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Supplemental Information
In September 2001, the Company's Board of Directors authorized a stock repurchase program. As of October 30, 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. In addition, on November 18, 2010, the Company's Board of Directors authorized the repurchase of up to an additional $10 billion of the Company's 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 impacts on Cisco shareholders' equity are summarized in the following table (in millions):
| Shares of Common Stock |
Common Stock and Additional Paid-In Capital |
Retained Earnings |
Total Cisco Shareholders' Equity |
|||||||||||||
|
Repurchases of common stock under the repurchase program |
3,240 | $ | 13,512 | $ | 53,970 | $ | 67,482 | |||||||||
|
|||
| 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 2011 is a 52-week fiscal year and fiscal 2010 was a 53-week fiscal year with the extra week included in the third quarter of fiscal 2010. 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 first quarter of fiscal 2011, in order to achieve operational efficiencies, the Company combined its Asia Pacific and Japan operations. Following this change, the Company is organized into the following four geographic segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. The Company has reclassified the geographic segment data for the prior period to conform to the current period's presentation. The Emerging Markets segment remains unchanged and includes Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States.
The accompanying financial data as of October 30, 2010 and for the three months ended October 30, 2010 and October 24, 2009 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The July 31, 2010 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2010.
The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates ("SOFTBANK") subject to the applicable accounting guidance. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Company's equity in the equity section of the Consolidated Balance Sheets. SOFTBANK's share of the earnings in the venture fund is not presented separately in the Consolidated Statements of Operations and is included in other income, net, as this amount is not material for any of the fiscal periods presented.
In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the statement of financial position as of October 30, 2010, and results of operations, cash flows, and equity for the three months ended October 30, 2010 and October 24, 2009, as applicable, have been made. The results of operations for the three months ended October 30, 2010 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
In addition to the segment reporting change referred to above, the Company has made certain reclassifications to prior period amounts in order to conform to the current period presentation. These items include reclassifications to prior period amounts related to net sales for similar groups of products, gross margin by geographic segment, and the allocation of share-based compensation expense within operating expenses due to the refinement of these respective categories.
The Company has evaluated subsequent events through the date that the financial statements were issued.
|
|||
2. Summary of Significant Accounting Policies
(a) New Accounting Standards or Updates Recently Adopted
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 was effective for the Company beginning in the first quarter of fiscal 2011. 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. See Note 11.
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 was effective for the Company beginning in the first quarter of fiscal 2011. 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.
(b) Recent Accounting Standards or Updates Not Yet Effective
In July 2010, the FASB issued an accounting standard 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 related to the period end balances are effective for the Company beginning in the second quarter of fiscal 2011, and the revised disclosures related to activity 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.
|
|||
3. Business Combinations
The Company completed two business combinations during the three months ended October 30, 2010. A summary of the allocation of the aggregated purchase consideration is presented as follows (in millions):
| Purchase Consideration |
Net Tangible Assets Acquired |
Purchased Intangible Assets |
Goodwill | |||||||||||||
|
Total acquisitions |
$ | 80 | $ | 1 | $ | 30 | $ | 49 | ||||||||
The total purchase consideration related to the Company's business combinations completed during the three months ended October 30, 2010 consisted of both cash consideration and vested share-based awards assumed. Total cash and cash equivalents acquired from these business combinations were $3 million.
Total transaction costs related to business combination activities for the three months ended October 30, 2010 were $8 million, which were expensed as incurred and recorded as G&A expenses.
The Company continues to evaluate certain assets and liabilities related to business combinations completed during the recent periods. Additional information, which existed as of the acquisition date but 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 three months ended October 30, 2010 is primarily related to expected synergies. The goodwill is not deductible for U.S. federal income tax purposes.
The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three months ended October 30, 2010 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
In the first quarter of fiscal 2011, in order to achieve operational efficiencies, the Company combined its Asia Pacific and Japan operations. Following this change, the Company is organized into the following four geographic segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. The goodwill of the former Asia Pacific and Japan geographic segments as of July 31, 2010 was allocated to the combined segment Asia Pacific Markets.
The following table presents the goodwill allocated to the Company's reportable segments as of and during the three months ended October 30, 2010 (in millions):
| Balance at July 31, 2010 |
Acquisitions | Other | Balance at October 30, 2010 |
|||||||||||||
|
United States and Canada |
$ | 11,289 | $ | 18 | $ | — | $ | 11,307 | ||||||||
|
European Markets |
2,729 | 17 | 19 | 2,765 | ||||||||||||
|
Emerging Markets |
762 | — | — | 762 | ||||||||||||
|
Asia Pacific Markets |
1,894 | 14 | — | 1,908 | ||||||||||||
|
Total |
$ | 16,674 | $ | 49 | $ | 19 | $ | 16,742 | ||||||||
In the preceding table, "Other" primarily includes foreign currency translation.
(b) Purchased Intangible Assets
The following table presents details of the Company's intangible assets acquired through business combinations completed during the three months ended October 30, 2010 (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 | |||||||||||||||||||||||||
|
Total |
5.2 | $ | 29 | — | $ | — | 3.0 | $ | 1 | $ | — | $ | 30 | |||||||||||||||||||
The following tables present details of the Company's purchased intangible assets (in millions):
|
October 30, 2010 |
Gross | Accumulated Amortization |
Net | |||||||||
|
Purchased intangible assets with finite lives: |
||||||||||||
|
Technology |
$ | 2,427 | $ | (735 | ) | $ | 1,692 | |||||
|
Customer relationships |
2,325 | (1,121 | ) | 1,204 | ||||||||
|
Other |
173 | (93 | ) | 80 | ||||||||
|
Total purchased intangible assets with finite lives |
4,925 | (1,949 | ) | 2,976 | ||||||||
|
IPR&D, with indefinite lives |
200 | — | 200 | |||||||||
|
Total |
$ | 5,125 | $ | (1,949 | ) | $ | 3,176 | |||||
|
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 | |||||
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):
| Three Months Ended | ||||||||
| October 30, 2010 | October 24, 2009 | |||||||
|
Amortization of purchased intangible assets: |
||||||||
|
Cost of sales |
$ | 106 | $ | 49 | ||||
|
Operating expenses |
113 | 105 | ||||||
|
Total |
$ | 219 | $ | 154 | ||||
The estimated future amortization expense of purchased intangible assets with finite lives as of October 30, 2010 is as follows (in millions):
|
Fiscal Year |
Amount | |||
|
2011 (remaining nine months) |
$ | 639 | ||
|
2012 |
743 | |||
|
2013 |
628 | |||
|
2014 |
443 | |||
|
2015 |
336 | |||
|
Thereafter |
187 | |||
|
Total |
$ | 2,976 | ||
|
|||
5. Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
| October 30, 2010 |
July 31, 2010 |
|||||||
|
Inventories: |
||||||||
|
Raw materials |
$ | 331 | $ | 217 | ||||
|
Work in process |
54 | 50 | ||||||
|
Finished goods: |
||||||||
|
Distributor inventory and deferred cost of sales |
586 | 587 | ||||||
|
Manufactured finished goods |
314 | 260 | ||||||
|
Total finished goods |
900 | 847 | ||||||
|
Service-related spares |
174 | 161 | ||||||
|
Demonstration systems |
64 | 52 | ||||||
|
Total |
$ | 1,523 | $ | 1,327 | ||||
|
Property and equipment, net: |
||||||||
|
Land, buildings, and building & leasehold improvements |
$ | 4,519 | $ | 4,470 | ||||
|
Computer equipment and related software |
1,427 | 1,405 | ||||||
|
Production, engineering, and other equipment |
4,879 | 4,702 | ||||||
|
Operating lease assets |
263 | 255 | ||||||
|
Furniture and fixtures |
479 | 476 | ||||||
| 11,567 | 11,308 | |||||||
|
Less accumulated depreciation and amortization |
(7,583 | ) | (7,367 | ) | ||||
|
Total |
$ | 3,984 | $ | 3,941 | ||||
|
Other assets: |
||||||||
|
Deferred tax assets |
$ | 1,881 | $ | 2,079 | ||||
|
Investments in privately held companies |
779 | 756 | ||||||
|
Lease receivables, net (1) |
1,265 | 1,176 | ||||||
|
Financed service contracts, net (1) |
767 | 763 | ||||||
|
Loan receivables, net (1) |
621 | 675 | ||||||
|
Other |
394 | 371 | ||||||
|
Total |
$ | 5,707 | $ | 5,820 | ||||
|
Deferred revenue: |
||||||||
|
Service |
$ | 7,169 | $ | 7,428 | ||||
|
Product: |
||||||||
|
Unrecognized revenue on product shipments and other deferred revenue |
2,737 | 2,788 | ||||||
|
Cash receipts related to unrecognized revenue from two-tier distributors |
830 | 867 | ||||||
|
Total product deferred revenue |
3,567 | 3,655 | ||||||
|
Total |
$ | 10,736 | $ | 11,083 | ||||
|
Reported as: |
||||||||
|
Current |
$ | 7,420 | $ | 7,664 | ||||
|
Noncurrent |
3,316 | 3,419 | ||||||
|
Total |
$ | 10,736 | $ | 11,083 | ||||
| (1) |
Amounts represent the noncurrent portions of the respective balances. See Note 6 for the current portions of the respective balances, which are included in other current assets. |
|
|||
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):
|
October 30, 2010 |
Lease Receivables |
Financed Service Contracts |
Loan Receivables |
Financing Receivables |
||||||||||||
|
Gross |
$ | 2,582 | $ | 1,758 | $ | 1,262 | $ | 5,602 | ||||||||
|
Unearned income |
(222 | ) | — | — | (222 | ) | ||||||||||
|
Allowances |
(232 | ) | (23 | ) | (80 | ) | (335 | ) | ||||||||
|
Total, net |
$ | 2,128 | $ | 1,735 | $ | 1,182 | $ | 5,045 | ||||||||
|
Reported as: |
||||||||||||||||
|
Current |
$ | 863 | $ | 968 | $ | 561 | $ | 2,392 | ||||||||
|
Noncurrent |
1,265 | 767 | 621 | 2,653 | ||||||||||||
|
Total, net |
$ | 2,128 | $ | 1,735 | $ | 1,182 | $ | 5,045 | ||||||||
|
July 31, 2010 |
Lease Receivables |
Financed Service Contracts |
Loan Receivables |
Financing Receivables |
||||||||||||
|
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 | ||||||||
Contractual maturities of the gross lease receivables at October 30, 2010 are summarized as follows (in millions):
|
Fiscal Year |
Amount | |||
|
2011 (remaining nine months) |
$ | 822 | ||
|
2012 |
818 | |||
|
2013 |
550 | |||
|
2014 |
287 | |||
|
Thereafter |
105 | |||
|
Total |
$ | 2,582 | ||
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 $4.5 billion and $3.7 billion for the three months ended October 30, 2010 and October 24, 2009, respectively. The balance of the channel partner financing subject to guarantees was $1.4 billion as of each of October 30, 2010 and July 31, 2010. For the periods presented, payments under these guarantee arrangements were not material.
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 $283 million and $255 million for the three months ended October 30, 2010 and October 24, 2009, respectively.
Financing Guarantee Summary
The aggregate amount of financing guarantees outstanding at October 30, 2010 and July 31, 2010, 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):
| October 30, 2010 | July 31, 2010 | |||||||
|
Maximum potential future payments relating to financing guarantees: |
||||||||
|
Channel partner |
$ | 412 | $ | 448 | ||||
|
End user |
294 | 304 | ||||||
|
Total |
$ | 706 | $ | 752 | ||||
|
Deferred revenue associated with financing guarantees: |
||||||||
|
Channel partner |
$ | 280 | $ | 277 | ||||
|
End user |
265 | 272 | ||||||
|
Total |
$ | 545 | $ | 549 | ||||
|
|||
7. Investments
(a) Summary of Available-for-Sale Investments
The following tables summarize the Company's available-for-sale investments (in millions):
|
October 30, 2010 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
|
Fixed income securities: |
||||||||||||||||
|
U.S. government securities |
$ | 16,387 | $ | 32 | $ | (1 | ) | $ | 16,418 | |||||||
|
U.S. government agency securities (1) |
12,710 | 51 | — | 12,761 | ||||||||||||
|
Non-U.S. government and agency securities (2) |
1,502 | 16 | — | 1,518 | ||||||||||||
|
Corporate debt securities |
2,897 | 71 | (17 | ) | 2,951 | |||||||||||
|
Asset-backed securities |
138 | 9 | (5 | ) | 142 | |||||||||||
|
Total fixed income securities |
33,634 | 179 | (23 | ) | 33,790 | |||||||||||
|
Publicly traded equity securities |
901 | 452 | (14 | ) | 1,339 | |||||||||||
|
Total |
$ | 34,535 | $ | 631 | $ | (37 | ) | $ | 35,129 | |||||||
|
July 31, 2010 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
|
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 | |||||||
| (1) |
Includes corporate debt securities that are guaranteed by the Federal Deposit Insurance Corporation (FDIC). |
| (2) |
Includes corporate debt securities that are guaranteed by non-U.S. governments. |
(b) Gains and Losses on Available-for-Sale Investments
The following table presents the net realized gains and losses related to the Company's available-for-sale investments (in millions):
|
Three Months Ended |
October 30, 2010 | October 24, 2009 | ||||||
|
Net gains on investments in publicly traded equity securities |
$ | 19 | $ | 11 | ||||
|
Net gains on investments in fixed income securities |
71 | 6 | ||||||
|
Total |
$ | 90 | $ | 17 | ||||
There were no impairment charges on available-for-sale investments for the three months ended October 30, 2010 and October 24, 2009.
The following table summarizes the activity related to credit losses for fixed income securities (in millions):
|
Three Months Ended |
October 30, 2010 | October 24, 2009 | ||||||
|
Balance at beginning of period |
$ | (95 | ) | $ | (153 | ) | ||
|
Sales of other-than-temporarily impaired fixed income securities |
27 | 19 | ||||||
|
Balance at end of period |
$ | (68 | ) | $ | (134 | ) | ||
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 October 30, 2010 and July 31, 2010 (in millions):
| UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
|
October 30, 2010 |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
|
Fixed income securities: |
||||||||||||||||||||||||
|
U.S. government securities |
$ | 2,299 | $ | (1 | ) | $ | — | $ | — | $ | 2,299 | $ | (1 | ) | ||||||||||
|
Corporate debt securities |
476 | (1 | ) | 250 | (16 | ) | 726 | (17 | ) | |||||||||||||||
|
Asset-backed securities |
2 | — | 111 | (5 | ) | 113 | (5 | ) | ||||||||||||||||
|
Total fixed income securities |
2,777 | (2 | ) | 361 | (21 | ) | 3,138 | (23 | ) | |||||||||||||||
|
Publicly traded equity securities |
69 | (6 | ) | 422 | (8 | ) | 491 | (14 | ) | |||||||||||||||
|
Total |
$ | 2,846 | $ | (8 | ) | $ | 783 | $ | (29 | ) | $ | 3,629 | $ | (37 | ) | |||||||||
| UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
|
July 31, 2010 |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
|
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 | ) | |||||||||
For fixed income securities that have unrealized losses as of October 30, 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 October 30, 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 three months ended October 30, 2010.
The Company has evaluated its publicly traded equity securities as of October 30, 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 October 30, 2010 (in millions):
| Amortized Cost |
Fair Value |
|||||||
|
Less than 1 year |
$ | 20,554 | $ | 20,587 | ||||
|
Due in 1 to 2 years |
8,230 | 8,289 | ||||||
|
Due in 2 to 5 years |
4,521 | 4,581 | ||||||
|
Due after 5 years |
329 | 333 | ||||||
|
Total |
$ | 33,634 | $ | 33,790 | ||||
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 available-for-sale investments. These transactions, with a daily balance averaging less than 25% of the Company's total available-for-sale investments 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. As of October 30, 2010 and July 31 2010, the Company had no outstanding securities lending transactions. The Company did not experience any losses in connection with the secured lending of securities during the periods presented.
|
|||
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 October 30, 2010 and July 31, 2010 were as follows (in millions):
| OCTOBER 30, 2010 | JULY 31, 2010 | |||||||||||||||||||||||||||||||
| FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Balance |
Level 1 | Level 2 | Level 3 | Total Balance |
|||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||||||||||
|
Cash equivalents: |
||||||||||||||||||||||||||||||||
|
Money market funds |
$ | 2,240 | $ | — | $ | — | $ | 2,240 | $ | 2,521 | $ | — | $ | — | $ | 2,521 | ||||||||||||||||
|
U.S. government securities |
— | 70 | — | 70 | — | 235 | — | 235 | ||||||||||||||||||||||||
|
U.S. government agency securities (1) |
— | 50 | — | 50 | — | 40 | — | 40 | ||||||||||||||||||||||||
|
Corporate debt securities |
— | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||
|
Available-for-sale investments: |
||||||||||||||||||||||||||||||||
|
U.S. government securities |
— | 16,418 | — | 16,418 | — | 16,612 | — | 16,612 | ||||||||||||||||||||||||
|
U.S. government agency securities (1) |
— | 12,761 | — | 12,761 | — | 13,579 | — | 13,579 | ||||||||||||||||||||||||
|
Non-U.S. government and agency securities (2) |
— | 1,518 | — | 1,518 | — | 1,467 | — | 1,467 | ||||||||||||||||||||||||
|
Corporate debt securities |
— | 2,951 | — | 2,951 | — | 2,222 | — | 2,222 | ||||||||||||||||||||||||
|
Asset-backed securities |
— | — | 142 | 142 | — | — | 149 | 149 | ||||||||||||||||||||||||
|
Publicly traded equity securities |
1,339 | — | — | 1,339 | 1,251 | — | — | 1,251 | ||||||||||||||||||||||||
|
Derivative assets |
— | 242 | 2 | 244 | — | 160 | 3 | 163 | ||||||||||||||||||||||||
|
Total |
$ | 3,579 | $ | 34,010 | $ | 144 | $ | 37,733 | $ | 3,772 | $ | 34,316 | $ | 152 | $ | 38,240 | ||||||||||||||||
|
Liabilities: |
||||||||||||||||||||||||||||||||
|
Derivative liabilities |
$ | — | $ | 17 | $ | — | $ | 17 | $ | — | $ | 19 | $ | — | $ | 19 | ||||||||||||||||
|
Total |
$ | — | $ | 17 | $ | — | $ | 17 | $ | — | $ | 19 | $ | — | $ | 19 | ||||||||||||||||
| (1) |
Includes corporate debt securities that are guaranteed by the FDIC. |
| (2) |
Includes corporate debt 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 input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Company's derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the three months ended October 30, 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 three months ended October 30, 2010 and October 24, 2009 (in millions):
| Asset-Backed Securities | Derivative Assets | Total | ||||||||||
|
Balance at July 31, 2010 |
$ | 149 | $ | 3 | $ | 152 | ||||||
|
Total gains and losses (realized and unrealized): |
||||||||||||
|
Included in operating expenses |
— | (1 | ) | (1 | ) | |||||||
|
Included in other comprehensive income |
(1 | ) | — | (1 | ) | |||||||
|
Purchases, sales and maturities |
(6 | ) | — | (6 | ) | |||||||
|
Balance at October 30, 2010 |
$ | 142 | $ | 2 | $ | 144 | ||||||
|
Losses attributable to assets still held as of October 30, 2010 |
$ | — | $ | (1 | ) | $ | (1 | ) | ||||
| 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, net |
(6 | ) | — | (6 | ) | |||||||
|
Included in operating expenses |
— | (2 | ) | (2 | ) | |||||||
|
Included in other comprehensive income |
23 | — | 23 | |||||||||
|
Purchases, sales and maturities |
(63 | ) | — | (63 | ) | |||||||
|
Balance at October 24, 2009 |
$ | 177 | $ | 2 | $ | 179 | ||||||
(c) Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following tables present the Company's financial instruments and nonfinancial assets that were measured at fair value on a nonrecurring basis during the indicated periods and the related recognized gains and losses for the periods (in millions):
|
FAIR VALUE MEASUREMENTS USING |
||||||||||||||||||||
|
Three Months Ended October 30, 2010 |
Net Carrying Value as of October 30, 2010 |
Level 1 | Level 2 | Level 3 | Total Losses for the Three Months Ended October 30, 2010 |
|||||||||||||||
|
Investments in privately held companies |
$ | 9 | $ | — | $ | — | $ | 9 | $ | (3 | ) | |||||||||
|
FAIR VALUE MEASUREMENTS USING |
||||||||||||||||||||
|
Three Months Ended October 24, 2009 |
Net Carrying Value as of October 24, 2009 |
Level 1 | Level 2 | Level 3 | Total Losses for the Three Months Ended October 24, 2009 |
|||||||||||||||
|
Investments in privately held companies |
$ | 23 | $ | — | $ | — | $ | 23 | $ | (10 | ) | |||||||||
|
Property held for sale |
$ | 4 | $ | — | $ | — | $ | 4 | $ | (2 | ) | |||||||||
The assets in the preceding tables 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 assets due to the absence of quoted market prices and inherent lack of liquidity. These assets were measured at fair value due to events or circumstances the Company identified that significantly impacted the fair value of these investments during the three months ended October 30, 2010 and October 24, 2009.
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. The losses for the investments in privately held companies were recorded to other income, net.
The fair values for property held for sale were measured using discounted cash flow techniques. The net losses for property held for sale were included in general and administrative ("G&A") expenses.
(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):
| October 30, 2010 | July 31, 2010 | |||||||||||||||
| 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 | % | 500 | 3.11 | % | ||||||||||
|
5.50% fixed-rate notes, due 2016 ("2016 Notes") |
3,000 | 3.09 | % | 3,000 | 3.18 | % | ||||||||||
|
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 | % | 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 | % | 2,000 | 5.67 | % | ||||||||||
|
Total senior notes |
15,000 | 15,000 | ||||||||||||||
|
Other notes and borrowings |
43 | 59 | ||||||||||||||
|
Unaccreted discount |
(72 | ) | (73 | ) | ||||||||||||
|
Hedge accounting adjustment |
307 | 298 | ||||||||||||||
|
Total |
$ | 15,278 | $ | 15,284 | ||||||||||||
|
Reported as: |
||||||||||||||||
|
Short-term debt |
$ | 3,064 | $ | 3,096 | ||||||||||||
|
Long-term debt |
12,214 | 12,188 | ||||||||||||||
|
Total |
$ | 15,278 | $ | 15,284 | ||||||||||||
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 $16.6 billion and $16.3 billion as of October 30, 2010 and July 31, 2010, 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 covenants on the senior notes and other notes and borrowings as of October 30, 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 $43 million and $59 million at October 30, 2010 and July 31, 2010, 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) the London Interbank Offered Rate ("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 October 30, 2010.
The Company may also, upon the agreement of either the then-existing lenders or of additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $1.9 billion and/or extend the expiration date of the credit facility up to August 15, 2014. As of October 30, 2010, the Company had not borrowed any funds under the credit facility.
|
|||
| 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 | October 30, 2010 |
July 31, 2010 |
Balance Sheet Line Item |
October 30, 2010 |
July 31, 2010 |
|||||||||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||||||||||||||
|
Foreign currency derivatives |
Other current assets | $ | 125 | $ | 82 | Other current liabilities | $ | 10 | $ | 7 | ||||||||||||
|
Interest rate derivatives |
Other assets | 101 | 72 | Other long-term liabilities | — | — | ||||||||||||||||
|
Total |
226 | 154 | 10 | 7 | ||||||||||||||||||
|
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||
|
Foreign currency derivatives |
Other current assets | 16 | 6 | Other current liabilities | 7 | 12 | ||||||||||||||||
|
Equity derivatives |
Other current assets | 1 | 1 | Other current liabilities | — | — | ||||||||||||||||
|
Equity derivatives |
Other assets | 1 | 2 | Other long-term liabilities | — | — | ||||||||||||||||
|
Total |
18 | 9 | 7 | 12 | ||||||||||||||||||
|
Total |
$ | 244 | $ | 163 | $ | 17 | $ | 19 | ||||||||||||||
The effects of the Company's cash flow hedging instruments on other comprehensive income (OCI) and the Consolidated Statements of Operations for the three months ended October 30, 2010 and October 24, 2009 are summarized as follows (in millions):
| GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES (EFFECTIVE PORTION) FOR THE THREE MONTHS ENDED |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR THE THREE MONTHS ENDED |
|||||||||||||||||
|
Derivatives Designated as Cash Flow |
October 30, 2010 |
October 24, 2009 |
Line Item in Statements of Operations |
October 30, 2010 |
October 24, 2009 |
|||||||||||||
|
Foreign currency derivatives |
$ | 55 | $ | 44 | Operating expenses | $ | 6 | $ | (7 | ) | ||||||||
| Cost of sales-service | 1 | (1 | ) | |||||||||||||||
|
Interest rate derivatives |
— | 15 | Interest expense | — | — | |||||||||||||
|
Total |
$ | 55 | $ | 59 | $ | 7 | $ | (8 | ) | |||||||||
During the three months ended October 30, 2010 and October 24, 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.
The effect on the Consolidated Statements of Operations of derivative instruments designated as fair value hedges and the underlying hedged items is summarized as follows (in millions):
| GAINS (LOSSES) ON DERIVATIVE INSTRUMENTS FOR THE THREE MONTHS ENDED |
GAINS (LOSSES) RELATED TO HEDGED ITEMS FOR THE THREE MONTHS ENDED |
|||||||||||||||||
|
Derivatives Designated as Fair Value Hedging Instruments |
Line Item in Statements |
October 30, 2010 |
October 24, 2009 |
October 30, 2010 |
October 24, 2009 |
|||||||||||||
|
Equity derivatives |
Other income, net | $ | — | $ | — | $ | — | $ | — | |||||||||
|
Interest rate derivatives |
Interest expense | 30 | — | (32 | ) | — | ||||||||||||
|
Total |
$ | 30 | $ | — | $ | (32 | ) | $ | — | |||||||||
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 THREE MONTHS ENDED | ||||||||||
|
Derivatives not Designated as Hedging Instruments |
Line Item in Statements of Operations |
October 30, 2010 | October 24, 2009 | |||||||
|
Foreign currency derivatives |
Other income, net | $ | 114 | $ | 126 | |||||
|
Equity derivatives |
Operating expenses | 11 | 13 | |||||||
|
Equity derivatives |
Other income, net | 5 | 4 | |||||||
|
Total |
$ | 130 | $ | 143 | ||||||
(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 option 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, 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.
During the three months ended October 24, 2009, the Company entered into foreign exchange forward and options contracts denominated in Norwegian kroner to hedge against a portion of the foreign currency exchange risk associated with the purchase consideration for Tandberg ASA ("Tandberg"). These contracts were not designated as hedging instruments and were substantially settled in the third quarter of fiscal 2010 in connection with the close of the acquisition.
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 $5 million in OCI for the effective portion of its net investment hedges for the three months ended October 30, 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):
| October 30, 2010 |
July 31, 2010 |
|||||||
|
Cash flow hedging instruments |
$ | 2,257 | $ | 2,611 | ||||
|
No hedge designation |
4,463 | 4,619 | ||||||
|
Net investment hedging instruments |
110 | 105 | ||||||
|
Total |
$ | 6,830 | $ | 7,335 | ||||
(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 October 30, 2010 and July 31, 2010, 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
During the three months ended October 24, 2009, the Company entered into $2.5 billion of interest rate derivatives designated as cash flow hedges to hedge against interest rate movements in connection with the anticipated issuance of senior notes in November 2009. The effective portion of these hedges was recorded to AOCI, net of tax, and is amortized to interest expense over the respective lives of the notes. These derivative instruments were settled in connection with the actual issuance of the senior notes in November 2009
Interest Rate Derivatives Designated as Fair Value Hedge, Long-Term Debt
The Company has entered into interest rate swaps with a $1.5 billion notional amount that are designated as fair value hedges for 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 $101 million and $72 million as of October 30, 2010 and July 31, 2010, respectively, and was reflected in other assets.
(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 hedges. The changes in the value of the hedging instruments are included in other income, net, and offset the change in the fair value of the underlying hedged investment. 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, net. As of October 30, 2010 and July 31, 2010, the Company did not have any equity derivatives outstanding related to its investment portfolio.
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 October 30, 2010 and July 31, 2010, the notional amount of the derivative instruments used to hedge such liabilities was $216 million and $169 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 October 30, 2010 and July 31, 2010.
|
|||
| 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. 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 October 30, 2010 are as follows (in millions):
|
Fiscal Year |
Amount | |||
|
2011 (remaining nine months) |
$ | 283 | ||
|
2012 |
262 | |||
|
2013 |
184 | |||
|
2014 |
129 | |||
|
Thereafter |
444 | |||
|
Total |
$ | 1,302 | ||
(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 October 30, 2010 and July 31, 2010, the Company had total purchase commitments for inventory of $4,048 million and $4,319 million, 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 October 30, 2010 and July 31, 2010, the liability for these purchase commitments was $136 million and $135 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 upon the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $37 million and $34 million during the three months ended October 30, 2010 and October 24, 2009, respectively. The largest component of such compensation expense during these periods was related to milestone achievements by former noncontrolling interest holders of Nuova Systems, Inc. ("Nuova Systems"), the remaining interest of which the Company purchased in fiscal 2008. As of October 30, 2010, the Company estimated that future compensation expense and contingent consideration of up to $175 million may be recognized pursuant to these business combination and asset purchase agreements.
The Company also has certain funding commitments, primarily related to its investments in privately held companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of which are required to be funded on demand. The funding commitments were $257 million and $279 million as of October 30, 2010 and July 31, 2010, respectively.
(d) Variable Interest Entities
In the ordinary course of business, the Company makes 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 evaluates on an ongoing basis its investments in these privately held companies and its customer financings and has determined that as of October 30, 2010 there were no material unconsolidated variable interest entities. Additionally, the Company's potential maximum exposure to loss with these investments was not material.
(e) Product Warranties and Guarantees
The following table summarizes the activity related to the product warranty liability during the three months ended October 30, 2010 and October 24, 2009 (in millions):
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Balance at beginning of period |
$ | 360 | $ | 321 | ||||
|
Provision for warranties issued |
110 | 108 | ||||||
|
Payments |
(120 | ) | (104 | ) | ||||
|
Balance at end of period |
$ | 350 | $ | 325 | ||||
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 October 30, 2010 and 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 $200 million for the alleged evasion of import taxes, $250 million for interest, and approximately $1.7 billion for various penalties, all determined using an exchange rate as of October 30, 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.
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 October 30, 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 did not issue any shares under the Purchase Plan during the periods presented. As of October 30, 2010, 156 million shares were available for issuance under the Purchase Plan.
(b) Employee Stock Incentive Plans
Stock Incentive Plan Program Description As of October 30, 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 25, 2009 |
1,004 | $ | 24.29 | |||||
|
Granted and assumed |
15 | 13.23 | ||||||
|
Exercised |
(158 | ) | 17.88 | |||||
|
Canceled/forfeited/expired |
(129 | ) | 47.31 | |||||
|
BALANCE AT JULY 31, 2010 |
732 | 21.39 | ||||||
|
Exercised |
(23 | ) | 16.63 | |||||
|
Canceled/forfeited/expired |
(5 | ) | 29.32 | |||||
|
BALANCE AT OCTOBER 30, 2010 |
704 | $ | 21.49 | |||||
The following table summarizes significant ranges of outstanding and exercisable stock options as of October 30, 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 |
68 | 2.30 | $ | 10.56 | $ | 839 | 63 | $ | 10.78 | $ | 758 | |||||||||||||||||
|
15.01 – 18.00 |
123 | 3.20 | 17.46 | 664 | 121 | 17.46 | 653 | |||||||||||||||||||||
|
18.01 – 20.00 |
173 | 2.66 | 19.29 | 618 | 170 | 19.29 | 601 | |||||||||||||||||||||
|
20.01 – 25.00 |
184 | 4.04 | 22.49 | 109 | 152 | 22.44 | 98 | |||||||||||||||||||||
|
25.01 – 35.00 |
155 | 5.81 | 30.63 | — | 98 | 30.57 | — | |||||||||||||||||||||
|
35.01 – 70.00 |
1 | 0.43 | 54.74 | — | 1 | 54.74 | — | |||||||||||||||||||||
|
Total |
704 | 3.77 | $ | 21.49 | $ | 2,230 | 605 | $ | 20.72 | $ | 2,110 | |||||||||||||||||
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company's closing stock price of $22.86 as of October 29, 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 October 30, 2010 was 404 million. As of July 31, 2010, 606 million outstanding stock options were exercisable and the weighted-average exercise price was $20.51.
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 per Share |
Aggregated Fair Market Value |
||||||||||
|
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 | |||||||||
|
Granted and assumed |
44 | 21.93 | ||||||||||
|
Vested |
(18 | ) | 23.36 | $ | 373 | |||||||
|
Canceled/forfeited |
(2 | ) | 22.00 | |||||||||
|
BALANCE AT OCTOBER 30, 2010 |
121 | $ | 22.05 | |||||||||
Certain of the restricted stock units awarded in fiscal 2011 are contingent on the future achievement of financial performance metrics. The performance measures for these performance-based restricted stock units are revenue and earnings per share with pre-established adjustments.
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 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 | |||
|
Restricted stock, stock units, and other share-based awards granted and assumed |
(66 | ) | ||
|
Share-based awards canceled/forfeited/expired |
6 | |||
|
Additional shares reserved |
1 | |||
|
BALANCE AT OCTOBER 30, 2010 |
236 | |||
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 such 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):
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Cost of sales – product |
$ | 15 | $ | 12 | ||||
|
Cost of sales – service |
43 | 33 | ||||||
|
Share-based compensation expense in cost of sales |
58 | 45 | ||||||
|
Research and development |
121 | 97 | ||||||
|
Sales and marketing |
164 | 128 | ||||||
|
General and administrative |
64 | 51 | ||||||
|
Share-based compensation expense in operating expenses |
349 | 276 | ||||||
|
Total share-based compensation expense |
$ | 407 | $ | 321 | ||||
As of October 30, 2010, total compensation cost related to unvested share-based awards not yet recognized was $3.8 billion, which is expected to be recognized over approximately 2.7 years on a weighted-average basis. The income tax benefit for share-based compensation expense was $109 million and $85 million for the three months ended October 30, 2010 and October 24, 2009, respectively.
Valuation of Share-Based Awards
The fair value of restricted stock and restricted stock units was measured as if awards were vested and issued on the grant date. The Company estimates the value of employee stock options on the date of grant using a lattice-binomial model and estimates the value of employee stock purchase rights on the date of grant using the Black-Scholes model. The lattice-binomial model is more capable of incorporating the features of the Company's employee stock options, such as the vesting provisions and various restrictions including restrictions on transfer and hedging, among others, and the options are often exercised prior to their contractual maturity. The use of the lattice-binomial model also requires extensive actual employee exercise behavior data for the relative probability estimation purpose, and a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends, kurtosis, and skewness. The Company did not grant a material number of options during the three months ended October 30, 2010 or October 24, 2009.
Accuracy of Fair Value Estimates
The Company uses third-party analyses to assist in developing the assumptions used in, as well as calibrating, its lattice-binomial and Black-Scholes models. The Company is responsible for determining the assumptions used in estimating the fair value of its share-based payment awards. The Company's determination of the fair value of share-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company's expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company's employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management's opinion, the existing valuation models may not provide an accurate measure of the fair value or be indicative of the fair value that would be observed in a willing buyer/willing seller market for the Company's employee stock options.
|
|||
| 14. | Income Taxes |
The following table provides details of income taxes (in millions, except percentages):
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Income before provision for income taxes |
$ | 2,425 | $ | 2,239 | ||||
|
Provision for income taxes |
$ | 495 | $ | 452 | ||||
|
Effective tax rate |
20.4 | % | 20.2 | % | ||||
As of October 30, 2010, the Company had $2.7 billion of unrecognized tax benefits, of which $2.4 billion, if recognized, would favorably impact the effective tax rate. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving transfer pricing and various other matters. The Company estimates that the unrecognized tax benefits at October 30, 2010 could be reduced by approximately $275 million in the next 12 months.
|
|||
| 15. | Segment Information and Major Customers |
The Company designs, manufactures, and sells Internet Protocol (IP)-based networking and other products related to the communications and IT industry and provides services associated with these products and their use. Cisco products include Routers, Switches, New Products, and Other. These products, primarily integrated by Cisco IOS Software, link geographically dispersed local-area networks (LANs), metropolitan-area networks (MANs) and wide-area networks (WANs).
(a) Net Sales and Gross Margin by Segment
The Company conducts business globally and is primarily managed on a geographic basis. In the first quarter of fiscal 2011, in order to achieve operational efficiencies, the Company combined its Asia Pacific and Japan operations. Following this change, the Company is organized into the following four geographic segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets.
The Company's management makes financial decisions and allocates resources based on the information it receives from its internal management system. Sales are attributed to a geographic segment based on the ordering location of the customer. The Company does not allocate research and development, sales and marketing, or general and administrative expenses to its geographic segments in this internal management system because management does not include the information in its measurement of the performance of the operating segments. In addition, the Company does not allocate amortization of acquisition-related intangible assets, share-based compensation expense, charges related to asset impairments and restructurings, and certain other charges to the gross margin for each segment because management does not include this information in its measurement of the performance of the operating segments.
Summarized financial information by segment for the three months ended October 30, 2010 and October 24, 2009, based on the Company's internal management system and as utilized by the Company's Chief Operating Decision Maker (CODM), is as follows (in millions):
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Net sales: |
||||||||
|
United States and Canada (1) |
$ | 5,878 | $ | 4,990 | ||||
|
European Markets |
2,018 | 1,822 | ||||||
|
Emerging Markets |
1,215 | 863 | ||||||
|
Asia Pacific Markets |
1,639 | 1,346 | ||||||
|
Total |
$ | 10,750 | $ | 9,021 | ||||
|
Gross margin (2): |
||||||||
|
United States and Canada |
$ | 3,788 | $ | 3,285 | ||||
|
European Markets |
1,315 | 1,246 | ||||||
|
Emerging Markets |
757 | 544 | ||||||
|
Asia Pacific Markets |
1,054 | 902 | ||||||
|
Segment total |
6,914 | 5,977 | ||||||
|
Unallocated corporate items (3) |
(159 | ) | (89 | ) | ||||
|
Total |
$ | 6,755 | $ | 5,888 | ||||
| (1) |
Net sales in the United States were $5.4 billion and $4.7 billion for the three months ended October 30, 2010 and October 24, 2009, respectively. |
| (2) |
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation. |
| (3) |
The unallocated corporate items include the effects of amortization of acquisition-related intangible assets and share-based compensation expense. |
(b) Net Sales for Groups of Similar Products and Services
Effective at the end of the first quarter of fiscal 2011, the Company revised the categorization of certain of its products into a category called New Products. The New Products category replaces the prior category of Advanced Technologies and also includes certain products previously classified as Other products. The New Products category consists of products related to collaboration, data center, security, wireless, and video connected home. The Other category now consists primarily of optical networking products and emerging technologies.
The following table presents net sales for groups of similar products and services (in millions):
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Net sales (1): |
||||||||
|
Routers |
$ | 1,804 | $ | 1,600 | ||||
|
Switches |
3,551 | 2,851 | ||||||
|
New Products |
3,114 | 2,545 | ||||||
|
Other |
231 | 204 | ||||||
|
Product |
8,700 | 7,200 | ||||||
|
Service |
2,050 | 1,821 | ||||||
|
Total |
$ | 10,750 | $ | 9,021 | ||||
| (1) |
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation. |
(c) Additional Segment Information
The majority of the Company's assets, excluding cash and cash equivalents and investments, as of October 30, 2010 and July 31, 2010 were attributable to its U.S. operations. The Company's total cash and cash equivalents and investments held outside of the United States in various foreign subsidiaries was $35.1 billion as of October 30, 2010, and the remaining $3.8 billion was held in the United States. For the three months ended October 30, 2010 and October 24, 2009, no single customer accounted for 10% or more of the Company's net sales.
Property and equipment information is based on the physical location of the assets. The following table presents property and equipment information for geographic areas (in millions):
| October 30, 2010 |
July 31, 2010 |
|||||||
|
Property and equipment, net: |
||||||||
|
United States |
$ | 3,327 | $ | 3,283 | ||||
|
International |
657 | 658 | ||||||
|
Total |
$ | 3,984 | $ | 3,941 | ||||
|
|||
(a) New Accounting Standards or Updates Recently Adopted
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 was effective for the Company beginning in the first quarter of fiscal 2011. 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. See Note 11.
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 was effective for the Company beginning in the first quarter of fiscal 2011. 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.
(b) Recent Accounting Standards or Updates Not Yet Effective
In July 2010, the FASB issued an accounting standard 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 related to the period end balances are effective for the Company beginning in the second quarter of fiscal 2011, and the revised disclosures related to activity 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.
|
|||
| 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 |
3,240 | $ | 13,512 | $ | 53,970 | $ | 67,482 | |||||||||
|
|||
| Purchase Consideration |
Net Tangible Assets Acquired |
Purchased Intangible Assets |
Goodwill | |||||||||||||
|
Total acquisitions |
$ | 80 | $ | 1 | $ | 30 | $ | 49 | ||||||||
|
|||
| Balance at July 31, 2010 |
Acquisitions | Other | Balance at October 30, 2010 |
|||||||||||||
|
United States and Canada |
$ | 11,289 | $ | 18 | $ | — | $ | 11,307 | ||||||||
|
European Markets |
2,729 | 17 | 19 | 2,765 | ||||||||||||
|
Emerging Markets |
762 | — | — | 762 | ||||||||||||
|
Asia Pacific Markets |
1,894 | 14 | — | 1,908 | ||||||||||||
|
Total |
$ | 16,674 | $ | 49 | $ | 19 | $ | 16,742 | ||||||||
| 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 | |||||||||||||||||||||||||
|
Total |
5.2 | $ | 29 | — | $ | — | 3.0 | $ | 1 | $ | — | $ | 30 | |||||||||||||||||||
|
October 30, 2010 |
Gross | Accumulated Amortization |
Net | |||||||||
|
Purchased intangible assets with finite lives: |
||||||||||||
|
Technology |
$ | 2,427 | $ | (735 | ) | $ | 1,692 | |||||
|
Customer relationships |
2,325 | (1,121 | ) | 1,204 | ||||||||
|
Other |
173 | (93 | ) | 80 | ||||||||
|
Total purchased intangible assets with finite lives |
4,925 | (1,949 | ) | 2,976 | ||||||||
|
IPR&D, with indefinite lives |
200 | — | 200 | |||||||||
|
Total |
$ | 5,125 | $ | (1,949 | ) | $ | 3,176 | |||||
|
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 | |||||
| Three Months Ended | ||||||||
| October 30, 2010 | October 24, 2009 | |||||||
|
Amortization of purchased intangible assets: |
||||||||
|
Cost of sales |
$ | 106 | $ | 49 | ||||
|
Operating expenses |
113 | 105 | ||||||
|
Total |
$ | 219 | $ | 154 | ||||
|
Fiscal Year |
Amount | |||
|
2011 (remaining nine months) |
$ | 639 | ||
|
2012 |
743 | |||
|
2013 |
628 | |||
|
2014 |
443 | |||
|
2015 |
336 | |||
|
Thereafter |
187 | |||
|
Total |
$ | 2,976 | ||
|
|||
| October 30, 2010 |
July 31, 2010 |
|||||||
|
Inventories: |
||||||||
|
Raw materials |
$ | 331 | $ | 217 | ||||
|
Work in process |
54 | 50 | ||||||
|
Finished goods: |
||||||||
|
Distributor inventory and deferred cost of sales |
586 | 587 | ||||||
|
Manufactured finished goods |
314 | 260 | ||||||
|
Total finished goods |
900 | 847 | ||||||
|
Service-related spares |
174 | 161 | ||||||
|
Demonstration systems |
64 | 52 | ||||||
|
Total |
$ | 1,523 | $ | 1,327 | ||||
|
Property and equipment, net: |
||||||||
|
Land, buildings, and building & leasehold improvements |
$ | 4,519 | $ | 4,470 | ||||
|
Computer equipment and related software |
1,427 | 1,405 | ||||||
|
Production, engineering, and other equipment |
4,879 | 4,702 | ||||||
|
Operating lease assets |
263 | 255 | ||||||
|
Furniture and fixtures |
479 | 476 | ||||||
| 11,567 | 11,308 | |||||||
|
Less accumulated depreciation and amortization |
(7,583 | ) | (7,367 | ) | ||||
|
Total |
$ | 3,984 | $ | 3,941 | ||||
|
Other assets: |
||||||||
|
Deferred tax assets |
$ | 1,881 | $ | 2,079 | ||||
|
Investments in privately held companies |
779 | 756 | ||||||
|
Lease receivables, net (1) |
1,265 | 1,176 | ||||||
|
Financed service contracts, net (1) |
767 | 763 | ||||||
|
Loan receivables, net (1) |
621 | 675 | ||||||
|
Other |
394 | 371 | ||||||
|
Total |
$ | 5,707 | $ | 5,820 | ||||
|
Deferred revenue: |
||||||||
|
Service |
$ | 7,169 | $ | 7,428 | ||||
|
Product: |
||||||||
|
Unrecognized revenue on product shipments and other deferred revenue |
2,737 | 2,788 | ||||||
|
Cash receipts related to unrecognized revenue from two-tier distributors |
830 | 867 | ||||||
|
Total product deferred revenue |
3,567 | 3,655 | ||||||
|
Total |
$ | 10,736 | $ | 11,083 | ||||
|
Reported as: |
||||||||
|
Current |
$ | 7,420 | $ | 7,664 | ||||
|
Noncurrent |
3,316 | 3,419 | ||||||
|
Total |
$ | 10,736 | $ | 11,083 | ||||
| (1) |
Amounts represent the noncurrent portions of the respective balances. See Note 6 for the current portions of the respective balances. |
|
|
October 30, 2010 |
Lease Receivables |
Financed Service Contracts |
Loan Receivables |
Financing Receivables |
||||||||||||
|
Gross |
$ | 2,582 | $ | 1,758 | $ | 1,262 | $ | 5,602 | ||||||||
|
Unearned income |
(222 | ) | — | — | (222 | ) | ||||||||||
|
Allowances |
(232 | ) | (23 | ) | (80 | ) | (335 | ) | ||||||||
|
Total, net |
$ | 2,128 | $ | 1,735 | $ | 1,182 | $ | 5,045 | ||||||||
|
Reported as: |
||||||||||||||||
|
Current |
$ | 863 | $ | 968 | $ | 561 | $ | 2,392 | ||||||||
|
Noncurrent |
1,265 | 767 | 621 | 2,653 | ||||||||||||
|
Total, net |
$ | 2,128 | $ | 1,735 | $ | 1,182 | $ | 5,045 | ||||||||
|
July 31, 2010 |
Lease Receivables |
Financed Service Contracts |
Loan Receivables |
Financing Receivables |
||||||||||||
|
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 | ||||||||
|
Fiscal Year |
Amount | |||
|
2011 (remaining nine months) |
$ | 822 | ||
|
2012 |
818 | |||
|
2013 |
550 | |||
|
2014 |
287 | |||
|
Thereafter |
105 | |||
|
Total |
$ | 2,582 | ||
| October 30, 2010 | July 31, 2010 | |||||||
|
Maximum potential future payments relating to financing guarantees: |
||||||||
|
Channel partner |
$ | 412 | $ | 448 | ||||
|
End user |
294 | 304 | ||||||
|
Total |
$ | 706 | $ | 752 | ||||
|
Deferred revenue associated with financing guarantees: |
||||||||
|
Channel partner |
$ | 280 | $ | 277 | ||||
|
End user |
265 | 272 | ||||||
|
Total |
$ | 545 | $ | 549 | ||||
|
|||
|
October 30, 2010 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
|
Fixed income securities: |
||||||||||||||||
|
U.S. government securities |
$ | 16,387 | $ | 32 | $ | (1 | ) | $ | 16,418 | |||||||
|
U.S. government agency securities (1) |
12,710 | 51 | — | 12,761 | ||||||||||||
|
Non-U.S. government and agency securities (2) |
1,502 | 16 | — | 1,518 | ||||||||||||
|
Corporate debt securities |
2,897 | 71 | (17 | ) | 2,951 | |||||||||||
|
Asset-backed securities |
138 | 9 | (5 | ) | 142 | |||||||||||
|
Total fixed income securities |
33,634 | 179 | (23 | ) | 33,790 | |||||||||||
|
Publicly traded equity securities |
901 | 452 | (14 | ) | 1,339 | |||||||||||
|
Total |
$ | 34,535 | $ | 631 | $ | (37 | ) | $ | 35,129 | |||||||
|
July 31, 2010 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
|
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 | |||||||
| (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. |
|
Three Months Ended |
October 30, 2010 | October 24, 2009 | ||||||
|
Net gains on investments in publicly traded equity securities |
$ | 19 | $ | 11 | ||||
|
Net gains on investments in fixed income securities |
71 | 6 | ||||||
|
Total |
$ | 90 | $ | 17 | ||||
|
Three Months Ended |
October 30, 2010 | October 24, 2009 | ||||||
|
Balance at beginning of period |
$ | (95 | ) | $ | (153 | ) | ||
|
Sales of other-than-temporarily impaired fixed income securities |
27 | 19 | ||||||
|
Balance at end of period |
$ | (68 | ) | $ | (134 | ) | ||
| UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
|
October 30, 2010 |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
|
Fixed income securities: |
||||||||||||||||||||||||
|
U.S. government securities |
$ | 2,299 | $ | (1 | ) | $ | — | $ | — | $ | 2,299 | $ | (1 | ) | ||||||||||
|
Corporate debt securities |
476 | (1 | ) | 250 | (16 | ) | 726 | (17 | ) | |||||||||||||||
|
Asset-backed securities |
2 | — | 111 | (5 | ) | 113 | (5 | ) | ||||||||||||||||
|
Total fixed income securities |
2,777 | (2 | ) | 361 | (21 | ) | 3,138 | (23 | ) | |||||||||||||||
|
Publicly traded equity securities |
69 | (6 | ) | 422 | (8 | ) | 491 | (14 | ) | |||||||||||||||
|
Total |
$ | 2,846 | $ | (8 | ) | $ | 783 | $ | (29 | ) | $ | 3,629 | $ | (37 | ) | |||||||||
| UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
|
July 31, 2010 |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
|
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 | ) | |||||||||
| Amortized Cost |
Fair Value |
|||||||
|
Less than 1 year |
$ | 20,554 | $ | 20,587 | ||||
|
Due in 1 to 2 years |
8,230 | 8,289 | ||||||
|
Due in 2 to 5 years |
4,521 | 4,581 | ||||||
|
Due after 5 years |
329 | 333 | ||||||
|
Total |
$ | 33,634 | $ | 33,790 | ||||
|
|||
| OCTOBER 30, 2010 | JULY 31, 2010 | |||||||||||||||||||||||||||||||
| FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total Balance |
Level 1 | Level 2 | Level 3 | Total Balance |
|||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||||||||||
|
Cash equivalents: |
||||||||||||||||||||||||||||||||
|
Money market funds |
$ | 2,240 | $ | — | $ | — | $ | 2,240 | $ | 2,521 | $ | — | $ | — | $ | 2,521 | ||||||||||||||||
|
U.S. government securities |
— | 70 | — | 70 | — | 235 | — | 235 | ||||||||||||||||||||||||
|
U.S. government agency securities (1) |
— | 50 | — | 50 | — | 40 | — | 40 | ||||||||||||||||||||||||
|
Corporate debt securities |
— | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||
|
Available-for-sale investments: |
||||||||||||||||||||||||||||||||
|
U.S. government securities |
— | 16,418 | — | 16,418 | — | 16,612 | — | 16,612 | ||||||||||||||||||||||||
|
U.S. government agency securities (1) |
— | 12,761 | — | 12,761 | — | 13,579 | — | 13,579 | ||||||||||||||||||||||||
|
Non-U.S. government and agency securities (2) |
— | 1,518 | — | 1,518 | — | 1,467 | — | 1,467 | ||||||||||||||||||||||||
|
Corporate debt securities |
— | 2,951 | — | 2,951 | — | 2,222 | — | 2,222 | ||||||||||||||||||||||||
|
Asset-backed securities |
— | — | 142 | 142 | — | — | 149 | 149 | ||||||||||||||||||||||||
|
Publicly traded equity securities |
1,339 | — | — | 1,339 | 1,251 | — | — | 1,251 | ||||||||||||||||||||||||
|
Derivative assets |
— | 242 | 2 | 244 | — | 160 | 3 | 163 | ||||||||||||||||||||||||
|
Total |
$ | 3,579 | $ | 34,010 | $ | 144 | $ | 37,733 | $ | 3,772 | $ | 34,316 | $ | 152 | $ | 38,240 | ||||||||||||||||
|
Liabilities: |
||||||||||||||||||||||||||||||||
|
Derivative liabilities |
$ | — | $ | 17 | $ | — | $ | 17 | $ | — | $ | 19 | $ | — | $ | 19 | ||||||||||||||||
|
Total |
$ | — | $ | 17 | $ | — | $ | 17 | $ | — | $ | 19 | $ | — | $ | 19 | ||||||||||||||||
| (1) |
Includes corporate debt securities that are guaranteed by the FDIC. |
| (2) |
Includes corporate debt securities that are guaranteed by non-U.S. governments. |
| Asset-Backed Securities | Derivative Assets | Total | ||||||||||
|
Balance at July 31, 2010 |
$ | 149 | $ | 3 | $ | 152 | ||||||
|
Total gains and losses (realized and unrealized): |
||||||||||||
|
Included in operating expenses |
— | (1 | ) | (1 | ) | |||||||
|
Included in other comprehensive income |
(1 | ) | — | (1 | ) | |||||||
|
Purchases, sales and maturities |
(6 | ) | — | (6 | ) | |||||||
|
Balance at October 30, 2010 |
$ | 142 | $ | 2 | $ | 144 | ||||||
|
Losses attributable to assets still held as of October 30, 2010 |
$ | — | $ | (1 | ) | $ | (1 | ) | ||||
| 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, net |
(6 | ) | — | (6 | ) | |||||||
|
Included in operating expenses |
— | (2 | ) | (2 | ) | |||||||
|
Included in other comprehensive income |
23 | — | 23 | |||||||||
|
Purchases, sales and maturities |
(63 | ) | — | (63 | ) | |||||||
|
Balance at October 24, 2009 |
$ | 177 | $ | 2 | $ | 179 | ||||||
|
FAIR VALUE MEASUREMENTS USING |
||||||||||||||||||||
|
Three Months Ended October 30, 2010 |
Net Carrying Value as of October 30, 2010 |
Level 1 | Level 2 | Level 3 | Total Losses for the Three Months Ended October 30, 2010 |
|||||||||||||||
|
Investments in privately held companies |
$ | 9 | $ | — | $ | — | $ | 9 | $ | (3 | ) | |||||||||
|
FAIR VALUE MEASUREMENTS USING |
||||||||||||||||||||
|
Three Months Ended October 24, 2009 |
Net Carrying Value as of October 24, 2009 |
Level 1 | Level 2 | Level 3 | Total Losses for the Three Months Ended October 24, 2009 |
|||||||||||||||
|
Investments in privately held companies |
$ | 23 | $ | — | $ | — | $ | 23 | $ | (10 | ) | |||||||||
|
Property held for sale |
$ | 4 | $ | — | $ | — | $ | 4 | $ | (2 | ) | |||||||||
|
|||
| October 30, 2010 | July 31, 2010 | |||||||||||||||
| 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 | % | 500 | 3.11 | % | ||||||||||
|
5.50% fixed-rate notes, due 2016 ("2016 Notes") |
3,000 | 3.09 | % | 3,000 | 3.18 | % | ||||||||||
|
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 | % | 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 | % | 2,000 | 5.67 | % | ||||||||||
|
Total senior notes |
15,000 | 15,000 | ||||||||||||||
|
Other notes and borrowings |
43 | 59 | ||||||||||||||
|
Unaccreted discount |
(72 | ) | (73 | ) | ||||||||||||
|
Hedge accounting adjustment |
307 | 298 | ||||||||||||||
|
Total |
$ | 15,278 | $ | 15,284 | ||||||||||||
|
Reported as: |
||||||||||||||||
|
Short-term debt |
$ | 3,064 | $ | 3,096 | ||||||||||||
|
Long-term debt |
12,214 | 12,188 | ||||||||||||||
|
Total |
$ | 15,278 | $ | 15,284 | ||||||||||||
|
|||
| DERIVATIVE ASSETS |
DERIVATIVE LIABILITIES |
|||||||||||||||||||||
| Balance Sheet Line Item | October 30, 2010 |
July 31, 2010 |
Balance Sheet Line Item |
October 30, 2010 |
July 31, 2010 |
|||||||||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||||||||||||||
|
Foreign currency derivatives |
Other current assets | $ | 125 | $ | 82 | Other current liabilities | $ | 10 | $ | 7 | ||||||||||||
|
Interest rate derivatives |
Other assets | 101 | 72 | Other long-term liabilities | — | — | ||||||||||||||||
|
Total |
226 | 154 | 10 | 7 | ||||||||||||||||||
|
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||
|
Foreign currency derivatives |
Other current assets | 16 | 6 | Other current liabilities | 7 | 12 | ||||||||||||||||
|
Equity derivatives |
Other current assets | 1 | 1 | Other current liabilities | — | — | ||||||||||||||||
|
Equity derivatives |
Other assets | 1 | 2 | Other long-term liabilities | — | — | ||||||||||||||||
|
Total |
18 | 9 | 7 | 12 | ||||||||||||||||||
|
Total |
$ | 244 | $ | 163 | $ | 17 | $ | 19 | ||||||||||||||
| GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES (EFFECTIVE PORTION) FOR THE THREE MONTHS ENDED |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR THE THREE MONTHS ENDED |
|||||||||||||||||
|
Derivatives Designated as Cash Flow |
October 30, 2010 |
October 24, 2009 |
Line Item in Statements of Operations |
October 30, 2010 |
October 24, 2009 |
|||||||||||||
|
Foreign currency derivatives |
$ | 55 | $ | 44 | Operating expenses | $ | 6 | $ | (7 | ) | ||||||||
| Cost of sales-service | 1 | (1 | ) | |||||||||||||||
|
Interest rate derivatives |
— | 15 | Interest expense | — | — | |||||||||||||
|
Total |
$ | 55 | $ | 59 | $ | 7 | $ | (8 | ) | |||||||||
| GAINS (LOSSES) ON DERIVATIVE INSTRUMENTS FOR THE THREE MONTHS ENDED |
GAINS (LOSSES) RELATED TO HEDGED ITEMS FOR THE THREE MONTHS ENDED |
|||||||||||||||||
|
Derivatives Designated as Fair Value Hedging Instruments |
Line Item in Statements |
October 30, 2010 |
October 24, 2009 |
October 30, 2010 |
October 24, 2009 |
|||||||||||||
|
Equity derivatives |
Other income, net | $ | — | $ | — | $ | — | $ | — | |||||||||
|
Interest rate derivatives |
Interest expense | 30 | — | (32 | ) | — | ||||||||||||
|
Total |
$ | 30 | $ | — | $ | (32 | ) | $ | — | |||||||||
| GAINS (LOSSES) FOR THE THREE MONTHS ENDED | ||||||||||
|
Derivatives not Designated as Hedging Instruments |
Line Item in Statements of Operations |
October 30, 2010 | October 24, 2009 | |||||||
|
Foreign currency derivatives |
Other income, net | $ | 114 | $ | 126 | |||||
|
Equity derivatives |
Operating expenses | 11 | 13 | |||||||
|
Equity derivatives |
Other income, net | 5 | 4 | |||||||
|
Total |
$ | 130 | $ | 143 | ||||||
| October 30, 2010 |
July 31, 2010 |
|||||||
|
Cash flow hedging instruments |
$ | 2,257 | $ | 2,611 | ||||
|
No hedge designation |
4,463 | 4,619 | ||||||
|
Net investment hedging instruments |
110 | 105 | ||||||
|
Total |
$ | 6,830 | $ | 7,335 | ||||
|
|||
|
Fiscal Year |
Amount | |||
|
2011 (remaining nine months) |
$ | 283 | ||
|
2012 |
262 | |||
|
2013 |
184 | |||
|
2014 |
129 | |||
|
Thereafter |
444 | |||
|
Total |
$ | 1,302 | ||
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Balance at beginning of period |
$ | 360 | $ | 321 | ||||
|
Provision for warranties issued |
110 | 108 | ||||||
|
Payments |
(120 | ) | (104 | ) | ||||
|
Balance at end of period |
$ | 350 | $ | 325 | ||||
|
|||
| STOCK OPTIONS OUTSTANDING | ||||||||
| Number Outstanding |
Weighted- Average Exercise Price per Share |
|||||||
|
BALANCE AT JULY 25, 2009 |
1,004 | $ | 24.29 | |||||
|
Granted and assumed |
15 | 13.23 | ||||||
|
Exercised |
(158 | ) | 17.88 | |||||
|
Canceled/forfeited/expired |
(129 | ) | 47.31 | |||||
|
BALANCE AT JULY 31, 2010 |
732 | 21.39 | ||||||
|
Exercised |
(23 | ) | 16.63 | |||||
|
Canceled/forfeited/expired |
(5 | ) | 29.32 | |||||
|
BALANCE AT OCTOBER 30, 2010 |
704 | $ | 21.49 | |||||
| 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 |
68 | 2.30 | $ | 10.56 | $ | 839 | 63 | $ | 10.78 | $ | 758 | |||||||||||||||||
|
15.01 – 18.00 |
123 | 3.20 | 17.46 | 664 | 121 | 17.46 | 653 | |||||||||||||||||||||
|
18.01 – 20.00 |
173 | 2.66 | 19.29 | 618 | 170 | 19.29 | 601 | |||||||||||||||||||||
|
20.01 – 25.00 |
184 | 4.04 | 22.49 | 109 | 152 | 22.44 | 98 | |||||||||||||||||||||
|
25.01 – 35.00 |
155 | 5.81 | 30.63 | — | 98 | 30.57 | — | |||||||||||||||||||||
|
35.01 – 70.00 |
1 | 0.43 | 54.74 | — | 1 | 54.74 | — | |||||||||||||||||||||
|
Total |
704 | 3.77 | $ | 21.49 | $ | 2,230 | 605 | $ | 20.72 | $ | 2,110 | |||||||||||||||||
| Restricted Stock/Stock Units |
Weighted- Average Grant Date Price per Share |
Aggregated Fair Market Value |
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|
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 | |||||||||
|
Granted and assumed |
44 | 21.93 | ||||||||||
|
Vested |
(18 | ) | 23.36 | $ | 373 | |||||||
|
Canceled/forfeited |
(2 | ) | 22.00 | |||||||||
|
BALANCE AT OCTOBER 30, 2010 |
121 | $ | 22.05 | |||||||||
| Share- Based Awards Available for Grant |
||||
|
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 | |||
|
Restricted stock, stock units, and other share-based awards granted and assumed |
(66 | ) | ||
|
Share-based awards canceled/forfeited/expired |
6 | |||
|
Additional shares reserved |
1 | |||
|
BALANCE AT OCTOBER 30, 2010 |
236 | |||
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
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|
Cost of sales – product |
$ | 15 | $ | 12 | ||||
|
Cost of sales – service |
43 | 33 | ||||||
|
Share-based compensation expense in cost of sales |
58 | 45 | ||||||
|
Research and development |
121 | 97 | ||||||
|
Sales and marketing |
164 | 128 | ||||||
|
General and administrative |
64 | 51 | ||||||
|
Share-based compensation expense in operating expenses |
349 | 276 | ||||||
|
Total share-based compensation expense |
$ | 407 | $ | 321 | ||||
|
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| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
|||||||
|
Income before provision for income taxes |
$ | 2,425 | $ | 2,239 | ||||
|
Provision for income taxes |
$ | 495 | $ | 452 | ||||
|
Effective tax rate |
20.4 | % | 20.2 | % | ||||
|
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| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
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|
Net sales: |
||||||||
|
United States and Canada (1) |
$ | 5,878 | $ | 4,990 | ||||
|
European Markets |
2,018 | 1,822 | ||||||
|
Emerging Markets |
1,215 | 863 | ||||||
|
Asia Pacific Markets |
1,639 | 1,346 | ||||||
|
Total |
$ | 10,750 | $ | 9,021 | ||||
|
Gross margin (2): |
||||||||
|
United States and Canada |
$ | 3,788 | $ | 3,285 | ||||
|
European Markets |
1,315 | 1,246 | ||||||
|
Emerging Markets |
757 | 544 | ||||||
|
Asia Pacific Markets |
1,054 | 902 | ||||||
|
Segment total |
6,914 | 5,977 | ||||||
|
Unallocated corporate items (3) |
(159 | ) | (89 | ) | ||||
|
Total |
$ | 6,755 | $ | 5,888 | ||||
| (1) |
Net sales in the United States were $5.4 billion and $4.7 billion for the three months ended October 30, 2010 and October 24, 2009, respectively. |
| (2) |
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation. |
| (3) |
The unallocated corporate items include the effects of amortization of acquisition-related intangible assets and share-based compensation expense. |
| Three Months Ended | ||||||||
| October 30, 2010 |
October 24, 2009 |
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|
Net sales (1): |
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|
Routers |
$ | 1,804 | $ | 1,600 | ||||
|
Switches |
3,551 | 2,851 | ||||||
|
New Products |
3,114 | 2,545 | ||||||
|
Other |
231 | 204 | ||||||
|
Product |
8,700 | 7,200 | ||||||
|
Service |
2,050 | 1,821 | ||||||
|
Total |
$ | 10,750 | $ | 9,021 | ||||
| (1) |
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation. |
| October 30, 2010 |
July 31, 2010 |
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|
Property and equipment, net: |
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|
United States |
$ | 3,327 | $ | 3,283 | ||||
|
International |
657 | 658 | ||||||
|
Total |
$ | 3,984 | $ | 3,941 | ||||
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