011

   Lease
Receivables 		    Loan
Receivables 		    Financed Service
Contracts & Other 		    Total  Financing
Receivables 		 

Gross

   $ 3,111      $ 1,468      $ 2,637      $ 7,216   

Unearned income

     (250 )     —          —          (250 )

Allowance for credit loss

     (237 )     (103 )      (27 )      (367 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

   $ 2,624      $ 1,365      $ 2,610      $ 6,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reported as:

        

Current

   $ 1,087      $ 673      $ 1,351      $ 3,111   

Noncurrent

     1,537        692        1,259        3,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total, net

   $ 2,624      $ 1,365      $ 2,610      $ 6,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

As of April 28, 2012 and July 30, 2011, the deferred service revenue related to the financed service contracts and other was $1,888 million and $2,044 million, respectively.

Contractual maturities of the gross lease receivables at April 28, 2012 are summarized as follows (in millions):

 

Fiscal Year

   Amount  

2012 (remaining three months)

   $ 430   

2013

     1,290   

2014

     908   

2015

     514   

2016

     217   

Thereafter

     47   
  

 

 

 

Total

   $ 3,406   
  

 

 

 

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

 

14

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(b) Credit Quality of Financing Receivables

Financing receivables categorized by the Company’s internal credit risk rating as of April 28, 2012 and July 30, 2011 are summarized as follows (in millions):

 

     INTERNAL CREDIT RISK
RATING 		        

April 28, 2012

   1 to 4      5 to 6      7 and Higher      Total      Residual
Value 		     Gross Receivables,
Net of Unearned
Income 		 

Lease receivables

   $ 1,535       $ 1,302       $ 26       $ 2,863       $ 290       $ 3,153   

Loan receivables

     830         942         55         1,827         —           1,827   

Financed service contracts & other

     1,593         977         58         2,628         —           2,628   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,958       $ 3,221       $ 139       $ 7,318       $ 290       $ 7,608   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     INTERNAL CREDIT RISK
RATING 		                      

July 30, 2011

   1 to 4      5 to 6      7 and Higher      Total      Residual
Value 		     Gross Receivables,
Net of Unearned
Income 		 

Lease receivables

   $ 1,249       $ 1,275       $ 41       $ 2,565       $ 296       $ 2,861   

Loan receivables

     662         767         39         1,468         —           1,468   

Financed service contracts & other

     1,623         958         56         2,637         —           2,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,534       $ 3,000       $ 136       $ 6,670       $ 296       $ 6,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other. Effective in the second quarter of fiscal 2012, the Company combined its financing receivables into a single class as the two prior classes, Established Markets and Growth Markets, now exhibit similar risk characteristics as reflected by the Company’s historical losses. The Company has reclassified applicable financing receivables data for the prior periods presented to conform to the current period’s presentation. In addition, effective in the second quarter of fiscal 2012, the Company also refined its methodology for calculating its allowance for financing receivables as discussed under (c) below, Allowance for Credit Loss Rollforward.

The 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 and constitute a relatively small portion of the Company’s financing receivables.

In circumstances when collectability 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 28, 2012 and July 30, 2011 were $2,484 million and $2,793 million, respectively, and they were associated with financing receivables (net of unearned income) of $7,608 million and $6,966 million as of their respective period ends. The losses that the Company has incurred historically as well as in the periods presented with respect to its financing receivables have been immaterial and consistent with the performance of an investment-grade portfolio. The Company did not modify any financing receivables during the periods presented.

 

15

Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The following tables present the aging analysis of financing receivables as of April 28, 2012 and July 30, 2011 (in millions):

 

     DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED) 		                             

April 28, 2012

   31-60      61-90      91+      Total
Past Due 		     Current      Gross Receivables,
Net of Unearned
Income 		     Non-
Accrual
Financing
Receivables 		     Impaired
Financing
Receivables 		 

Lease receivables

   $ 134       $ 76       $ 221       $ 431       $ 2,722       $ 3,153       $ 21       $ 13   

Loan receivables

     14         10         6         30         1,797         1,827         9         8   

Financed service contracts & other

     101         70         435            606         2,022         2,628         14         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 249       $ 156       $ 662       $ 1,067       $ 6,541       $ 7,608       $ 44       $ 29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED) 		                             

July 30, 2011

   31-60      61-90      91+      Total
Past Due 		     Current      Gross Receivables,
Net of Unearned
Income 		     Non-
Accrual
Financing
Receivables 		     Impaired
Financing
Receivables 		 

Lease receivables

   $ 89       $ 35       $ 152       $ 276       $ 2,585       $ 2,861       $ 34       $ 24   

Loan receivables

     8         7         21         36         1,432         1,468         4         4   

Financed service contracts & other

     68         33         265         366         2,271         2,637         17         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 165       $ 75       $ 438       $    678       $ 6,288       $ 6,966       $ 55       $ 34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables are presented by contract and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The preceding aging tables exclude pending adjustments on billed tax assessment in certain international markets. The balances of either unbilled or current financing receivables included in the category of greater than 90 days past due for lease receivables, loan receivables, and financed service contracts and other were, respectively, $184 million, $2 million, and $371 million as of April 28, 2012; and were, respectively, $116 million, $15 million, and $230 million as of July 30, 2011.

As of April 28, 2012, the Company had financing receivables of $99 million, net of unbilled or current receivables from the same contract, that were in the category for greater than 90 days past due but remained on accrual status. Such balance was $50 million as of July 30, 2011. A financing receivable may be placed on non-accrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.

 

16

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(c) Allowance for Credit Loss Rollforward

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

 

Allowance for Credit Loss

   Lease
Receivables 		    Loan
Receivables 		    Financed Service
Contracts & Other 		    Total  

BALANCE AT JULY 30, 2011

   $ 237      $ 103      $ 27      $ 367   

Provisions

     2        5        2        9   

Foreign exchange and other

     (6 )     (5 )     —          (11 )
  

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT OCTOBER 29, 2011

     233        103        29        365   

Provisions

     18        4        (18 )     4   

Foreign exchange and other

     (1 )     3        (2 )     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 28, 2012

     250        110        9        369   

Provisions

     3        7        2        12   

Write-offs, net of recoveries

     (1 )      —          —          (1 ) 

Foreign exchange and other

     —          1        —          1   
  

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT APRIL 28, 2012

   $ 252      $ 118      $ 11      $ 381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross receivables net of unearned income, as of April 28, 2012

   $ 3,153      $ 1,827      $ 2,628      $ 7,608   

 

Allowance for Credit Loss

   Lease
Receivables 		    Loan
Receivables 		    Financed Service
Contracts & Other 		    Total  

BALANCE AT JULY 31, 2010

   $ 207      $ 73      $ 21      $ 301   

Provisions

     6        (15 )     3        (6 )

Write offs, net of recoveries

     (1 )     —          (1 )      (2 )

Foreign exchange and other

     20        22        —          42   
  

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT OCTOBER 30, 2010

     232        80        23        335   

Provisions

     15        24        4        43   

Foreign exchange and other

     (14 )     (20 )     —          (34 )
  

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 29, 2011

     233        84        27        344   

Provisions

     3        26        (2 )      27   

Write-offs, net of recoveries

     (5 )      (2 )     (1 )     (8 ) 

Foreign exchange and other

     5        3        1        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT APRIL 30, 2011

   $ 236      $ 111      $ 25      $ 372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross receivables net of unearned income, as of April 30, 2011

   $ 2,648      $ 1,373      $ 2,495      $ 6,516   

When determining the allowances for credit loss, financing receivables are evaluated on an individual or a collective basis. When evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis, the Company considers historical experience, credit quality, age of the receivable balances, and economic conditions that may affect a 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, are assessed at the customer level and will be fully reserved. Typically, the Company considers receivables with a risk rating of 8 or higher to be impaired. Financing receivables that were individually evaluated for impairment during the periods presented were not material and therefore are not presented separately in the preceding tables.

The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. Effective at the beginning of the second quarter of fiscal 2012, the Company refined its methodology for determining the portion of its allowance for credit loss that is evaluated on a collective basis. The refinement consists of more systematically giving effect to economic conditions, concentration of risk and correlation. The Company also began to use expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default. Previously the Company used only historical loss rates published by the same third-party credit-rating agency. These refinements are intended to better identify changes in macroeconomic conditions and credit risk. There was not a material change to the Company’s total allowance for credit loss related to financing receivables as a result of these methodology refinements. See the Company’s Annual Report on Form 10-K for the fiscal year ended July 30, 2011 for a discussion of the methodology applied in previous periods.

 

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(d) Financing Guarantees

In the ordinary course of business, the Company provides financing guarantees for various third-party financing arrangements extended to channel partners and end-user customers. Payments under these financing guarantee arrangements were not material for the periods presented.

Channel Partner Financing Guarantees The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $5.2 billion and $4.4 billion for the three months ended April 28, 2012 and April 30, 2011, respectively. The volume of channel partner financing was $15.9 billion and $13.4 billion for the nine months ended April 28, 2012 and April 30, 2011, respectively. The balance of the channel partner financing subject to guarantees was $1.3 billion as of April 28, 2012 and $1.4 billion as of July 30, 2011.

End-User Financing Guarantees The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans that typically have terms of up to three years. The volume of financing provided by third parties for leases and loans which the Company had provided guarantees was $99 million and $45 million for the three months ended April 28, 2012 and April 30, 2011, respectively, and was $194 million and $153 million for the nine months ended April 28, 2012 and April 30, 2011, respectively.

Financing Guarantee Summary The aggregate amount of financing guarantees outstanding at April 28, 2012 and July 30, 2011, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):

 

     April 28,
2012 		    July 30,
2011 		 

Maximum potential future payments relating to financing guarantees:

    

Channel partner

   $ 283      $ 336   

End user

     258        277   
  

 

 

   

 

 

 

Total

   $ 541      $ 613   
  

 

 

   

 

 

 

Deferred revenue associated with financing guarantees:

    

Channel partner

   $ (209 )   $ (248 )

End user

     (224 )     (248 )
  

 

 

   

 

 

 

Total

   $ (433 )   $ (496 )
  

 

 

   

 

 

 

Maximum potential future payments relating to financing guarantees, net of associated deferred revenue

   $ 108      $ 117   
  

 

 

   

 

 

 

 

8. Investments

(a) Summary of Available-for-Sale Investments

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

 

April 28, 2012

   Amortized
Cost 		     Gross
Unrealized
Gains 		     Gross
Unrealized
Losses 		    Fair
Value 		 

Fixed income securities:

          

U.S. government securities

   $ 25,118       $ 41       $ (2 )   $ 25,157   

U.S. government agency securities

     6,884         24         —          6,908   

Non-U.S. government and agency securities

     2,219         8         —          2,227   

Corporate debt securities

     6,080         57         (6 )     6,131   

Asset-backed securities

     16         —           (2 )     14   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed income securities

     40,317         130         (10 )     40,437   

Publicly traded equity securities

     826         692         (4 )     1,514   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 41,143       $ 822       $ (14 )   $ 41,951   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

18

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

July 30, 2011

   Amortized
Cost 		     Gross
Unrealized
Gains 		     Gross
Unrealized
Losses 		    Fair
Value 		 

Fixed income securities:

          

U.S. government securities

   $ 19,087       $ 52       $ —        $ 19,139   

U.S. government agency securities

     8,742         35         (1 )      8,776   

Non-U.S. government and agency securities

     3,119         14         (1 )      3,132   

Corporate debt securities

     4,333         65         (4 )     4,394   

Asset-backed securities

     120         5         (4 )     121   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed income securities

     35,401         171         (10 )     35,562   

Publicly traded equity securities

     734         639         (12 )     1,361   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 36,135       $ 810       $ (22 )   $ 36,923   
  

 

 

    

 

 

    

 

 

   

 

 

 

U.S. government agency securities include corporate debt securities that are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) while non-U.S. government and agency securities include agency and corporate debt securities that are guaranteed by non-U.S. governments.

(b) Gains and Losses on Available-for-Sale Investments

The following table presents the gross realized gains and gross realized losses related to the Company’s available-for-sale investments (in millions):

 

       Three Months Ended     Nine Months Ended  
       April 28,
2012 		    April 30,
2011 		    April 28,
2012 		    April 30,
2011 		 

Gross realized gains

   $ 118      $ 107      $ 542      $ 272   

Gross realized losses

     (88 )      (58 )      (466 )      (116 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 30      $ 49      $ 76      $ 156   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

       Three Months Ended     Nine Months Ended  
       April 28,
2012 		    April 30,
2011 		    April 28,
2012 		    April 30,
2011 		 

Net gains on investments in publicly traded equity securities

   $   15      $   42      $   30      $ 72   

Net gains on investments in fixed income securities

     15        7        46        84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 30      $ 49      $ 76      $ 156   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment charges on available-for-sale investments were not material for the periods presented.

The following table summarizes the activity related to credit losses for fixed income securities (in millions):

 

Nine Months Ended

   April 28, 2012     April 30, 2011  

Balance at beginning of period

   $ (23 )   $ (95 )

Sales of other-than-temporarily impaired fixed income securities

     22        52   
  

 

 

   

 

 

 

Balance at end of period

   $ (1 )   $ (43 )
  

 

 

   

 

 

 

 

19

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at April 28, 2012 and July 30, 2011 (in millions):

 

       UNREALIZED LOSSES
LESS THAN 12 MONTHS 		    UNREALIZED LOSSES
12 MONTHS OR GREATER 		    TOTAL  

April 28, 2012

   Fair Value      Gross
Unrealized
Losses 		    Fair Value      Gross
Unrealized
Losses 		    Fair
Value 		     Gross
Unrealized
Losses 		 

Fixed income securities:

               

U.S. government securities  

   $ 6,756       $ (2 )    $ —         $ —        $ 6,756       $ (2 ) 

Corporate debt securities

     1,718         (6 )      21         —          1,739         (6 ) 

Asset-backed securities

     —           —          14         (2 )     14         (2 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed income securities

     8,474         (8 )      35         (2 )      8,509         (10 ) 

Publicly traded equity securities

     42         (4 )      1        —          43         (4 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 8,516       $ (12 )    $ 36       $ (2 )    $ 8,552       $ (14 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

       UNREALIZED LOSSES
LESS THAN 12 MONTHS 		    UNREALIZED LOSSES
12 MONTHS OR GREATER 		    TOTAL  

July 30, 2011

   Fair Value      Gross
Unrealized
Losses 		    Fair Value      Gross
Unrealized
Losses 		    Fair
Value 		     Gross
Unrealized
Losses 		 

Fixed income securities:

               

U.S. government agency securities

   $ 2,310       $ (1 )    $ —         $ —        $ 2,310       $ (1 )

Non-U.S. government and agency securities

     875         (1 )      —           —          875         (1 ) 

Corporate debt securities

     548         (2 )      56         (2 )      604         (4 ) 

Asset-backed securities

     —           —          105         (4 )     105         (4 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed income securities

     3,733         (4 )      161         (6 )      3,894         (10 ) 

Publicly traded equity securities

     112         (12 )      —           —          112         (12 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,845       $ (16 )    $ 161       $ (6 )    $ 4,006       $ (22 ) 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of April 28, 2012, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of April 28, 2012, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three and nine months ended April 28, 2012.

The Company has evaluated its publicly traded equity securities as of April 28, 2012 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.

(c) Maturities of Fixed Income Securities

The following table summarizes the maturities of the Company’s fixed income securities at April 28, 2012 (in millions):

 

     Amortized Cost      Fair Value  

Less than 1 year

   $ 18,983       $ 19,005   

Due in 1 to 2 years

     13,046         13,091   

Due in 2 to 5 years

     8,175         8,226   

Due after 5 years

     113         115   
  

 

 

    

 

 

 

Total

   $ 40,317       $ 40,437   
  

 

 

    

 

 

 

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

 

20

Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(d) Securities Lending

The Company periodically engages in securities lending activities with certain of its available-for-sale investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for the nine months ended April 28, 2012 was approximately $0.4 billion. The average daily balance of securities lending for the nine months ended April 30, 2011 was approximately $1.9 billion. The Company requires collateral equal to at least 102% of the fair market value of the loaned security in the form of cash or liquid, high-quality assets. The Company engages in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify the Company against any collateral losses. The Company did not experience any losses in connection with the secured lending of securities during the periods presented. As of April 28, 2012 and July 30, 2011, the Company had no outstanding securities lending transactions.

 

9. Fair Value

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability.

(a) Fair Value Hierarchy

The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2  applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

21

Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(b) Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of April 28, 2012 and July 30, 2011 were as follows (in millions):

 

     APRIL 28, 2012      JULY 30, 2011  
     FAIR VALUE MEASUREMENTS      FAIR VALUE MEASUREMENTS  
     Level 1      Level 2      Level 3      Total
Balance 		     Level 1      Level 2      Level 3      Total
Balance 		 

Assets

                       

Cash equivalents:

                       

Money market funds

   $ 4,293       $ —         $ —         $ 4,293       $ 5,852       $ —         $ —         $ 5,852   

U.S. government agency securities

     —           —           —           —           —           1         —           1   

Corporate debt securities

     —           12         —           12         —           —           —           —     

Available-for-sale investments:

                       

U.S. government securities

     —           25,157         —           25,157         —           19,139         —           19,139   

U.S. government agency securities

     —           6,908         —           6,908         —           8,776         —           8,776   

Non-U.S. government and agency securities

     —           2,227         —           2,227         —           3,132         —           3,132   

Corporate debt securities

     —           6,131         —           6,131         —           4,394         —           4,394   

Asset-backed securities

     —           14         —           14         —           —           121         121   

Publicly traded equity securities

     1,514         —           —           1,514         1,361         —           —           1,361   

Derivative assets

     —           233         1         234         —           220         2         222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,807       $ 40,682       $ 1       $ 46,490       $ 7,213       $ 35,662       $ 123       $ 42,998   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

                       

Derivative liabilities

   $ —         $ 22       $ —         $ 22       $ —         $ 24       $ —         $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 22       $ —         $ 22       $ —         $ 24       $ —         $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 fixed income securities are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Company’s derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.

Level 3 assets include certain derivative instruments, the values of which are determined based on discounted cash flow models using inputs that the Company could not corroborate with market data. The asset-backed securities were reclassified from Level 3 to Level 2 at January 28, 2012, the end of the Company’s fiscal second quarter, as circumstances indicated an increase in market activity and related market observable data is available for such financial assets.

The following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended April 28, 2012 and April 30, 2011 (in millions):

 

     Asset-Backed
Securities 		    Derivative
Assets 		    Total  

Balance at July 30, 2011

   $ 121      $ 2      $ 123   

Total gains and losses (realized and unrealized):

      

Included in other income, net

     3        —          3   

Included in other comprehensive income

     (3 )     —          (3 )

Sales

     (14 )     (1 )     (15 )

Transfer into Level 2

     (107 )     —          (107 )
  

 

 

   

 

 

   

 

 

 

Balance at April 28, 2012

   $ —        $ 1      $ 1   
  

 

 

   

 

 

   

 

 

 

 

22

Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

     Asset-Backed
Securities 		    Derivative
Assets 		    Total  

Balance at July 31, 2010

   $ 149      $ 3      $ 152   

Total gains and losses (realized and unrealized):

      

Included in other income, net

     3        —          3   

Included in operating expense

     —          (1 )      (1 )

Included in other comprehensive income

     (1 )      —          (1 )

Sales and maturities

     (21 )     —          (21 ) 
  

 

 

   

 

 

   

 

 

 

Balance at April 30, 2011

   $ 130      $ 2      $ 132   
  

 

 

   

 

 

   

 

 

 

Losses attributable to assets still held as of April 30, 2011

   $ —        $ (1 )   $ (1 ) 

(c) Assets Measured at Fair Value on a Nonrecurring Basis

The following tables present the Company’s financial instruments and nonfinancial assets that were measured at fair value on a nonrecurring basis during the indicated periods and the related recognized gains and losses for the periods (in millions):

 

            FAIR VALUE MEASUREMENTS               
     Net Carrying
Value as of
April 28, 2012 		         Level 1              Level 2              Level 3          Total Losses
for the Three Months
Ended
April 28, 2012 		    Total Gains
(Losses)
for the Nine Months
Ended
April 28, 2012 		 

Investments in privately held companies

   $ 17       $ —         $ —         $ 17       $ (15 )    $ (17 )

Property held for sale

   $   52       $ —         $ —         $   52         (76 )      (192 ) 

Gains on assets no longer held as of April 28, 2012

                 —          14   
              

 

 

   

 

 

 

Total losses for nonrecurring measurements

               $ (91 )    $ (195 ) 
              

 

 

   

 

 

 

 

            FAIR VALUE MEASUREMENTS               
     Net Carrying
Value as of
April 30, 2011 		         Level 1              Level 2              Level 3          Total Losses
for the Three Months
Ended
April 30, 2011 		    Total Losses
for the Nine Months
Ended
April 30, 2011 		 

Investments in privately held companies

   $ 11       $ —         $ —         $ 11       $ (1 )    $ (6 )

Purchased intangible assets

   $ —         $ —         $ —         $ —           (9 )      (164 ) 
              

 

 

   

 

 

 

Total losses for nonrecurring measurements

               $ (10 )    $ (170 ) 
              

 

 

   

 

 

 

The assets in the preceding tables were measured at fair value due to events or circumstances the Company identified as having significant impact on their fair value during the respective periods. To arrive at the valuation of these assets, the Company considers any significant changes in the financial metrics and economic variables and also uses third-party valuation reports to assist in the valuation as necessary.

The fair value measurement of the impaired investments was classified as Level 3 because significant unobservable inputs were used in the valuation due to the absence of quoted market prices and inherent lack of liquidity. Significant unobservable inputs, which included financial metrics of comparable private and public companies, financial condition and near-term prospects of the investees, recent financing activities of the investee, and the investee’s capital structure as well as other economic variables, reflected the assumptions market participants would use in pricing these assets. The impairment charges, representing the difference between the cost and the fair value as a result of the evaluation, were recorded to other income, net.

The fair value of purchased intangible assets measured at fair value on a nonrecurring basis was categorized as Level 3 due to the use of significant unobservable inputs in the valuation. Significant unobservable inputs that were used included expected revenues and net income related to the assets and the expected life of the assets. The difference between the estimated fair value and the carrying value of the assets was recorded as an impairment charge. For the three and nine months ended April 30, 2011, such impairment charges were recorded in operating expenses and cost of sales as appropriate.

 

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The fair value of property held for sale was measured with the assistance of third-party valuation models that used comparable property values in less active markets. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation report. The impairment charges as a result of the valuations, which represented the difference between the fair value and the carrying amount of the assets held for sale, were included in G&A expenses.

(d) Other Fair Value Disclosures

As of April 28, 2012, the carrying value of the Company’s investments in privately held companies that were accounted for under the cost method was $245 million. It was not practicable to estimate the fair value of this portfolio.

The fair value of the Company’s short-term loan receivables and financed service contracts approximates their carrying value due to their short duration.

The aggregate carrying value of the Company’s long-term loan receivables and financed service contracts and other as of April 28, 2012 was $1.8 billion with an estimated fair value that approximates the carrying value. The Company uses significant unobservable inputs in determining the discounted cash flows for the assets to estimate the fair value of its long-term loan receivables and financed service contracts and therefore they are categorized as Level 3.

As of April 28, 2012, the fair value of the Company’s long-term debt was $18.2 billion with a carrying amount of $16.3 billion. The fair value of the long-term debt is determined based on observable market prices in a less active market and is categorized as Level 2 in the fair value hierarchy.

 

10. Borrowings

(a) Short-Term Debt

The following table summarizes the Company’s short-term debt (in millions, except percentages):

 

     April 28, 2012     July 30, 2011  
     Amount      Weighted-Average
Interest Rate 		    Amount      Weighted-Average
Interest Rate 		 

Commercial paper

   $ —           —        $ 500         0.14  %

Other notes and borrowings

     83         5.88 %     88         4.59  % 
  

 

 

      

 

 

    

Total short-term debt

   $ 83         $ 588      
  

 

 

      

 

 

    

In fiscal 2011, the Company established a short-term debt financing program of up to $3.0 billion through the issuance of commercial paper notes. The Company uses the proceeds from the issuance of commercial paper notes for general corporate purposes. The Company had no commercial paper outstanding as of April 28, 2012.

Other notes and borrowings in the preceding table consist of notes and credit facilities established with a number of financial institutions that are available to certain foreign subsidiaries of the Company. These notes and credit facilities are subject to various terms and foreign currency market interest rates pursuant to individual financial arrangements between the financing institution and the applicable foreign subsidiary.

As of April 28, 2012, the estimated fair value of the short-term debt approximates its carrying value due to the short maturities.

 

24

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(b) Long-Term Debt

The following table summarizes the Company’s long-term debt (in millions, except percentages):

 

     April 28, 2012     July 30, 2011  
     Amount     Effective Rate     Amount     Effective Rate  

Senior Notes:

        

Floating-rate notes, due 2014

   $ 1,250        0.82  %   $ 1,250        0.60  %

1.625% fixed-rate notes, due 2014

     2,000        0.80  %     2,000        0.58  %

2.90% fixed-rate notes, due 2014

     500        3.11  %     500        3.11  %

5.50% fixed-rate notes, due 2016

     3,000        3.17  %     3,000        3.06  %

3.15% fixed-rate notes, due 2017

     750        1.04  %     750        0.81  %

4.95% fixed-rate notes, due 2019

     2,000        5.08  %     2,000        5.08  %

4.45% fixed-rate notes, due 2020

     2,500        4.50  %      2,500        4.50  % 

5.90% fixed-rate notes, due 2039

     2,000        6.11  %     2,000        6.11  %

5.50% fixed-rate notes, due 2040

     2,000        5.67  %      2,000        5.67  % 
  

 

 

     

 

 

   

Total

     16,000          16,000     

Other long-term debt

     10        0.19  %      —          —     

Unaccreted discount

     (70 )        (73 )   

Hedge accounting adjustment

     346          307     
  

 

 

     

 

 

   

Total long-term debt

   $ 16,286        $ 16,234     
  

 

 

     

 

 

   

To achieve its interest rate risk management objectives, the Company entered into interest rate swaps with an aggregate notional amount of $4.25 billion designated as fair value hedges of certain fixed-rate senior notes. In effect, these swaps convert the fixed interest rates of the fixed-rate notes to floating interest rates based on the London InterBank Offered Rate (“LIBOR”). The gains and losses related to changes in the fair value of the interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest rates. See Note 11.

The effective rates for the fixed-rate debt include the interest on the notes, the accretion of the discount, and, if applicable, adjustments related to hedging. Interest is payable semiannually on each class of the senior fixed-rate notes and payable quarterly on the floating-rate notes. Each of the senior fixed-rate notes is redeemable by the Company at any time, subject to a make-whole premium.

The senior notes rank at par with the issued commercial paper notes, as well as any other commercial paper notes that may be issued in the future pursuant to the short-term debt financing program, as discussed earlier under “Short-Term Debt.” As of April 28, 2012, the Company was in compliance with all debt covenants.

Future principal payments for long-term debt as of April 28, 2012 are summarized as follows (in millions):

 

Fiscal Year

   Amount  

2014

   $ 3,260   

2015

     500   

2016

     3,000   

Thereafter

     9,250   
  

 

 

 

Total

   $ 16,010   
  

 

 

 

(c) Credit Facility

On February 17, 2012, the Company entered into a credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on February 17, 2017. Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50%, Bank of America’s “prime rate” as announced from time to time, or one-month LIBOR plus 1.00%, or (ii) LIBOR plus a margin that is based on the Company’s senior debt credit ratings as published by Standard & Poor’s Financial Services, LLC and Moody’s Investors Service, Inc. The credit agreement requires the Company to comply with certain covenants, including that it maintains an interest coverage ratio as defined in the agreement. As of April 28, 2012, the Company was in compliance with all such required covenants, and the Company had not borrowed any funds under the credit facility.

 

25

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The Company may also, upon the agreement of either the then-existing lenders or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $2.0 billion and/or extend the expiration date of the credit facility up to February 17, 2019.

This credit facility replaces the Company’s prior credit facility that was entered into on August 17, 2007, which was terminated in connection with its entering into the new credit facility.

 

11. Derivative Instruments

(a) Summary of Derivative Instruments

The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate, interest rate, and equity price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates, interest rates, and equity prices. The Company’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.

The fair values of the Company’s derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded are summarized as follows (in millions):

 

   

DERIVATIVE ASSETS

   

DERIVATIVE LIABILITIES

 
     

Balance Sheet Line Item

  April 28,
2012 		    July 30, 2011    

Balance Sheet Line Item

  April 28,
2012 		    July 30, 2011  

Derivatives designated as hedging instruments:

           

Foreign currency derivatives

  Other current assets   $ 15      $ 67      Other current liabilities   $ 10      $ 12   

Interest rate derivatives

  Other assets     206        146      Other long-term liabilities     —          —     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total

    $ 221      $ 213        $ 10      $ 12   
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedging instruments:

           

Foreign currency derivatives

  Other current assets   $ 12      $ 7      Other current liabilities   $ 12      $ 12   

Equity derivatives

  Other assets     1        2      Other long-term liabilities     —          —     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total

      13        9          12        12   
   

 

 

   

 

 

     

 

 

   

 

 

 

Total

    $ 234      $ 222        $ 22      $ 24   
   

 

 

   

 

 

     

 

 

   

 

 

 

The effects of the Company’s cash flow hedging instruments on other comprehensive income (OCI) and the Consolidated Statements of Operations are summarized as follows (in millions):

 

$000,000 $000,000 $000,000 $000,000 $000,000

Three Months Ended

     GAINS (LOSSES) RECOGNIZED
IN OCI ON DERIVATIVES
(EFFECTIVE PORTION) 		     GAINS (LOSSES) RECLASSIFIED
FROM AOCI INTO INCOME
(EFFECTIVE PORTION) 		 

Derivatives Designated as Cash

Flow Hedging Instruments

   April 28, 2012      April 30, 2011      Line Item in Statements
of Operations 		   April 28, 2012     April 30, 2011  

Foreign currency derivatives

   $ 11       $ 51       Operating expenses    $ (15 )    $ 28   
         Cost of sales-service      (4 )     5   

Interest rate derivatives

     —           —         Interest expense      1        1   
  

 

 

    

 

 

       

 

 

   

 

 

 

Total

   $ 11       $ 51          $ (18 )    $ 34   
  

 

 

    

 

 

       

 

 

   

 

 

 

 

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CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

$000,000,00 $000,000,00 $000,000,00 $000,000,00 $000,000,00

Nine Months Ended

    GAINS (LOSSES) RECOGNIZED  
IN OCI ON DERIVATIVES
(EFFECTIVE PORTION) 		     GAINS (LOSSES) RECLASSIFIED
FROM AOCI INTO INCOME
(EFFECTIVE PORTION) 		 

Derivatives Designated as Cash
Flow Hedging Instruments

   April 28, 2012     April 30, 2011      Line Item in Statements
of Operations 		   April 28, 2012     April 30, 2011  

Foreign currency derivatives

   $ (83 )    $ 96       Operating expenses    $ (37 )    $ 51   
        Cost of sales-service      (8 )     9   

Interest rate derivatives

     —