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Supplemental Information
In September 2001, the Company's Board of Directors authorized a stock repurchase program. As of July 31, 2010, the Company's Board of Directors had authorized an aggregate repurchase of up to $72 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 12 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 table below (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 |
3,127 | $ | 12,759 | $ | 52,223 | $ | 64,982 | ||||
See Notes to Consolidated Financial Statements.
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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 2010 was a 53-week fiscal year, while fiscal 2009 and 2008 were 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 in the following theaters: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The Emerging Markets theater consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States.
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 (loss), net, as this amount is not material for any of the fiscal years presented.
Certain reclassifications have been made to amounts for prior years in order to conform to the current year's presentation. The Company has evaluated subsequent events through the date that the financial statements were issued.
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2. Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
(b) Available-for-Sale Investments The Company classifies its investments in both fixed income securities and publicly traded equity securities as available-for-sale investments. Fixed income securities primarily consist of U.S. government securities, U.S. agency securities, non-U.S. government and agency securities, corporate debt securities, and asset-backed securities. These available-for-sale investments are held in the custody of several major financial institutions. The specific identification method is used to determine the cost basis of fixed income securities sold. The weighted-average method is used to determine the cost basis of publicly traded equity securities sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments, to the extent the investments are unhedged, are included as a separate component of accumulated other comprehensive income (AOCI), net of tax. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
(c) Other-than-Temporary Impairments on Investments Effective at the beginning of the fourth quarter of fiscal 2009, the Company was required to evaluate its fixed income securities for impairments in connection with an updated accounting standard. Under this updated standard, if the fair value of a debt security is less than its amortized cost, the Company assesses whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If impairment is considered other than temporary based on condition (i) or (ii) described above, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings and the amount relating to all other factors will be recognized in OCI. Upon the adoption of the updated accounting standard, the Company recorded a cumulative effect adjustment of $49 million, which resulted in an increase to the balance of retained earnings with a corresponding decrease to OCI. Prior to the adoption of this accounting standard, the Company recognized impairment charges on fixed income securities using the impairment policy as is currently applied to publicly traded equity securities, as discussed below.
The Company recognizes an impairment charge on publicly traded equity securities when a decline in the fair value of its investments in publicly traded equity securities below the cost basis is judged to be other than temporary. The Company considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has been less than the Company's cost basis, the financial condition and near-term prospects of the issuer, and the Company's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Investments in privately held companies are included in other assets in the Consolidated Balance Sheets and are primarily accounted for using either the cost or equity method. The Company monitors these investments for impairments and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the financial condition and near-term prospects of these companies.
(d) Inventories Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. In addition, the Company records a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of the Company's future demand forecasts consistent with its valuation of excess and obsolete inventory.
(e) Allowance for Doubtful Accounts The allowance for doubtful accounts is based on the Company's assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer's ability to pay.
(f) Financing Receivables and Guarantees The Company provides financing arrangements, including leases, financed service contracts, and loans, for certain qualified end-user customers to build, maintain, and upgrade their networks. Lease receivables primarily represent sales-type and direct-financing leases. Leases and loans have on average a three-year term and are usually collateralized by a security interest in the underlying assets. Financed service contracts also typically have terms of one to three years and primarily relate to technical support services. The Company maintains an allowance for uncollectible financing receivables based on a variety of factors, including the risk rating of the portfolio, macroeconomic conditions, historical experience, and other market factors.
In addition, the Company facilitates third-party financing arrangements for channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of the Company's receivables to the third party. The receivables are derecognized upon transfer, as these transfers qualify as true sales, and the Company receives a payment for the receivables from the third party based on the Company's standard payment terms. 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 Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The Company could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners or end-user customers. Deferred revenue relating to these financing arrangements is recorded in accordance with revenue recognition policies or for the fair value of the financing guarantees.
(g) Depreciation and Amortization Property and equipment are stated at cost, less accumulated depreciation or amortization, whenever applicable. Depreciation and amortization are computed using the straight-line method, generally over the following periods:
| Period | ||
|
Buildings |
25 years | |
|
Building improvements |
10 years | |
|
Furniture and fixtures |
5 years | |
|
Leasehold improvements |
Shorter of remaining lease term or 5 years | |
|
Computer equipment and related software |
30 to 36 months | |
|
Production, engineering, and other equipment |
Up to 5 years | |
|
Operating lease assets |
Based on lease term— generally up to 3 years |
(h) Business Combinations Upon adoption of the revised accounting guidance for business combinations in the first quarter of fiscal 2010, the Company has applied the expanded definition of "business" and "business combination" as prescribed by the revised accounting guidance. Other significant changes in connection with the revised accounting guidance include (i) the recognition of assets acquired, liabilities assumed and noncontrolling interests (including goodwill) measured at fair value at the acquisition date with subsequent changes to the fair value of such assets acquired and liabilities assumed recognized in earnings after the expiration of the measurement period, a period not to exceed 12 months from the acquisition date; (ii) the recognition of acquisition-related expenses and acquisition-related restructuring costs in earnings; and (iii) the capitalization of in-process research and development (IPR&D) at fair value as an indefinite-lived intangible asset that will be assessed for impairment thereafter. Upon completion of development, the underlying R&D intangible asset will be amortized over its estimated useful life.
(i) Goodwill and Purchased Intangible Assets Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. There was no impairment of goodwill identified in fiscal 2010, 2009, or 2008. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to seven years. See below related to the impairment test for purchased intangible assets with finite lives. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired.
(j) Long-Lived Assets Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
(k) Derivative Instruments The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change. The Company records derivative instruments in the statements of cash flows to operating, investing or financing activities consistent with the cash flows of the hedged item.
(l) Foreign Currency Translation Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of AOCI. Income and expense accounts are translated at average exchange rates during the year. Remeasurement adjustments are recorded in other income (loss), net. The effect of foreign currency exchange rates on cash and cash equivalents was not material for any of the years presented.
(m) Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties.
The Company performs ongoing credit evaluations of its customers and, with the exception of certain financing transactions, does not require collateral from its customers. The Company receives certain of its components from sole suppliers. Additionally, the Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for its products. The inability of a contract manufacturer or supplier to fulfill supply requirements of the Company could materially impact future operating results.
(n) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. For hosting arrangements, the Company recognizes revenue based on customer utilization. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years. Advanced services revenue is recognized upon delivery or completion of performance.
The Company uses distributors that stock inventory and typically sell to systems integrators, service providers, and other resellers. In addition, certain products are sold through retail partners. The Company refers to this as its two-tier system of sales to the end customer. Revenue from distributors and retail partners generally is recognized based on a sell-through method using information provided by them. Distributors and retail partners participate in various cooperative marketing and other programs, and the Company maintains estimated accruals and allowances for these programs. The Company accrues for warranty costs, sales returns, and other allowances based on its historical experience. Shipping and handling fees billed to customers are included in net sales, with the associated costs included in cost of sales.
In October 2009, the FASB amended the accounting standards for revenue recognition to remove from the scope of industry-specific software revenue recognition guidance tangible products containing software components and nonsoftware components that function together to deliver the product's essential functionality. In October 2009, the FASB also amended the accounting standards for multiple-deliverable revenue arrangements to:
| (i) | provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how consideration should be allocated; |
| (ii) | require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and |
| (iii) | eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. |
The Company elected to early adopt this accounting guidance at the beginning of its first quarter of fiscal 2010 on a prospective basis for applicable transactions originating or materially modified after July 25, 2009. This guidance does not generally change the units of accounting for the Company's revenue transactions. Most products and services qualify as separate units of accounting and the revenue is recognized when the applicable revenue recognition criteria are met. The Company's arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.
Many of the Company's products have both software and nonsoftware components that function together to deliver the products' essential functionality. The Company's product offerings fall into the following categories: routing, switching, advanced technologies, and other products, the last of which includes emerging technologies items. The Company also provides technical support and advanced services. The Company has a broad customer base that encompasses virtually all types of public and private entities, including enterprise businesses, service providers, commercial customers, and consumers. The Company and its salesforce are not organized by product divisions and the Company's products and services can be sold standalone or together in various combinations across the Company's geographic segments or customer markets. For example, service provider arrangements are typically larger in scale with longer deployment schedules and involve the delivery of a variety of product technologies, including high-end routing, video and network management software, among others, along with technical support and advanced services. The Company's enterprise and commercial arrangements are typically unique for each customer and smaller in scale and may include network infrastructure products such as routers and switches or collaboration technologies such as unified communications and Cisco TelePresence systems products along with technical support services. Consumer products, including Linksys wireless routers and Pure Digital video recorders, are sold in standalone arrangements directly to distributors and retailers without support, as customers generally only require repair or replacement of defective products or parts under warranty.
The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and the technical support services delivered across multiple reporting periods. Another customer may purchase networking products along with advanced service offerings, in which all the elements are delivered within the same reporting period. In addition, distributors and retail partners purchase products or technical support services on a standalone basis for resale to an end user or for purposes of stocking certain products, and these transactions would not result in a multiple element arrangement. For transactions entered into prior to the first quarter of fiscal 2010, the Company primarily recognized revenue based on software revenue recognition guidance. For the vast majority of the Company's arrangements involving multiple deliverables, such as sales of products with services, the entire fee from the arrangement was allocated to each respective element based on its relative selling price, using VSOE. In the limited circumstances when the Company was not able to determine VSOE for all of the deliverables of the arrangement, but was able to obtain VSOE for any undelivered elements, revenue was allocated using the residual method. Under the residual method, the amount of revenue allocated to delivered elements equaled the total arrangement consideration less the aggregate selling price of any undelivered elements, and no revenue was recognized until all elements without VSOE had been delivered. If VSOE of any undelivered items did not exist, revenue from the entire arrangement was initially deferred and recognized at the earlier of (i) delivery of those elements for which VSOE did not exist or (ii) when VSOE could be established. However, in limited cases where technical support services were the only undelivered element without VSOE, the entire arrangement fee was recognized ratably as a single unit of accounting over the technical services contractual period. The residual and ratable revenue recognition methods were generally used in a limited number of arrangements containing advanced and emerging technologies, such as Cisco TelePresence systems products. Several of these technologies are sold as solution offerings, whereas products or services are not sold on a standalone basis.
In many instances, products are sold separately in standalone arrangements as customers may support the products themselves or purchase support on a time-and-materials basis. Advanced services are sometimes sold in standalone engagements such as general consulting, network management, or security advisory projects and technical support services are sold separately through renewals of annual contracts. As a result, for substantially all of the arrangements with multiple deliverables pertaining to routing and switching products and related services, as well as most arrangements containing advanced and emerging technologies, the Company has used and intends to continue using VSOE to allocate the selling price to each deliverable. Consistent with its methodology under previous accounting guidance, the Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups and customer classifications, and other environmental or marketing variables in determining VSOE.
In certain limited instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. When VSOE cannot be established, the Company attempts to establish selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company's go-to-market strategy typically differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products' selling prices are on a standalone basis. Therefore, the Company is typically not able to determine TPE.
When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. ESP is generally used for new or highly customized offerings and solutions or offerings not priced within a narrow range, and it applies to a small proportion of the Company's arrangements with multiple deliverables.
The Company determines ESP for a product or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and formal approval by the Company's management, taking into consideration the go-to-market strategy.
The Company regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material impacts during the fiscal year nor does the Company currently expect a material impact in the near term from changes in VSOE, TPE, or ESP.
Net sales as reported for the fiscal year ended July 31, 2010, and the Company's estimate of the pro forma net sales that would have been reported if the transaction entered into or materially modified during fiscal 2010 were subject to previous accounting guidance, are shown in the following table (in millions):
| FISCAL YEAR ENDED JULY 31, 2010 | ||||||
| As Reported | Pro Forma Basis as if the Previous Accounting Guidance Were in Effect | |||||
|
Net sales |
$ | 40,040 | $ | 39,802 | ||
The estimated impact to net sales of the accounting standard was primarily to net product sales.
The new accounting standards for revenue recognition if applied in the same manner to the year ended July 25, 2009 would not have had a material impact on net sales for that fiscal year. In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on net sales in periods after the initial adoption when applied to multiple-element arrangements based on current go-to-market strategies due to the existence of VSOE across most of the Company's product and service offerings. However, the Company expects that this new accounting guidance will facilitate the Company's efforts to optimize its offerings due to better alignment between the economics of an arrangement and the accounting. This may lead to the Company engaging in new go-to-market practices in the future. In particular, the Company expects that the new accounting standards will enable it to better integrate products and services without VSOE into existing offerings and solutions. As these go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP. As a result, the Company's future revenue recognition for multiple-element arrangements could differ materially from the results in the current period. The Company is currently unable to determine the impact that the newly adopted accounting guidance could have on its revenue as these go-to-market strategies evolve.
The Company's arrangements with multiple deliverables may have a standalone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the nonsoftware deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. In the limited circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purposes of performing this allocation.
(o) Advertising Costs The Company expenses all advertising costs as incurred. Advertising costs included within sales and marketing expenses were approximately $290 million, $165 million, and $195 million for fiscal 2010, 2009 and 2008, respectively.
(p) Share-Based Compensation Expense The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan ("employee stock purchase rights") based on estimated fair values. The fair value of employee stock options is estimated on the date of grant using a lattice-binomial option-pricing model ("lattice-binomial model") and for employee stock purchase rights the Company estimates the fair value using the Black-Scholes model. The Company measures the fair value of restricted stock and restricted stock units as if the awards were vested and issued on the grant date. The value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods. Because share-based compensation expense is based on awards ultimately expected to vest, it has been reduced for forfeitures.
(q) Software Development Costs Software development costs required to be capitalized for software sold, leased, or otherwise marketed have not been material to date. Software development costs required to be capitalized for internal use software have also not been material to date.
(r) Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
(s) Computation of Net Income per Share Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible, are collectively assumed to be used to repurchase shares.
(t) Consolidation of Variable Interest Entities In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company's Consolidated Financial Statements.
(u) Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for the following, among others:
| • |
Revenue recognition |
| • |
Allowances for receivables and sales returns |
| • |
Inventory valuation and liability for purchase commitments with contract manufacturers and suppliers |
| • |
Warranty costs |
| • |
Share-based compensation expense |
| • |
Fair value measurements and other-than-temporary impairments |
| • |
Goodwill and purchased intangible asset impairments |
| • |
Income taxes |
| • |
Loss contingencies |
The actual results experienced by the Company may differ materially from management's estimates.
(v) Recent Accounting Standards or Updates In June 2009, the FASB issued revised guidance for the consolidation of variable interest entities. In February 2010, the FASB issued amendments to the consolidation requirements, exempting certain investment funds from the June 2009 guidance for the consolidation of variable interest entities. The June 2009 guidance for the consolidation of variable interest entities replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and has the obligation to absorb losses or the right to receive benefits from the entity that could be potentially significant to the variable interest entity. The accounting guidance also requires an ongoing reassessment of whether an enterprise is the primary beneficiary and requires additional disclosures about an enterprise's involvement in variable interest entities. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2011. Upon adoption, the application of the revised guidance for the consolidation of variable interest entities did not have a material impact to the Company's Consolidated Financial Statements.
In June 2009, the FASB issued revised guidance for the accounting of transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity, removes the scope exception for qualifying special-purpose entities when applying the accounting guidance related to the consolidation of variable interest entities, changes the requirements for derecognizing financial assets, and requires enhanced disclosure. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2011. Upon adoption, the application of the revised guidance for the accounting of transfers of financial assets did not have a material impact to the Company's Consolidated Financial Statements.
In July 2010, the FASB issued an accounting update to provide guidance to enhance disclosures related to the credit quality of a company's financing receivables portfolio and the associated allowance for credit losses. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its allowance for credit loss with the objective of facilitating users' evaluation of the nature of credit risk inherent in the company's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The revised disclosures as of the end of the reporting period are effective for the Company beginning in the second quarter of fiscal 2011, and the revised disclosures related to activities during the reporting period are effective for the Company beginning in the third quarter of fiscal 2011. The Company is currently evaluating the impact of this accounting update on its financial disclosures.
|
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3. Business Combinations
The Company completed seven business combinations during fiscal 2010. A summary of the more significant acquisitions completed in fiscal 2010 is as follows:
| • |
In December 2009, the Company acquired ScanSafe, Inc. ("ScanSafe"), a provider of hosted web security to help build a borderless network security architecture that combines network and cloud-based services for advanced security enforcement. |
| • |
In December 2009, the Company acquired Starent Networks, Corp. ("Starent"), a provider of IP-based mobile infrastructure for mobile and converged carriers, to enhance the Company's portfolio of products to provide an integrated architecture to offer rich, quality multimedia experiences to mobile subscribers. |
| • |
In April 2010, the Company acquired Tandberg ASA ("Tandberg"), a leader in video communications. With this acquisition, the Company expects that it will be able to combine innovations with multivendor interoperability capabilities to provide a platform significantly more attractive to its customers and partners. |
| • |
In July 2010, the Company acquired CoreOptics Inc. ("CoreOptics"), a designer of digital signal processing solutions for high-speed optical networking applications. |
Allocation of the purchase consideration for business combinations completed in fiscal 2010 is summarized as follows (in millions):
| Shares Issued | Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | |||||||||||||
| Fiscal 2010 | |||||||||||||||||
|
ScanSafe, Inc. |
— | $ | 154 | $ | 2 | $ | 31 | $ | 121 | ||||||||
|
Starent Networks, Corp. |
— | 2,636 | (17 | ) | 1,274 | 1,379 | |||||||||||
|
Tandberg ASA |
— | 3,268 | 17 | 980 | 2,271 | ||||||||||||
|
CoreOptics Inc. |
— | 86 | (2 | ) | 70 | 18 | |||||||||||
|
Other |
— | 42 | 4 | 25 | 13 | ||||||||||||
|
Total |
— | $ | 6,186 | $ | 4 | $ | 2,380 | $ | 3,802 | ||||||||
The total purchase consideration related to the Company's business combinations completed during fiscal 2010 consisted of one, or both, of cash consideration and vested share-based awards assumed. Total cash and cash equivalents acquired from business combinations completed during fiscal 2010 were approximately $760 million.
Pursuant to the revised accounting guidance related to business combinations, transaction costs for the business combinations completed during fiscal 2010 were expensed as incurred. Such transaction costs, totaling $40 million for fiscal 2010, were recorded as G&A expenses. In addition, IPR&D of $199 million for fiscal 2010 has been capitalized at fair value as an intangible asset with an indefinite life (see Note 4) and is assessed for impairment in subsequent periods. Upon completion of development, the underlying R&D intangible asset will be amortized over its estimated useful life. Prior to the adoption of the revised accounting guidance, IPR&D was expensed upon acquisition if it had no alternative future use.
The Company continues to evaluate certain assets and liabilities related to business combinations completed during the period. Additional information, which existed as of the acquisition date but was at that time 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 year ended July 31, 2010 is primarily related to expected synergies. The goodwill is generally not deductible for U.S. federal income tax purposes.
Fiscal 2009
Allocation of the purchase consideration for business combinations completed in fiscal 2009 is summarized as follows (in millions):
| Fiscal 2009 | Shares Issued | Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | IPR&D | |||||||||||||||||||||||||||||||
|
PostPath, Inc. |
— | $ |
|
$ | (10 | ) | $ | 52 | $ | 152 | $ | 3 | |||||||||||||||||||||||||
|
Pure Digital Technologies, Inc. |
27 | 533 | (9 | ) | 191 | 299 | 52 | ||||||||||||||||||||||||||||||
|
Pure Networks, Inc. |
— | 105 | (4 | ) | 30 | 79 | — | ||||||||||||||||||||||||||||||
|
Tidal Software, Inc. |
— | 92 | (3 | ) | 52 | 35 | 8 | ||||||||||||||||||||||||||||||
|
Other |
— | 54 | (2 | ) | 23 | 33 | — | ||||||||||||||||||||||||||||||
|
Total |
27 | $ | 981 | $ | (28 | ) | $ | 348 | $ | 598 | $ | 63 | |||||||||||||||||||||||||
Fiscal 2008
Allocation of the purchase consideration for business combinations completed in fiscal 2008 is summarized as follows (in millions):
| Fiscal 2008 | Shares Issued | Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | IPR&D | ||||||||||||
|
Navini Networks, Inc. |
— | $ | 276 | $ | (4 | ) | $ | 108 | $ | 172 | $ | — | ||||||
|
Securent, Inc. |
— | 75 | (5 | ) | 24 | 56 | — | |||||||||||
|
Other |
— | 61 | 7 | 14 | 37 | 3 | ||||||||||||
|
Total |
— | $ | 412 | $ | (2 | ) | $ | 146 | $ | 265 | $ | 3 | ||||||
The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for the acquisitions completed during fiscal 2010, 2009, and 2008 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company's financial results.
|
|||
4. Goodwill and Purchased Intangible Assets
(a) Goodwill
The following tables present the goodwill allocated to the Company's reportable segments as of July 31, 2010 and July 25, 2009 and the changes to goodwill during fiscal 2010 and 2009 (in millions):
| Balance at July 25, 2009 |
Acquisitions | Other | Balance at July 31, 2010 | ||||||||||
|
United States and Canada |
$ | 9,512 | $ | 1,802 | $ | (25 | ) | $ | 11,289 | ||||
|
European Markets |
1,669 | 1,089 | (29 | ) | 2,729 | ||||||||
|
Emerging Markets |
437 | 324 | 1 | 762 | |||||||||
|
Asia Pacific |
506 | 473 | — | 979 | |||||||||
|
Japan |
801 | 114 | — | 915 | |||||||||
|
Total |
$ | 12,925 | $ | 3,802 | $ | (53) | $ | 16,674 | |||||
| Balance at July 26, 2008 |
Acquisitions | Other | Balance at July 25, 2009 | ||||||||||
|
United States and Canada |
$ | 9,059 | $ | 467 | $ | (14 | ) | $ | 9,512 | ||||
|
European Markets |
1,650 | 65 | (46 | ) | 1,669 | ||||||||
|
Emerging Markets |
405 | 37 | (5 | ) | 437 | ||||||||
|
Asia Pacific |
479 | 27 | — | 506 | |||||||||
|
Japan |
799 | 2 | — | 801 | |||||||||
|
Total |
$ | 12,392 | $ | 598 | $ | (65) | $ | 12,925 | |||||
In the preceding tables, "Other" primarily includes foreign currency translation and purchase accounting adjustments.
(b) Purchased Intangible Assets
The following tables present details of the intangible assets acquired through business combinations during fiscal 2010 and 2009 (in millions, except years):
| FINITE LIVES | INDEFINITE LIVES |
||||||||||||||||||||||||||
| TECHNOLOGY | CUSTOMER RELATIONSHIPS | OTHER | IPR&D | TOTAL | |||||||||||||||||||||||
| Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | Amount | ||||||||||||||||||||
| Fiscal 2010 | |||||||||||||||||||||||||||
|
ScanSafe, Inc. |
5.0 | $ | 14 | 6.0 | $ | 11 | 3.0 | $ | 6 | $ | — | $ | 31 | ||||||||||||||
|
Starent Networks, Corp. |
6.0 | 691 | 7.0 | 434 | 0.3 | 35 | 114 | 1,274 | |||||||||||||||||||
|
Tandberg ASA |
5.0 | 709 | 7.0 | 179 | 3.0 | 21 | 71 | 980 | |||||||||||||||||||
|
CoreOptics Inc. |
4.0 | 60 | 1.0 | 1 | 1.0 | 1 | 8 | 70 | |||||||||||||||||||
|
Other |
4.0 | 8 | 5.0 | 11 | — | — | 6 | 25 | |||||||||||||||||||
|
Total |
$ | 1,482 | $ | 636 | $ | 63 | $ | 199 | $ | 2,380 | |||||||||||||||||
| FINITE LIVES | ||||||||||||||||||||||||||
| TECHNOLOGY | CUSTOMER RELATIONSHIPS | OTHER | TOTAL | |||||||||||||||||||||||
| Fiscal 2009 | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | |||||||||||||||||||
|
PostPath, Inc. |
6.0 | $ | 52 | — | $ | — | — | $ | — | $ | 52 | |||||||||||||||
|
Pure Digital Technologies, Inc. |
5.0 | 90 | 5.0 | 58 | 4.7 | 43 | 191 | |||||||||||||||||||
|
Pure Networks, Inc. |
4.0 | 27 | 3.0 | 3 | — | — | 30 | |||||||||||||||||||
|
Tidal Software, Inc. |
5.0 | 28 | 6.8 | 22 | 1.6 | 2 | 52 | |||||||||||||||||||
|
Other |
6.0 | 18 | 3.7 | 5 | — | — | 23 | |||||||||||||||||||
|
Total |
$ | 215 | $ | 88 | $ | 45 | $ | 348 | ||||||||||||||||||
The following tables present details of the Company's purchased intangible assets (in millions):
| July 31, 2010 | Gross | Accumulated Amortization |
Net | |||||||
|
Purchased intangible assets with finite lives: |
||||||||||
|
Technology |
$ | 2,396 | $ | (686 | ) | $ | 1,710 | |||
|
Customer relationships |
2,326 | (1,045 | ) | 1,281 | ||||||
|
Other |
172 | (85 | ) | 87 | ||||||
|
Total purchased intangible assets with finite lives |
4,894 | (1,816 | ) | 3,078 | ||||||
|
IPR&D, with indefinite lives |
196 | — | 196 | |||||||
|
Total |
$ | 5,090 | $ | (1,816 | ) | $ | 3,274 | |||
| July 25, 2009 | Gross | Accumulated Amortization |
Net | ||||||
|
Purchased intangible assets with finite lives: |
|||||||||
|
Technology |
$ | 1,469 | $ | (803) | $ | 666 | |||
|
Customer relationships |
1,730 | (768) | 962 | ||||||
|
Other |
184 | (110) | 74 | ||||||
|
Total |
$ | 3,383 | $ | (1,681) | $ | 1,702 | |||
Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses.
The following table presents the amortization of purchased intangible assets (in millions):
| Years Ended | July 31, 2010 | July 25, 2009 | July 26, 2008 | ||||||
|
Amortization of purchased intangible assets: |
|||||||||
|
Cost of sales |
$ | 277 | $ | 211 | $ | 233 | |||
|
Operating expenses |
491 | 533 | 499 | ||||||
|
Total |
$ | 768 | $ | 744 | $ | 732 | |||
The Company recorded impairment charges of $28 million, $95 million and $33 million during fiscal 2010, 2009 and 2008, respectively, related to its purchased intangible assets. These impairment charges were due to reductions in expected future cash flows related to certain technologies and customer relationships and were recorded as amortization of purchased intangible assets.
For purchased intangible assets with finite lives, the estimated future amortization expense as of July 31, 2010 is as follows (in millions):
| Fiscal Year | Amount | ||
|
2011 |
$ | 836 | |
|
2012 |
720 | ||
|
2013 |
603 | ||
|
2014 |
420 | ||
|
2015 |
317 | ||
|
Thereafter |
182 | ||
|
Total |
$ | 3,078 | |
|
|||
5. Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
| July 31, 2010 | July 25, 2009 | |||||||
|
Inventories: |
||||||||
|
Raw materials |
$ | 217 | $ | 165 | ||||
|
Work in process |
50 | 33 | ||||||
|
Finished goods: |
||||||||
|
Distributor inventory and deferred cost of sales |
587 | 382 | ||||||
|
Manufactured finished goods |
260 | 310 | ||||||
|
Total finished goods |
847 | 692 | ||||||
|
Service-related spares |
161 | 151 | ||||||
|
Demonstration systems |
52 | 33 | ||||||
|
Total |
$ | 1,327 | $ | 1,074 | ||||
|
Property and equipment, net: |
||||||||
|
Land, buildings, and building & leasehold improvements |
$ | 4,470 | $ | 4,618 | ||||
|
Computer equipment and related software |
1,405 | 1,823 | ||||||
|
Production, engineering, and other equipment |
4,702 | 5,075 | ||||||
|
Operating lease assets |
255 | 227 | ||||||
|
Furniture and fixtures |
476 | 465 | ||||||
| 11,308 | 12,208 | |||||||
|
Less accumulated depreciation and amortization |
(7,367 | ) | (8,165 | ) | ||||
|
Total |
$ | 3,941 | $ | 4,043 | ||||
|
Other assets: |
||||||||
|
Deferred tax assets |
$ | 2,079 | $ | 2,122 | ||||
|
Investments in privately held companies |
756 | 709 | ||||||
|
Lease receivables, net(1) |
1,176 | 966 | ||||||
|
Financed service contracts, net(1) |
763 | 676 | ||||||
|
Loan receivables, net(1) |
675 | 537 | ||||||
|
Other |
371 | 271 | ||||||
|
Total |
$ | 5,820 | $ | 5,281 | ||||
|
Deferred revenue: |
||||||||
|
Service |
$ | 7,428 | $ | 6,496 | ||||
|
Product: |
||||||||
|
Unrecognized revenue on product shipments and other deferred revenue |
2,788 | 2,490 | ||||||
|
Cash receipts related to unrecognized revenue from two-tier distributors |
867 | 407 | ||||||
|
Total product deferred revenue |
3,655 | 2,897 | ||||||
|
Total |
$ | 11,083 | $ | 9,393 | ||||
|
Reported as: |
||||||||
|
Current |
$ | 7,664 | $ | 6,438 | ||||
|
Noncurrent |
3,419 | 2,955 | ||||||
|
Total |
$ | 11,083 | $ | 9,393 | ||||
(1) Amounts represent the noncurrent portions of the respective balances. See Note 6 for the current portions of the respective balances.
|
|||
6. Financing Receivables and Guarantees
(a) Financing Receivables
Financing receivables primarily consist of lease receivables, financed service contracts and loan receivables. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company's and complementary third-party products. These lease arrangements have terms of on average three years and are generally collateralized by a security interest in the underlying assets. The revenue related to financed service contracts, which is primarily associated with technical support services, is deferred and included in deferred service revenue. The revenue is recognized ratably over the period during which the related services are to be performed, which is typically from one to three years.
A summary of the Company's financing receivables is presented as follows (in millions):
|
Lease |
Financed Service Contracts |
Loan |
Financing |
||||||||||||||
| July 31, 2010 | |||||||||||||||||
|
Gross |
$ | 2,411 | $ | 1,773 | $ | 1,249 | $ | 5,433 | |||||||||
|
Unearned income |
(215 | ) | — | — | (215 | ) | |||||||||||
|
Allowances |
(207 | ) | (21) | (73 | ) | (301 | ) | ||||||||||
|
Total, net |
$ | 1,989 | $ | 1,752 | $ | 1,176 | $ | 4,917 | |||||||||
|
Reported as: |
|||||||||||||||||
|
Current |
$ | 813 | $ | 989 | $ | 501 | $ | 2,303 | |||||||||
|
Noncurrent |
1,176 | 763 | 675 | 2,614 | |||||||||||||
|
Total, net |
$ | 1,989 | $ | 1,752 | $ | 1,176 | $ | 4,917 | |||||||||
| July 25, 2009 | Lease Receivables |
Financed Service Contracts |
Loan Receivables |
Financing Receivables |
||||||||||||
|
Gross |
$ | 1,996 | $ | 1,642 | $ | 861 | $ | 4,499 | ||||||||
|
Unearned income |
(191 | ) | — | — | (191 | ) | ||||||||||
|
Allowances |
(213 | ) | (26 | ) | (88 | ) | (327 | ) | ||||||||
|
Total, net |
$ | 1,592 | $ | 1,616 | $ | 773 | $ | 3,981 | ||||||||
|
Reported as: |
||||||||||||||||
|
Current |
$ | 626 | $ | 940 | $ | 236 | $ | 1,802 | ||||||||
|
Noncurrent |
966 | 676 | 537 | 2,179 | ||||||||||||
|
Total, net |
$ | 1,592 | $ | 1,616 | $ | 773 | $ | 3,981 | ||||||||
Contractual maturities of the gross lease receivables at July 31, 2010 are summarized as follows (in millions):
| Fiscal Year | Amount | ||
|
2011 |
$ | 961 | |
|
2012 |
706 | ||
|
2013 |
454 | ||
|
2014 |
223 | ||
|
2015 |
63 | ||
|
Thereafter |
4 | ||
|
Total |
$ | 2,411 | |
Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.
(b) Financing Guarantees
In the ordinary course of business, the Company provides financing guarantees that are generally for various third-party financing arrangements extended to channel partners and end-user customers.
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 $17.2 billion, $14.2 billion and $14.4 billion for fiscal 2010, 2009, and 2008, respectively. As of July 31, 2010 and July 25, 2009, the balance of the channel partner financing subject to guarantees was $1.4 billion and $1.1 billion, respectively.
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 on which the Company has provided guarantees was $944 million for fiscal 2010 and $1.2 billion for both fiscal 2009 and fiscal 2008.
Financing Guarantee Summary The aggregate amount of financing guarantees outstanding at July 31, 2010 and July 25, 2009, representing the total maximum potential future payments under financing arrangements with third parties, and the related deferred revenue are summarized in the following table (in millions):
| July 31, 2010 | July 25, 2009 | |||||
|
Maximum potential future payments relating to financing guarantees: |
||||||
|
Channel partner |
$ | 448 | $ | 334 | ||
|
End user |
304 | 405 | ||||
|
Total |
$ | 752 | $ | 739 | ||
|
Deferred revenue associated with financing guarantees: |
||||||
|
Channel partner |
$ | 277 | $ | 218 | ||
|
End user |
272 | 378 | ||||
|
Total |
$ | 549 | $ | 596 | ||
|
|||
7. Investments
(a) Summary of Available-for-Sale Investments
The following tables summarize the Company's available-for-sale investments (in millions):
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| July 31, 2010 | |||||||||||||||
|
Fixed income securities: |
|||||||||||||||
|
U.S. government securities |
$ | 16,570 | $ | 42 | $ | — | $ | 16,612 | |||||||
|
U.S. government agency securities(1) |
13,511 | 68 | — | 13,579 | |||||||||||
|
Non-U.S. government and agency securities(2) |
1,452 | 15 | — | 1,467 | |||||||||||
|
Corporate debt securities |
2,179 | 64 | (21 | ) | 2,222 | ||||||||||
|
Asset-backed securities |
145 | 9 | (5 | ) | 149 | ||||||||||
|
Total fixed income securities |
33,857 | 198 | (26 | ) | 34,029 | ||||||||||
|
Publicly traded equity securities |
889 | 411 | (49 | ) | 1,251 | ||||||||||
|
Total |
$ | 34,746 | $ | 609 | $ | (75) | $ | 35,280 | |||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| July 25, 2009 | |||||||||||||||
|
Fixed income securities: |
|||||||||||||||
|
U.S. government securities |
$ | 10,266 | $ | 23 | $ | (5 | ) | $ | 10,284 | ||||||
|
U.S. government agency securities(1) |
15,501 | 104 | (2 | ) | 15,603 | ||||||||||
|
Non-U.S. government and agency securities(2) |
528 | 12 | — | 540 | |||||||||||
|
Corporate debt securities |
1,740 | 51 | (86 | ) | 1,705 | ||||||||||
|
Asset-backed securities |
252 | 5 | (34 | ) | 223 | ||||||||||
|
Total fixed income securities |
28,287 | 195 | (127 | ) | 28,355 | ||||||||||
|
Publicly traded equity securities |
824 | 193 | (89 | ) | 928 | ||||||||||
|
Total |
$ | 29,111 | $ | 388 | $ | (216) | $ | 29,283 | |||||||
(1) Includes corporate securities that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).
(2) Includes agency and corporate securities that are guaranteed by non-U.S. governments.
(b) Gains and Losses on Available-for-Sale Investments
The following tables present the gross and net realized gains and losses related to the Company's available-for-sale investments (in millions):
| Years Ended | July 31, 2010 | July 25, 2009 | July 26, 2008 | |||||||||
|
Gross realized gains |
$ | 279 | $ | 435 | $ | 306 | ||||||
|
Gross realized losses |
(110 | ) | (459 | ) | (197 | ) | ||||||
|
Total |
$ | 169 | $ | (24 | ) | $ | 109 | |||||
| Years Ended | July 31, 2010 | July 25, 2009 | July 26, 2008 | |||||||
|
Net gains on investments in publicly traded equity securities |
$ | 66 | $ | 86 | $ | 88 | ||||
|
Net gains (losses) on investments in fixed income securities |
103 | (110 | ) | 21 | ||||||
|
Total |
$ | 169 | $ | (24 | ) | $ | 109 | |||
There were no impairment charges on available-for-sale investments for the years ended July 31, 2010 and July 26, 2008. For the year ended July 25, 2009, net losses on fixed income securities and net gains on publicly traded equity securities included impairment charges of $219 million and $39 million, respectively. The impairment charges for both types of securities were due to a decline in the fair value of the investments below their cost basis that were judged to be other than temporary and were recorded as a reduction to the amortized cost of the respective investments.
The following table summarizes the activity related to credit losses for fixed income securities (in millions):
| July 31, 2010 | July 25, 2009(1) | |||||||
|
Balance at beginning of fiscal year |
$ | (153 | ) | $ | (159 | ) | ||
|
Sales of other-than-temporarily impaired fixed income securities |
58 | 6 | ||||||
|
Balance at end of fiscal year |
$ | (95 | ) | $ | (153 | ) | ||
(1) The beginning balance for the year ended July 25, 2009 represents the credit loss balance as of April 26, 2009, the date on which the Company adopted the revised accounting guidance related to other-than-temporary impairments on debt securities.
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 July 31, 2010 and July 25, 2009 (in millions):
| UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | |||||||||||||||||||||||
| Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses | ||||||||||||||||||||
| July 31, 2010 | |||||||||||||||||||||||||
|
Fixed income securities: |
|||||||||||||||||||||||||
|
Corporate debt securities |
$ | 140 | $ | (1 | ) | $ | 304 | $ | (20) | $ | 444 | $ | (21) | ||||||||||||
|
Asset-backed securities |
2 | — | 115 | (5) | 117 | (5) | |||||||||||||||||||
|
Total fixed income securities |
142 | (1 | ) | 419 | (25) | 561 | (26) | ||||||||||||||||||
|
Publicly traded equity securities |
168 | (12 | ) | 393 | (37) | 561 | (49) | ||||||||||||||||||
|
Total |
$ | 310 | $ | (13 | ) | $ | 812 | $ | (62) | $ | 1,122 | $ | (75) | ||||||||||||
| UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | |||||||||||||||||||||||
|
July 25, 2009 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
|||||||||||||||||||
|
Fixed income securities: |
|||||||||||||||||||||||||
|
U.S. government securities |
$ | 1,850 | $ | (5 | ) | $ | — | $ | — | $ | 1,850 | $ | (5 | ) | |||||||||||
|
U.S. government agency securities(1) |
1,346 | (2 | ) | — | — | 1,346 | (2 | ) | |||||||||||||||||
|
Non-U.S. government and agency securities(2) |
16 | — | 5 | — | 21 | — | |||||||||||||||||||
|
Corporate debt securities |
123 | (10 | ) | 613 | (76 | ) | 736 | (86 | ) | ||||||||||||||||
|
Asset-backed securities |
41 | (11 | ) | 141 | (23 | ) | 182 | (34 | ) | ||||||||||||||||
|
Total fixed income securities |
3,376 | (28 | ) | 759 | (99 | ) | 4,135 | (127 | ) | ||||||||||||||||
|
Publicly traded equity securities |
25 | (3 | ) | 328 | (86 | ) | 353 | (89 | ) | ||||||||||||||||
|
Total |
$ | 3,401 | $ | (31 | ) | $ | 1,087 | $ | (185 | ) | $ | 4,488 | $ | (216 | ) | ||||||||||
(1) Includes corporate securities that are guaranteed by the FDIC.
(2) Includes agency and corporate securities that are guaranteed by non-U.S. governments.
For fixed income securities that have unrealized losses as of July 31, 2010, 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 July 31, 2010, 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 year ended July 31, 2010.
The Company has evaluated its publicly traded equity securities as of July 31, 2010 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 July 31, 2010 (in millions):
| Amortized Cost |
Fair Value | |||||
|
Less than 1 year |
$ | 24,004 | $ | 24,044 | ||
|
Due in 1 to 2 years |
5,631 | 5,703 | ||||
|
Due in 2 to 5 years |
3,867 | 3,928 | ||||
|
Due after 5 years |
355 | 354 | ||||
|
Total |
$ | 33,857 | $ | 34,029 | ||
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
(d) Securities Lending
The Company periodically engages in securities lending activities with certain of its fixed income securities. These transactions, with a daily balance averaging less than 25% of the Company's total fixed income portfolio, are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. 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 years presented. As of July 31, 2010 and July 25, 2009, the Company had no outstanding securities lending transactions.
|
|||
8. Fair Value
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, 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 recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
(a) Fair Value Hierarchy
The accounting guidance for fair value measurement also 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 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 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 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.
(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 July 31, 2010 and July 25, 2009 were as follows (in millions):
|
JULY 31, 2010 FAIR VALUE MEASUREMENTS |
JULY 25, 2009 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 |
$ | 2,521 | $ | — | $ | — | $ | 2,521 | $ | 4,514 | $ | — | $ | — | $ | 4,514 | ||||||||
|
U.S. government securities |
— | 235 | — | 235 | — | 61 | — | 61 | ||||||||||||||||
|
U.S. government agency securities(1) |
— | 40 | — | 40 | — | 313 | — | 313 | ||||||||||||||||
|
Corporate debt securities |
— | 1 | — | 1 | — | 35 | — | 35 | ||||||||||||||||
|
Available-for-sale investments: |
||||||||||||||||||||||||
|
U.S. government securities |
— | 16,612 | — | 16,612 | — | 10,284 | — | 10,284 | ||||||||||||||||
|
U.S. government agency securities(1) |
— | 13,579 | — | 13,579 | — | 15,603 | — | 15,603 | ||||||||||||||||
|
Non-U.S. government and agency securities(2) |
— | 1,467 | — | 1,467 | 540 | 540 | ||||||||||||||||||
|
Corporate debt securities |
— | 2,222 | — | 2,222 | — | 1,705 | — | 1,705 | ||||||||||||||||
|
Asset-backed securities |
— | — | 149 | 149 | — | — | 223 | 223 | ||||||||||||||||
|
Publicly traded equity securities |
1,251 | — | — | 1,251 | 928 | — | — | 928 | ||||||||||||||||
|
Derivative assets |
— | 160 | 3 | 163 | — | 109 | 4 | 113 | ||||||||||||||||
|
Total |
$ | 3,772 | $ | 34,316 | $ | 152 | $ | 38,240 | $ | 5,442 | $ | 28,650 | $ | 227 | $ | 34,319 | ||||||||
|
Liabilities: |
||||||||||||||||||||||||
|
Derivative liabilities |
$ | — | $ | 19 | $ | — | $ | 19 | $ | — | $ | 66 | $ | — | $ | 66 | ||||||||
|
Total |
$ | — | $ | 19 | $ | — | $ | 19 | $ | — | $ | 66 | $ | — | $ | 66 | ||||||||
(1) Includes corporate securities that are guaranteed by the FDIC.
(2) Includes agency and corporate securities that are guaranteed by non-U.S. governments.
Level 2 fixed income securities are priced using quoted market prices for similar instruments; nonbinding market prices that are corroborated by observable market data; or in limited circumstances, discounted cash flow techniques. 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 inputs 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 fiscal 2010.
Level 3 assets include asset-backed securities and 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 following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended July 31, 2010 and July 25, 2009 (in millions):
| Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
|
Balance at July 25, 2009 |
$ | 223 | $ | 4 | $ | 227 | ||||||
|
Total gains and losses (realized and unrealized): |
||||||||||||
|
Included in other income (loss), net |
(6 | ) | — | (6 | ) | |||||||
|
Included in operating expenses |
— | (1 | ) | (1 | ) | |||||||
|
Included in other comprehensive income |
34 | — | 34 | |||||||||
|
Purchases, sales and maturities |
(102 | ) | — | (102 | ) | |||||||
|
Balance at July 31, 2010 |
$ | 149 | $ | 3 | $ | 152 | ||||||
|
Losses attributable to assets still held as of July 31, 2010 |
$ | — | $ | (1 | ) | $ | (1 | ) | ||||
| Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
|
Balance at July 27, 2008 |
$ | — | $ | — | $ | — | ||||||
|
Transfers into Level 3 |
618 | 6 | 624 | |||||||||
|
Total gains and losses (realized and unrealized): |
||||||||||||
|
Included in other income (loss), net |
(28 | ) | — | (28 | ) | |||||||
|
Included in operating expenses |
— | (2 | ) | (2 | ) | |||||||
|
Included in other comprehensive income |
(9 | ) | — | (9 | ) | |||||||
|
Purchases, sales and maturities |
(358 | ) | — | (358 | ) | |||||||
|
Balance at July 25, 2009 |
$ | 223 | $ | 4 | $ | 227 | ||||||
|
Losses attributable to assets still held as of July 25, 2009 |
$ | (13 | ) | $ | — | $ | (13 | ) | ||||
(c) Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table presents the Company's financial instruments and nonfinancial assets that were measured at fair value on a nonrecurring basis and the gains and losses recorded for the year ended July 31, 2010 (in millions):
| FAIR VALUE MEASUREMENTS USING | ||||||||||||||||
| Net Carrying Value as of July 31, 2010 |
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total (Losses) Gains for the Year Ended July 31, 2010 |
||||||||||||
|
Investments in privately held companies |
$ | 45 | $ | — | $ | — | $ | 45 | $ | (25 | ) | |||||
|
Purchased intangible assets |
$ | — | $ | — | $ | — | $ | — | (28 | ) | ||||||
|
Property held for sale |
$ | 25 | $ | — | $ | — | $ | 25 | (86 | ) | ||||||
|
Gains on assets no longer held as of July 31, 2010 |
2 | |||||||||||||||
|
Total |
$ | (137 | ) | |||||||||||||
The fair value for investments in privately held companies was measured using financial metrics, comparison to other private and public companies, and analysis of the financial condition and near-term prospects of the issuers, including recent financing activities and their capital structure as well as other economic variables. These investments were classified as Level 3 assets because the Company used unobservable inputs to value them, reflecting the Company's assessment of the assumptions market participants would use in pricing these investments due to the absence of quoted market prices and inherent lack of liquidity. The losses for the investments in privately held companies were recorded to other income (loss), net.
The fair values for purchased intangible assets and property held for sale were measured using discounted cash flow techniques. These assets were classified as Level 3 assets because the Company used unobservable inputs to value them, reflecting the Company's assessment of the assumptions market participants would use in valuing these assets. The losses for purchased intangible assets were included in amortization of purchased intangible assets, and the net losses for property held for sale were included in G&A expenses.
The following table presents the Company's financial instruments that were measured at fair value on a nonrecurring basis and the losses recorded for the year ended July 25, 2009 (in millions):
| FAIR VALUE MEASUREMENTS USING | ||||||||||||||||
| Net Carrying Value as of July 25, 2009 |
Quoted Prices in Active Markets for Identical Instruments (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Losses for the Year Ended July 25, 2009 |
||||||||||||
|
Investments in privately held companies |
$ | 69 | $ | — | $ | — | $ | 69 | $ | (78 | ) | |||||
|
Losses on assets no longer held as of July 25, 2009 |
(9 | ) | ||||||||||||||
|
Total |
$ | (87 | ) | |||||||||||||
(d) Other
The fair value of certain of the Company's financial instruments that are not measured at fair value, including accounts receivable, accounts payable, accrued compensation, and other current liabilities, approximates the carrying amount because of their short maturities. In addition, the fair value of the Company's loan receivables and financed service contracts also approximates the carrying amount. The fair value of the Company's debt is disclosed in Note 9 and was determined using quoted market prices for those securities.
|
|||
9. Borrowings
(a) Debt
The following table summarizes the Company's debt (in millions, except percentages):
| July 31, 2010 | July 25, 2009 | |||||||||||||
| Amount | Effective Rate |
Amount | Effective Rate | |||||||||||
|
Senior notes: |
||||||||||||||
|
5.25% fixed-rate notes, due 2011 ("2011 Notes") |
$ | 3,000 | 3.12% | $ | 3,000 | 3.12% | ||||||||
|
2.90% fixed-rate notes, due 2014 ("2014 Notes") |
500 | 3.11% | — | — | ||||||||||
|
5.50% fixed-rate notes, due 2016 ("2016 Notes") |
3,000 | 3.18% | 3,000 | 4.34% | ||||||||||
|
4.95% fixed-rate notes, due 2019 ("2019 Notes") |
2,000 | 5.08% | 2,000 | 5.08 % | ||||||||||
|
4.45% fixed-rate notes, due 2020 ("2020 Notes") |
2,500 | 4.50% | — | — | ||||||||||
|
5.90% fixed-rate notes, due 2039 ("2039 Notes") |
2,000 | 6.11% | 2,000 | 6.11% | ||||||||||
|
5.50% fixed-rate notes, due 2040 ("2040 Notes") |
2,000 | 5.67% | — | — | ||||||||||
|
Total senior notes |
15,000 | 10,000 | ||||||||||||
|
Other notes and borrowings |
59 | 2 | ||||||||||||
|
Unaccreted discount |
(73 | ) | (21 | ) | ||||||||||
|
Hedge accounting adjustment |
298 | 314 | ||||||||||||
|
Total |
$ | 15,284 | $ | 10,295 | ||||||||||
|
Reported as: |
||||||||||||||
|
Short-term debt |
$ | 3,096 | $ | — | ||||||||||
|
Long-term debt |
12,188 | 10,295 | ||||||||||||
|
Total |
$ | 15,284 | $ | 10,295 | ||||||||||
In November 2009, the Company issued senior unsecured notes in an aggregate principal amount of $5.0 billion. Of these notes, $500 million will mature in 2014 and bear interest at a fixed rate of 2.90% per annum (the "2014 Notes"), $2.5 billion will mature in 2020 and bear interest at a fixed rate of 4.45% per annum (the "2020 Notes"), and $2.0 billion will mature in 2040 and bear interest at a fixed rate of 5.50% per annum (the "2040 Notes"). To achieve its interest rate risk management objectives, the Company entered into interest rate swaps, in an aggregate notional amount of $1.5 billion, designated as fair value hedges for a portion of the 2016 Notes. In effect, these swaps convert the fixed interest rates of a portion of the 2016 Notes to floating interest rates based on LIBOR plus a fixed number of basis points. Gains and losses in the value of the interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt.
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. Based on market prices, the fair value of the Company's senior notes was $16.3 billion and $10.5 billion as of July 31, 2010 and July 25, 2009, respectively. Interest is payable semiannually on each class of the senior fixed-rate notes. The notes are redeemable by the Company at any time, subject to a make-whole premium. The Company was in compliance with all debt covenants as of July 31, 2010.
Other notes and borrowings include notes and credit facilities with a number of financial institutions that are available to certain foreign subsidiaries of the Company. The amount of borrowings outstanding under these arrangements was $59 million and $2 million at July 31, 2010 and July 25, 2009, respectively.
(b) Credit Facility
The Company has a credit agreement with certain institutional lenders providing for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on August 17, 2012. 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% or Bank of America's "prime rate" as announced from time to time or (ii) LIBOR plus a margin that is based on the Company's senior debt credit ratings as published by Standard & Poor's Ratings Services and Moody's Investors Service, Inc. The credit agreement requires the Company to comply with certain covenants, including that it maintain an interest coverage ratio as defined in the agreement. The Company was in compliance with the required interest coverage ratio and the other covenants as of July 31, 2010.
|
|||
10. 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 | July 31, 2010 |
July 25, 2009 |
Balance Sheet Line Item | July 31, 2010 |
July 25, 2009 | |||||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||||||||||
|
Foreign currency derivatives |
Other current assets | $ | 82 | $ | 87 | Other current liabilities | $ | 7 | $ | 36 | ||||||||
|
Interest rate derivatives |
Other assets | 72 | — | Other long-term liabilities | — | — | ||||||||||||
|
Total |
154 | 87 | 7 | 36 | ||||||||||||||
|
Derivatives not designated as hedging instruments: |
||||||||||||||||||
|
Foreign currency derivatives |
Other current assets | 6 | 22 | Other current liabilities | 12 | 30 | ||||||||||||
|
Equity derivatives |
Other current assets | 1 | 2 | Other current liabilities | — | — | ||||||||||||
|
Equity derivatives |
Other assets | 2 | 2 | Other long-term liabilities | — | — | ||||||||||||
|
Total |
9 | 26 | 12 | 30 | ||||||||||||||
|
Total |
$ | 163 | $ | 113 | $ | 19 | $ | 66 | ||||||||||
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):
|
GAINS (LOSSES) (EFFECTIVE PORTION) |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR THE YEARS ENDED (EFFECTIVE PORTION) |
|||||||||||||||
| Derivatives Designated as Cash Flow Hedging Instruments | July 31, 2010 |
July 25, 2009 |
Line Item in Statements of Operations | July 31, 2010 | July 25, 2009 | |||||||||||
|
Foreign currency derivatives |
$ | 33 | $ | (116) | Operating expenses | $ (1) | $ | (95 | ) | |||||||
| Cost of sales-service | — | (13 | ) | |||||||||||||
|
Interest rate derivatives |
23 | (42) | Interest expense | — | — | |||||||||||
|
Other derivatives |
— | (2) | Operating expenses | — | (2 | ) | ||||||||||
|
Total |
$ | 56 | $ | (160) | $ (1) | $ | (110 | ) | ||||||||
During the years ended July 31, 2010 and July 25, 2009, the amounts recognized in earnings on derivative instruments designated as cash flow hedges related to the ineffective portion were not material, and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.
As of July 31, 2010, the Company estimates that approximately $40 million of net derivative gains related to its cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months.
The effect on the Consolidated Statements of Operations of derivative instruments designated as fair value hedges is summarized as follows (in millions):
| GAINS (LOSSES) FOR THE YEARS ENDED |
||||||||
| Derivatives Designated as Fair Value Hedging Instruments | Line Item in Statements of Operations | July 31, 2010 | July 25, 2009 | |||||
|
Equity derivatives |
Other income (loss), net | $ 3 | $ | 97 | ||||
|
Interest rate derivatives |
Other income (loss), net | — | (7 | ) | ||||
|
Interest rate derivatives |
Interest expense | 72 | — | |||||
|
Total |
$75 | $ | 90 | |||||
The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as follows (in millions):
| GAINS (LOSSES) FOR THE YEARS ENDED |
||||||||||
| Derivatives not Designated as Hedging Instruments | Line Item in Statements of Operations | July 31, 2010 | July 25, 2009 | |||||||
|
Foreign currency derivatives |
Other income (loss), net | $ | (100 | ) | $ | 1 | ||||
|
Equity derivatives |
Operating expenses | 18 | (14 | ) | ||||||
|
Equity derivatives |
Other income (loss), net | 12 | 11 | |||||||
|
Total |
$ | (70 | ) | $ | (2 | ) | ||||
(b) Foreign Currency Exchange Risk
The Company conducts business globally in numerous currencies. Therefore, it is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The Company does not enter into such contracts for trading purposes.
The Company hedges foreign currency forecasted transactions related to certain operating expenses and service cost of sales with currency options and forward contracts. These currency option and forward contracts, designated as cash flow hedges, generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of the derivatives. The effective portion of the derivative instrument's gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. The Company did not discontinue any hedges during any of the periods presented because it was probable that the original forecasted transaction would not occur.
The Company enters into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings, investments, and payables. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are included in other income (loss), net, and substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity.
The Company hedges certain net investments in its foreign subsidiaries with forward contracts, which generally have maturities of up to six months. The Company recognized a loss of $2 million in OCI for the effective portion of its net investment hedges for the year ended July 31, 2010. The Company's net investment hedges are not included in the preceding tables.
The notional amounts of the Company's foreign currency derivatives are summarized as follows (in millions):
| July 31, 2010 | July 25, 2009 | |||||
|
Cash flow hedging instruments |
$ | 2,611 | $ | 2,965 | ||
|
No hedge designation |
4,619 | 4,423 | ||||
|
Net investment hedging instruments |
105 | 103 | ||||
|
Total |
$ | 7,335 | $ | 7,491 | ||
(c) Interest Rate Risk
Interest Rate Derivatives, Investments The Company's primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of July 31, 2010 and July 25, 2009 the Company did not have any outstanding interest rate derivatives related to its fixed income securities.
Interest Rate Derivatives Designated as Cash Flow Hedge, Long-Term Debt In fiscal 2010 and 2009, the Company entered into contracts related to interest rate derivatives designated as cash flow hedges, with an aggregate notional amount of $3.7 billion and $3.9 billion, respectively, to hedge against interest rate movements in connection with its anticipated issuance of senior notes in each of those fiscal years. These derivative instruments were settled in connection with the actual issuance of the senior notes. The effective portion of these hedges was recorded to AOCI, net of tax, and is being amortized to interest expense over the respective lives of the notes.
Interest Rate Derivatives Designated as Fair Value Hedge, Long-Term Debt In fiscal 2010, the Company entered into interest rate swaps with a $1.5 billion notional amount designated as fair value hedges of a portion of the 2016 Notes. Under these interest rate swaps, the Company receives fixed-rate interest payments and makes interest payments based on LIBOR plus a fixed number of basis points. The effect of these swaps is to convert fixed-rate interest expense on a portion of the 2016 Notes to a floating rate interest expense. The gains and losses related to changes in the fair value of the interest rate swaps are included in interest expense and substantially offset changes in the fair value of the hedged portion of the underlying hedged debt. The fair value of the interest rate swaps was $72 million as of July 31, 2010 and was reflected in other assets. The Company did not have any interest rate swaps outstanding at July 25, 2009.
(d) Equity Price Risk
The Company may hold equity securities for strategic purposes or to diversify its overall investment portfolio. The publicly traded equity securities in the Company's portfolio are subject to price risk. To manage its exposure to changes in the fair value of certain equity securities, the Company may enter into equity derivatives that are designated as fair value or cash flow hedges. The changes in the value of the hedging instruments are included in other income (loss), net, and offset the change in the fair value of the underlying hedged investment. The Company did not have any equity derivatives outstanding at July 31, 2010 and July 25, 2009.
In addition, the Company periodically manages the risk of its investment portfolio by entering into equity derivatives that are not designated as accounting hedges. The changes in the fair value of these derivatives were also included in other income (loss), net. The Company is also exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Although not designated as accounting hedges, the Company utilizes equity derivatives to economically hedge this exposure. As of July 31, 2010 and July 25, 2009, the notional amount of the derivative instruments used to hedge such liabilities was $169 million and $91 million, respectively.
(e) Credit-Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that have provisions requiring the Company and counterparty to maintain a specified credit rating from certain credit rating agencies. If the Company's or counterparty's credit rating falls below a specified credit rating, either party has the right to request collateral on the derivatives' net liability position. Such provisions did not affect the Company's financial position as of July 31, 2010 and July 25, 2009.
|
|||
11. Commitments and Contingencies
(a) Operating Leases
The Company leases office space in several U.S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, China, Germany, India, Israel, Italy, Japan, Norway, and the United Kingdom. Rent expense totaled $364 million, $328 million, and $291 million in fiscal 2010, 2009, and 2008, respectively. The Company also leases equipment and vehicles. Future minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of July 31, 2010 are as follows (in millions):
| Fiscal Year | Amount | ||
|
2011 |
$ | 343 | |
|
2012 |
243 | ||
|
2013 |
167 | ||
|
2014 |
119 | ||
|
2015 |
122 | ||
|
Thereafter |
310 | ||
|
Total |
$ | 1,304 | |
(b) Purchase Commitments with Contract Manufacturers and Suppliers
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by the Company or that establish the parameters defining the Company's requirements. A significant portion of the Company's reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company's requirements based on its business needs prior to firm orders being placed. As of July 31, 2010 and July 25, 2009, the Company had total purchase commitments for inventory of $4.319 billion and $1.962 billion, respectively.
The Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of the Company's excess and obsolete inventory. As of July 31, 2010 and July 25, 2009, the liability for these purchase commitments was $135 million and $175 million, respectively, and was included in other current liabilities.
(c) Other Commitments
In connection with the Company's business combinations and asset purchases, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon-technology, development, product, or other milestones or the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $120 million, $291 million, and $340 million during fiscal 2010, 2009, and 2008, respectively. The largest component of such compensation expense during the fiscal years presented was related to milestone payments made to former noncontrolling interest holders of Nuova Systems, Inc. ("Nuova Systems"), the remaining interest of which the Company purchased in fiscal 2008. As of July 31, 2010, the Company estimated that future compensation expense and contingent consideration of up to $205 million may be required to be recognized pursuant to these business combination and asset purchase agreements. The remaining potential compensation expense is primarily related to Nuova Systems.
(d) Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers. These privately held companies and customers may be considered to be variable interest entities. The Company has evaluated its investments in these privately held companies and its customer financings and has determined that there were no significant unconsolidated variable interest entities as of July 31, 2010.
(e) Product Warranties and Guarantees
The following table summarizes the activity related to the product warranty liability during fiscal 2010 and 2009 (in millions):
| July 31, 2010 | July 25, 2009 | |||||||
|
Balance at beginning of fiscal year |
$ | 321 | $ | 399 | ||||
|
Provision for warranties issued |
469 | 374 | ||||||
|
Payments |
(437 | ) | (452 | ) | ||||
|
Fair value of warranty liability acquired |
7 | — | ||||||
|
Balance at end of fiscal year |
$ | 360 | $ | 321 | ||||
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The Company's products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime warranty.
In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company's bylaws contain similar indemnification obligations to the Company's agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company's limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company's operating results, financial position, or cash flows.
The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other end-user customers. See Note 6. The Company's other guarantee arrangements as of July 31, 2010 that are subject to recognition and disclosure requirements were not material.
(f) Legal Proceedings
Brazilian authorities have investigated the Company's Brazilian subsidiary and certain of its current and former employees, as well as a Brazilian importer of the Company's products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer. Brazilian authorities have assessed claims against the Company's Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes and related penalties. The claims are for calendar years 2003 through 2007 and aggregate to approximately $190 million for the alleged evasion of import taxes, $85 million for interest, and approximately $1.6 billion for various penalties, all determined using an exchange rate as of July 31, 2010. The Company has completed a thorough review of the matter and believes the asserted tax claims against it are without merit, and the Company intends to defend the claims vigorously. While the Company believes there is no legal basis for its alleged liability, due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims asserting joint liability with the importer, the Company is unable to determine the likelihood of an unfavorable outcome against it and is unable to reasonably estimate a range of loss, if any. The Company does not expect a final judicial determination for several years.
The Company has investigated the alleged improper transactions referred to above. The Company communicated with United States authorities to provide information and report on its findings and the United States authorities have investigated such allegations.
The Company and other defendants were subject to patent claims asserted by Network-1 Security Solutions, Inc. on February 7, 2008 in the Federal District Court for the Eastern District of Texas. Network-1 alleged that various Cisco products implement a method for remotely powering equipment that infringes United States Patent No. 6,218,930. Network-1 sought monetary damages. The trial on these claims began on July 12, 2010. During trial, the Company and Network-1 settled the dispute on terms that are not material to the Company, and the lawsuit was dismissed with prejudice on August 6, 2010.
In addition, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows.
|
|||
13. Employee Benefit Plans
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which includes its subplan, the International Employee Stock Purchase Plan (together, the "Purchase Plan"), under which 471.4 million shares of the Company's common stock have been reserved for issuance as of July 31, 2010. Effective July 1, 2009, eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited number of shares of the Company's stock at a discount of up to 15% of the lesser of the market value at the beginning of the offering period or the end of each 6-month purchase period. Prior to July 1, 2009 the offering period was six months. The Purchase Plan is scheduled to terminate on January 3, 2020. The Company issued 27 million, 28 million, and 19 million shares under the Purchase Plan in fiscal 2010, 2009, and 2008, respectively. As of July 31, 2010, 156 million shares were available for issuance under the Purchase Plan.
(b) Employee Stock Incentive Plans
Stock Incentive Plan Program Description As of July 31, 2010, the Company had five stock incentive plans: the 2005 Stock Incentive Plan (the "2005 Plan"); the 1996 Stock Incentive Plan (the "1996 Plan"); the 1997 Supplemental Stock Incentive Plan (the "Supplemental Plan"); the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan (the "SA Acquisition Plan"); and the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan (the "WebEx Acquisition Plan"). In addition, the Company has, in connection with the acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors. Since the inception of the stock incentive plans, the Company has granted share-based awards to a significant percentage of its employees, and the majority has been granted to employees below the vice president level. The Company's primary stock incentive plans are summarized as follows:
2005 Plan As amended on November 15, 2007, the maximum number of shares issuable under the 2005 Plan over its term is 559 million shares plus the amount of any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that are forfeited or are terminated for any other reason before being exercised or settled. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, then the shares underlying the awards will again be available under the 2005 Plan.
Prior to November 12, 2009, the number of shares available for issuance under the 2005 Plan was reduced by 2.5 shares for each share awarded as a stock grant or stock unit. Pursuant to an amendment approved by the Company's shareholders on November 12, 2009, following that amendment the number of shares available for issuance under the 2005 Plan is reduced by 1.5 shares for each share awarded as a stock grant or a stock unit, and any shares underlying awards outstanding under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that expire unexercised at the end of their maximum terms become available for reissuance under the 2005 Plan. The 2005 Plan permits the granting of stock options, stock, stock units, and stock appreciation rights to employees (including employee directors and officers), consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Stock options and stock appreciation rights granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and prior to November 12, 2009 have an expiration date no later than nine years from the grant date. The expiration date for stock options and stock appreciation rights granted subsequent to the amendment approved on November 12, 2009 shall be no later than ten years from the grant date. The stock options will generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Stock grants and stock units will generally vest with respect to 20% or 25% of the shares covered by the grant on each of the first through fifth or fourth anniversaries of the date of the grant, respectively. The Compensation and Management Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants, and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.
1996 Plan The 1996 Plan expired on December 31, 2006, and the Company can no longer make equity awards under the 1996 Plan. The maximum number of shares issuable over the term of the 1996 Plan was 2.5 billion shares. Stock options granted under the 1996 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Certain other grants have utilized a 60-month ratable vesting schedule. In addition, the Board of Directors, or other committees administering the plan, has the discretion to use a different vesting schedule and have done so from time to time.
Supplemental Plan The Supplemental Plan expired on December 31, 2007, and the Company can no longer make equity awards under the Supplemental Plan. Officers and members of the Company's Board of Directors were not eligible to participate in the Supplemental Plan. Nine million shares were reserved for issuance under the Supplemental Plan.
Acquisition Plans In connection with the Company's acquisitions of Scientific-Atlanta, Inc. ("Scientific-Atlanta") and WebEx Communications, Inc. ("WebEx"), the Company adopted the SA Acquisition Plan and the WebEx Acquisition Plan, respectively, each effective upon completion of the applicable acquisition. These plans constitute assumptions, amendments, restatements, and renamings of the 2003 Long-Term Incentive Plan of Scientific-Atlanta and the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan, respectively. The plans permit the grant of stock options, stock, stock units, and stock appreciation rights to certain employees of the Company and its subsidiaries and affiliates who had been employed by Scientific-Atlanta or its subsidiaries or WebEx or its subsidiaries, as applicable. As a result of the shareholder approval of the amendment and extension of the 2005 Plan, as of November 15, 2007, the Company will no longer make stock option grants or direct share issuances under either the SA Acquisition Plan or the WebEx Acquisition Plan.
General Share-Based Award Information
Stock Option Awards A summary of the stock option activity is as follows (in millions, except per-share amounts):
| STOCK OPTIONS OUTSTANDING | ||||||
| Number Outstanding |
Weighted- Average Exercise Price per Share | |||||
|
BALANCE AT JULY 28, 2007 |
1,289 | $ | 26.60 | |||
|
Granted and assumed |
159 | 31.12 | ||||
|
Exercised(1) |
(146 | ) | 18.50 | |||
|
Canceled/forfeited/expired |
(103 | ) | 30.74 | |||
|
BALANCE AT JULY 26, 2008 |
1,199 | 27.83 | ||||
|
Granted and assumed |
14 | 19.01 | ||||
|
Exercised(1) |
(33 | ) | 14.67 | |||
|
Canceled/forfeited/expired |
(176 | ) | 49.79 | |||
|
BALANCE AT JULY 25, 2009 |
1,004 | 24.29 | ||||
|
Granted and assumed |
15 | 13.23 | ||||
|
Exercised(1) |
(158 | ) | 17.88 | |||
|
Canceled/forfeited/expired |
(129 | ) | 47.31 | |||
|
BALANCE AT JULY 31, 2010 |
732 | $ | 21.39 | |||
(1) The total pretax intrinsic value of stock options exercised during fiscal 2010, 2009, and 2008 was $1.0 billion, $158 million, and $1.6 billion, respectively.
The following table summarizes significant ranges of outstanding and exercisable stock options as of July 31, 2010 (in millions, except years and share prices):
| STOCK OPTIONS OUTSTANDING | STOCK OPTIONS EXERCISABLE | |||||||||||||||||||
| Range of Exercise Prices |
Number Outstanding |
Weighted- Average Remaining Contractual Life (in Years) |
Weighted- Average Exercise Price per Share |
Aggregate Intrinsic Value |
Number Exercisable |
Weighted- Average Exercise Price per Share |
Aggregate Intrinsic Value | |||||||||||||
|
$ 0.01 – 15.00 |
71 | 2.50 | $ | 10.62 | $ | 884 | 65 | $ | 10.87 | $ | 782 | |||||||||
|
15.01 – 18.00 |
137 | 3.18 | 17.36 | 782 | 129 | 17.34 | 741 | |||||||||||||
|
18.01 – 20.00 |
177 | 2.90 | 19.29 | 669 | 173 | 19.29 | 654 | |||||||||||||
|
20.01 – 25.00 |
188 | 4.26 | 22.48 | 125 | 146 | 22.40 | 109 | |||||||||||||
|
25.01 – 35.00 |
158 | 6.02 | 30.63 | — | 92 | 30.56 | — | |||||||||||||
|
35.01 – 70.00 |
1 | 0.61 | 54.22 | — | 1 | 54.22 | — | |||||||||||||
|
Total |
732 | 3.94 | $ | 21.39 | $ | 2,460 | 606 | $ | 20.51 | $ | 2,286 | |||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company's closing stock price of $23.07 as of July 30, 2010, which would have been received by the option holders had those option holders exercised their stock options as of that date. The total number of in-the-money stock options exercisable as of July 31, 2010 was 500 million. As of July 25, 2009, 768 million outstanding stock options were exercisable and the weighted-average exercise price was $24.16.
Restricted Stock and Stock Unit Awards A summary of the restricted stock and stock unit activity is as follows (in millions, except per-share amounts):
| Restricted Stock/ Stock Units |
Weighted-Average Grant Date Price |
Aggregated Fair Market Value | |||||||
|
BALANCE AT JULY 28, 2007 |
11 | $ | 22.52 | ||||||
|
Granted and assumed |
4 | 27.29 | |||||||
|
Vested |
(4 | ) | 22.49 | $ | 83 | ||||
|
Canceled/forfeited |
(1 | ) | 24.24 | ||||||
|
BALANCE AT JULY 26, 2008 |
10 | $ | 24.27 | ||||||
|
Granted and assumed |
57 | 20.90 | |||||||
|
Vested |
(4 | ) | 23.56 | $ | 69 | ||||
|
Canceled/forfeited |
(1 | ) | 22.76 | ||||||
|
BALANCE AT JULY 25, 2009 |
62 | $ | 21.25 | ||||||
|
Granted and assumed |
54 | 23.40 | |||||||
|
Vested |
(16 | ) | 21.56 | $ | 378 | ||||
|
Canceled/forfeited |
(3 | ) | 22.40 | ||||||
|
BALANCE AT JULY 31, 2010 |
97 | $ | 22.35 | ||||||
Share-Based Awards Available for Grant A summary of share-based awards available for grant is as follows (in millions):
| Share-Based Awards Available for Grant |
|||
|
BALANCE AT JULY 28, 2007 |
294 | ||
|
Options granted and assumed |
(159 | ) | |
|
Restricted stock, stock units, and other share-based awards granted and assumed |
(11 | ) | |
|
Share-based awards canceled/forfeited/expired |
27 | ||
|
Additional shares reserved |
211 | ||
|
BALANCE AT JULY 26, 2008 |
362 | ||
|
Options granted and assumed |
(14 | ) | |
|
Restricted stock, stock units, and other share-based awards granted and assumed |
(140 | ) | |
|
Share-based awards canceled/forfeited/expired |
38 | ||
|
Additional shares reserved |
7 | ||
|
BALANCE AT JULY 25, 2009 |
253 | ||
|
Options granted and assumed |
(15 | ) | |
|
Restricted stock, stock units, and other share-based awards granted and assumed |
(81 | ) | |
|
Share-based awards canceled/forfeited/expired |
123 | ||
|
Additional shares reserved |
15 | ||
|
BALANCE AT JULY 31, 2010 |
295 |
As reflected in the preceding table, for each share awarded as restricted stock or subject to a restricted stock unit award under the 2005 Plan, beginning November 15, 2007 and prior to November 12, 2009, an equivalent of 2.5 shares was deducted from the available share-based award balance. Effective as of November 12, 2009, the equivalent number of shares was revised to 1.5 shares for each share awarded as restricted stock or subject to a restricted stock unit award under the 2005 Plan beginning on this date.
Expense and Valuation Information for Share-Based Awards
Share-Based Compensation Expense
Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and restricted stock units granted to employees. The following table summarizes share-based compensation expense (in millions):
| Years Ended | July 31, 2010 | July 25, 2009 | July 26, 2008 | ||||||
|
Cost of sales—product |
$ | 57 | $ | 46 | $ | 40 | |||
|
Cost of sales—service |
164 | 128 | 108 | ||||||
|
Share-based compensation expense in cost of sales |
221 | 174 | 148 | ||||||
|
Research and development |
450 | 382 | 339 | ||||||
|
Sales and marketing |
536 | 441 | 438 | ||||||
|
General and administrative |
310 | 234 | 187 | ||||||
|
Share-based compensation expense in operating expenses |
1,296 | 1,057 | 964 | ||||||
|
Total share-based compensation expense |
$ | 1,517 | $ | 1,231 | $ | 1,112 | |||
As of July 31, 2010, the total compensation cost related to unvested share-based awards not yet recognized was $3.3 billion, which is expected to be recognized over approximately 2.5 years on a weighted-average basis. The income tax benefit for share-based compensation expense was $415 million, $317 million, and $362 million for fiscal 2010, 2009, and 2008, respectively.
Valuation of Employee Stock Options and Employee Stock Purchase Rights
The assumptions related to and the valuation of employee stock options and employee stock purchase rights are summarized as follows:
| EMPLOYEE STOCK OPTIONS | EMPLOYEE STOCK PURCHASE RIGHTS | |||||||||||||||||||||
| Years Ended | July 31, 2010 | July 25, 2009 | July 26, 2008 | July 31, 2010 | July 25, 2009 | July 26, 2008 | ||||||||||||||||
|
Number of options granted (in millions) |
4 | 9 | 151 | N/A | N/A | N/A | ||||||||||||||||
|
Weighted-average assumptions: |
||||||||||||||||||||||
|
Expected volatility |
30.5% | 36.0% | 31.0% | 30.9% | 36.4% | 32.6% | ||||||||||||||||
|
Risk-free interest rate |
2.3% | 3.0 % | 4.3 % | 0.5% | 0.6% | 2.7% | ||||||||||||||||
|
Expected dividend |
0.0% | 0.0 % | 0.0 % | 0.0% | ||||||||||||||||||