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Supplemental Information
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of July 28, 2012, the Company’s Board of Directors had authorized an aggregate repurchase of up to $82 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 13 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related 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 |
3,740 | $ | 17,041 | $ | 59,092 | $ | 76,133 |
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
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1. Basis of Presentation
The fiscal year for Cisco Systems, Inc. (the “Company” or “Cisco”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2012 and fiscal 2011 are each 52-week fiscal years, while fiscal 2010 is a 53-week fiscal year. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis. Beginning in fiscal 2012, the Company is organized into the following three geographic segments: the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia Pacific, Japan, and China (“APJC”). In fiscal 2011, the Company was organized into the following four geographic segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. As a result of this geographic segment change in fiscal 2012, countries within the former Emerging Markets segment were consolidated into either EMEA or the Americas segment depending on their respective geographic locations. The Company has reclassified the geographic segment data for prior periods to conform to the current year’s presentation.
The Company consolidates its investment in Insieme Networks, Inc. (“Insieme”) and a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as these are variable interest entities and the Company is the primary beneficiary. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Company’s equity in the equity section of the Consolidated Balance Sheets. SOFTBANK’s share of the earnings in the venture fund 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. The loss attributable to the noncontrolling interests on Insieme (see Note 12) is not presented separately in the Consolidated Statements of Operations as this amount is not material for the periods presented.
In addition to the geographic segment change referred to earlier, certain other reclassifications have been made to the amounts for prior years in order to conform to the current year’s presentation, which includes the combination of the Company’s financing receivables from a former two classes into a single class (see Note 7) and re-categorization of the Company’s products (see Note 16). The Company has evaluated subsequent events through the date that the financial statements were issued.
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2. Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
(b) Available-for-Sale Investments The Company classifies its investments in both fixed income securities and publicly traded equity securities as available-for-sale investments. Fixed income securities primarily consist of U.S. government securities, U.S. government agency securities, non-U.S. government and agency securities, corporate debt securities, and asset-backed securities. These available-for-sale investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of fixed income and public equity securities sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments, to the extent the investments are unhedged, are included as a separate component of accumulated other comprehensive income (“AOCI”), net of tax. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
(c) Other-than-Temporary Impairments on Investments When the fair value of a debt security is less than its amortized cost, it is deemed impaired, and the Company will assess whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If impairment is considered other than temporary based on condition (i) or (ii) described earlier, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (“OCI”).
The Company recognizes an impairment charge on publicly traded equity securities when a decline in the fair value of a security below the respective cost basis is judged to be other than temporary. The Company considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Investments in privately held companies are included in other assets in the Consolidated Balance Sheets and are primarily accounted for using either the cost or equity method. The Company monitors these investments for impairments and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the financial condition and near-term prospects of these companies.
(d) Inventories Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. In addition, the Company records a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of the Company’s future demand forecasts consistent with its valuation of excess and obsolete inventory.
(e) Allowance for Doubtful Accounts The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, economic conditions that may affect a customer’s ability to pay, and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.
(f) Financing Receivables The Company provides financing arrangements, including leases, financed service contracts, and loans, for certain qualified end-user customers to build, maintain, and upgrade their networks. Lease receivables primarily represent sales-type and direct-financing leases. Leases have on average a four-year term and are usually collateralized by a security interest in the underlying assets, while loan receivables generally have terms of up to three years. Financed service contracts typically have terms of one to three years and primarily relate to technical support services.
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other. Effective in the second quarter of fiscal 2012, the Company combined its financing receivables into a single class as the two prior classes, Established Markets and Growth Markets, now exhibit similar risk characteristics as reflected by the Company’s historical losses. See Note 7.
The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company’s historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer’s ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, will be assessed and fully reserved at the customer level. Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. Effective at the beginning of the second quarter of fiscal 2012, the Company refined its methodology for determining the portion of its allowance for credit loss that is evaluated on a collective basis. The refinement consists of more systematically giving effect to economic conditions, concentration of risk, and correlation. The Company also began to use expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default. Previously the Company used only historical loss rates published by the same third-party credit-rating agency. These refinements are intended to better identify changes in macroeconomic conditions and credit risk. There was not a material change to the Company’s total allowance for credit loss related to financing receivables as a result of these methodology refinements.
Expected default frequency rates are published quarterly by a major third-party credit-rating agency, and the internal credit risk rating is derived by taking into consideration various customer-specific factors and macroeconomic conditions. These factors, which include the strength of the customer’s business and financial performance, the quality of the customer’s banking relationships, the Company’s specific historical experience with the customer, the performance and outlook of the customer’s industry, the customer’s legal and regulatory environment, the potential sovereign risk of the geographic locations in which the customer is operating, and independent third-party evaluations, are updated regularly or when facts and circumstances indicate that an update is deemed necessary. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.
Financing receivables are written off at the point when they are considered uncollectible and all outstanding balances, including any previously earned but uncollected interest income, will be reversed and charged against earnings. The Company does not typically have any partially written-off financing receivables.
Outstanding financing receivables that are aged 31 days or more from the contractual payment date are considered past due. The Company does not accrue interest on financing receivables that are considered impaired or more than 90 days past due unless either the receivable has not been collected due to administrative reasons or the receivable is well secured. Financing receivables may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a financing receivable has been categorized as nonaccrual, interest will be recognized when cash is received. A financing receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled and the customer remains current for an appropriate period.
The Company facilitates third-party financing arrangements for channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of the Company’s receivables to the third party. The receivables are derecognized upon transfer, as these transfers qualify as true sales, and the Company receives a payment for the receivables from the third party based on the Company’s standard payment terms. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The Company could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners or end-user customers. Deferred revenue relating to these financing arrangements is recorded in accordance with revenue recognition policies or for the fair value of the financing guarantees.
(g) Depreciation and Amortization Property and equipment are stated at cost, less accumulated depreciation or amortization, whenever applicable. Depreciation and amortization expenses for property and equipment were approximately $1.1 billion, $1.1 billion, and $1.0 billion for fiscal 2012, 2011 and 2010, respectively. Depreciation and amortization are computed using the straight-line method, generally over the following periods:
Asset category |
Period |
|
Buildings |
25 years | |
Building improvements |
10 years | |
Furniture and fixtures |
5 years | |
Leasehold improvements |
Shorter of remaining lease term or 5 years | |
Computer equipment and related software |
30 to 36 months | |
Production, engineering, and other equipment |
Up to 5 years | |
Operating lease assets |
Based on lease term generally up to 3 years |
(h) Business Combinations The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over the asset’s estimated useful life. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.
(i) Goodwill and Purchased Intangible Assets Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to seven years. See “Long-Lived Assets,” following, for the Company’s policy regarding impairment testing of purchased intangible assets with finite lives. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired.
(j) Long-Lived Assets Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
(k) Derivative Instruments The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For a derivative instrument designated as a net investment hedge of the Company’s foreign operations, the gain or loss is recorded in the cumulative translation adjustment within AOCI together with the offsetting loss or gain of the hedged exposure of the underlying foreign operations. Any ineffective portion of the net investment hedges is reported in earnings during the period of change. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change. The Company records derivative instruments in the statements of cash flows to operating, investing, or financing activities consistent with the cash flows of the hedged item.
(l) Foreign Currency Translation Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of AOCI. Income and expense accounts are translated at average exchange rates during the year. Remeasurement adjustments are recorded in other income, net. The effect of foreign currency exchange rates on cash and cash equivalents was not material for any of the fiscal years presented.
(m) Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties.
The Company performs ongoing credit evaluations of its customers and, with the exception of certain financing transactions, does not require collateral from its customers. The Company receives certain of its components from sole suppliers. Additionally, the Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for its products. The inability of a contract manufacturer or supplier to fulfill supply requirements of the Company could materially impact future operating results.
(n) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. For hosting arrangements, the Company recognizes subscription revenue ratably over the subscription period, while usage revenue is recognized based on utilization. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years. Advanced services transactional revenue is recognized upon delivery or completion of performance.
The Company uses distributors that stock inventory and typically sell to systems integrators, service providers, and other resellers. In addition, certain products are sold through retail partners. The Company refers to this as its two-tier system of sales to the end customer. Revenue from distributors and retail partners is recognized based on a sell-through method using information provided by them. Distributors and retail partners participate in various cooperative marketing and other programs, and the Company maintains estimated accruals and allowances for these programs. The Company accrues for warranty costs, sales returns, and other allowances based on its historical experience. Shipping and handling fees billed to customers are included in net sales, with the associated costs included in cost of sales.
Many of the Company’s products have both software and nonsoftware components that function together to deliver the products’ essential functionality. The Company’s product offerings fall into the following categories: Switching, Next-Generation Network (“NGN”) Routing, Collaboration, Service Provider Video, Wireless, Security, Data Center, and Other Products. The Company also provides technical support and advanced services. The Company has a broad customer base that encompasses virtually all types of public and private entities, including enterprise businesses, service providers, commercial customers, and consumers. The Company and its salesforce are not organized by product divisions, and the Company’s products and services can be sold standalone or together in various combinations across the Company’s geographic segments or customer markets. For example, service provider arrangements are typically larger in scale with longer deployment schedules and involve the delivery of a variety of product technologies, including high-end routing, video and network management software, and other product technologies along with technical support and advanced services. The Company’s enterprise and commercial arrangements are unique for each customer and smaller in scale and may include network infrastructure products such as routers and switches or collaboration technologies such as unified communications and Cisco TelePresence systems products along with technical support services.
The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and the technical support services delivered across multiple reporting periods. Another customer may purchase networking products along with advanced service offerings, in which all the elements are delivered within the same reporting period. In addition, distributors and retail partners purchase products or technical support services on a standalone basis for resale to an end user or for purposes of stocking certain products, and these transactions would not result in a multiple-element arrangement.
In many instances, products are sold separately in standalone arrangements as customers may support the products themselves or purchase support on a time-and-materials basis. Advanced services are sometimes sold in standalone engagements such as general consulting, network management, or security advisory projects, and technical support services are sold separately through renewals of annual contracts. The Company determines its Vendor-Specific Objective Evidence (“VSOE”) based on its normal pricing and discounting practices for the specific product or service when sold separately. VSOE determination requires that a substantial majority of the historical standalone transactions have the selling prices for a product or service that fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups and customer classifications, and other environmental or marketing variables in determining VSOE.
When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain newly introduced product categories, the Company attempts to determine the selling price of each element based on third-party evidence of selling price (“TPE”). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers, and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, the Company is typically not able to determine TPE.
When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling prices (“ESP”) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were regularly sold on a standalone basis. ESP is generally used for new or highly proprietary offerings and solutions, or for offerings not priced within a reasonably narrow range. The Company determines ESP for a product or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and formal approval by the Company’s management, taking into consideration the go-to-market strategy.
The Company regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material impacts during the fiscal year, nor does the Company currently expect a material impact in the near term from changes in VSOE, TPE, or ESP.
The Company’s arrangements with multiple deliverables may have a standalone software deliverable that is subject to the software revenue recognition guidance. In these cases, revenue for the software is generally recognized upon shipment or electronic delivery and granting of the license. The revenue for these multiple-element arrangements is allocated to the software deliverable and the nonsoftware deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the applicable accounting guidance. In the limited circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purposes of performing this allocation.
(o) Advertising Costs The Company expenses all advertising costs as incurred. Advertising costs included within sales and marketing expenses were approximately $218 million, $325 million, and $290 million for fiscal 2012, 2011, and 2010, respectively.
(p) Share-Based Compensation Expense The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors, including employee stock options, stock grants, stock units, and employee stock purchases related to the Employee Stock Purchase Plan (“Employee Stock Purchase Rights”) based on estimated fair values. The fair value of employee stock options is estimated on the date of grant using a lattice-binomial option-pricing model (“Lattice-Binomial Model”), and for employee stock purchase rights the Company estimates the fair value using the Black-Scholes model. The fair value for time-based stock awards and stock awards that are contingent upon the achievement of financial performance metrics is based on the grant date share price reduced by the present value of the expected dividend yield prior to vesting. The fair value of market-based stock awards is estimated using an option-pricing model on the date of grant. Because share-based compensation expense is based on awards ultimately expected to vest, it has been reduced for forfeitures.
(q) Software Development Costs Software development costs required to be capitalized for software sold, leased, or otherwise marketed have not been material to date. Software development costs required to be capitalized for internal use software have also not been material to date.
(r) Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
(s) Computation of Net Income per Share Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.
(t) Consolidation of Variable Interest Entities The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s Consolidated Financial Statements.
(u) Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for the following, among others:
• |
Revenue recognition |
• |
Allowances for accounts receivable, sales returns, and financing receivables |
• |
Inventory valuation and liability for purchase commitments with contract manufacturers and suppliers |
• |
Warranty costs |
• |
Share-based compensation expense |
• |
Fair value measurements and other-than-temporary impairments |
• |
Goodwill and purchased intangible asset impairments |
• |
Income taxes |
• |
Loss contingencies |
The actual results experienced by the Company may differ materially from management’s estimates.
(v) New Accounting Update Recently Adopted
In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This accounting standard update became effective for the Company beginning in the third quarter of fiscal 2012. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 9.
(w) Recent Accounting Standards or Updates Not Yet Effective
In June 2011, the FASB issued an accounting standard update to provide guidance on increasing the prominence of items reported in other comprehensive income. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This accounting standard update is effective for the Company beginning in the first quarter of fiscal 2013, and it will result in changes in the Company’s financial statement presentation.
In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2013, and the adoption is not expected to have any impact on the Company’s Consolidated Financial Statements.
In December 2011, the FASB issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the required disclosures.
In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update in its Consolidated Financial Statements.
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(a) Acquisition Summary
The Company completed seven business combinations during fiscal 2012. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
Fiscal 2012 |
Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | ||||||||||||
Lightwire, Inc. |
$ | 239 | $ | (15 | ) | $ | 97 | $ | 157 | |||||||
All others |
159 | (24 | ) | 103 | 80 | |||||||||||
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Total acquisitions |
$ | 398 | $ | (39 | ) | $ | 200 | $ | 237 | |||||||
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The Company acquired Lightwire, Inc. (“Lightwire”) in the third quarter of fiscal 2012. With its acquisition of Lightwire, a developer of advanced optical interconnect technology for high-speed networking applications, the Company aims to develop and deliver cost-effective, high-speed networks with the next generation of optical connectivity.
The total purchase consideration related to the Company’s business combinations completed during fiscal 2012 consisted of either cash consideration or cash consideration along with vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations were immaterial. Total transaction costs related to the Company’s business combination activities during fiscal 2012, 2011, and 2010 were $15 million, $10 million, and $32 million, respectively. These transaction costs were expensed as incurred as general and administrative (“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 at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill.
The goodwill generated from the Company’s business combinations completed during the year ended July 28, 2012 is primarily related to expected synergies. The goodwill is not deductible for U.S. federal income tax purposes.
Fiscal 2011 and 2010
Allocation of the purchase consideration for business combinations completed in fiscal 2011 is summarized as follows (in millions):
Fiscal 2011 |
Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | ||||||||||||
Total acquisitions |
$ | 288 | $ | (10 | ) | $ | 114 | $ | 184 |
Allocation of the purchase consideration for business combinations completed in fiscal 2010 is summarized as follows (in millions):
Fiscal 2010 |
Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | ||||||||||||
ScanSafe, Inc. |
$ | 154 | $ | 2 | $ | 31 | $ | 121 | ||||||||
Starent Networks, Corp. |
2,636 | (17 | ) | 1,274 | 1,379 | |||||||||||
Tandberg ASA |
3,268 | 17 | 980 | 2,271 | ||||||||||||
All others |
128 | 2 | 95 | 31 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total acquisitions |
$ | 6,186 | $ | 4 | $ | 2,380 | $ | 3,802 | ||||||||
|
|
|
|
|
|
|
|
The Consolidated Financial Statements include the operating results of each business combination from the date of acquisition. Pro forma results of operations for the acquisitions completed during fiscal 2012, 2011, and 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.
(b) Acquisition of NDS Group Limited
On July 30, 2012, the Company completed its acquisition of NDS Group Limited (“NDS”), a leading provider of video software and content security solutions that enable service providers and media companies to securely deliver and monetize new video entertainment experiences. NDS uses the combination of a software platform and services to create differentiated video offerings for service providers that enable subscribers to intuitively view, search, and navigate digital content. Under the terms of the acquisition agreement, the Company paid total cash consideration of approximately $5.0 billion, which included the repayment of approximately $1.0 billion of debt, to acquire all of the business and operations of NDS.
The acquisition of NDS is expected to complement and accelerate the delivery of Cisco Videoscape, the Company’s comprehensive platform that enables service providers and media companies to deliver next-generation entertainment experiences. With the NDS acquisition, the Company aims to broaden its opportunities in the service provider market and to expand its reach into emerging markets such as China and India, where NDS has an established customer presence. The Company has not completed its purchase accounting for the NDS acquisition and therefore has not included a detailed purchase price allocation in this note. The Company expects that most of the purchase price will be allocated to goodwill and purchased intangible assets with finite lives.
|
4. Goodwill and Purchased Intangible Assets
(a) Goodwill
Beginning in fiscal 2012, the Company’s reportable segments were changed to the following segments: the Americas, EMEA, and APJC. As a result, the Company reallocated the goodwill at July 30, 2011 to these reportable segments. The following table presents the goodwill allocated to the Company’s reportable segments as of July 28, 2012 and July 30, 2011, as well as the changes to goodwill during fiscal 2012 and 2011 (in millions):
Balance at July 30, 2011 |
Acquisitions | Other | Balance at July 28, 2012 |
|||||||||||||
Americas |
$ | 11,627 | $ | 136 | $ | (8 | ) | $ | 11,755 | |||||||
EMEA |
3,272 | 64 | (49 | ) | 3,287 | |||||||||||
APJC |
1,919 | 37 | — | 1,956 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,818 | $ | 237 | $ | (57 | ) | $ | 16,998 | |||||||
|
|
|
|
|
|
|
|
Balance at July 31, 2010 |
Acquisitions | Other | Balance at July 30, 2011 |
|||||||||||||
Americas |
$ | 11,571 | $ | 122 | $ | (66 | ) | $ | 11,627 | |||||||
EMEA |
3,209 | 38 | 25 | 3,272 | ||||||||||||
APJC |
1,894 | 24 | 1 | 1,919 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,674 | $ | 184 | $ | (40 | ) | $ | 16,818 | |||||||
|
|
|
|
|
|
|
|
In the preceding table, the column entitled “Other” primarily includes foreign currency translation and purchase accounting adjustments. In fiscal 2011, “Other” also includes a goodwill reduction of $63 million related to the sale of the Company’s manufacturing operations in Juarez, Mexico and an adjustment related to a divestiture. The goodwill reductions were included in restructuring and other charges. See Note 5.
(b) Purchased Intangible Assets
The following tables present details of the Company’s intangible assets acquired through business combinations completed during fiscal 2012 and 2011 (in millions, except years):
FINITE LIVES | INDEFINITE LIVES |
TOTAL | ||||||||||||||||||||||||||||||
TECHNOLOGY | CUSTOMER RELATIONSHIPS |
OTHER | IPR&D | |||||||||||||||||||||||||||||
Fiscal 2012 |
Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | Amount | ||||||||||||||||||||||||
Lightwire, Inc. |
5.0 | $ | 97 | — | $ | — | — | $ | — | $ | — | $ | 97 | |||||||||||||||||||
All others |
3.5 | 102 | 3.0 | 1 | — | — | — | 103 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 199 | $ | 1 | $ | — | $ | — | $ | 200 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
FINITE LIVES | INDEFINITE LIVES |
TOTAL | ||||||||||||||||||||||||||||||
TECHNOLOGY | CUSTOMER RELATIONSHIPS |
OTHER | IPR&D | |||||||||||||||||||||||||||||
Fiscal 2011 |
Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | Amount | ||||||||||||||||||||||||
Total |
4.8 | $ | 92 | 6.4 | $ | 16 | 2.5 | $ | 1 | $ | 5 | $ | 114 |
The following tables present details of the Company’s purchased intangible assets (in millions):
July 28, 2012 |
Gross | Accumulated Amortization |
Net | |||||||||
Purchased intangible assets with finite lives: |
||||||||||||
Technology |
$ | 2,267 | $ | (908 | ) | $ | 1,359 | |||||
Customer relationships |
2,261 | (1,669 | ) | 592 | ||||||||
Other |
49 | (41 | ) | 8 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,577 | $ | (2,618 | ) | $ | 1,959 | |||||
|
|
|
|
|
|
July 30, 2011 |
Gross | Accumulated Amortization |
Net | |||||||||
Purchased intangible assets with finite lives: |
||||||||||||
Technology |
$ | 1,961 | $ | (561 | ) | $ | 1,400 | |||||
Customer relationships |
2,277 | (1,346 | ) | 931 | ||||||||
Other |
123 | (91 | ) | 32 | ||||||||
|
|
|
|
|
|
|||||||
Total purchased intangible assets with finite lives |
4,361 | (1,998 | ) | 2,363 | ||||||||
IPR&D, with indefinite lives |
178 | — | 178 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,539 | $ | (1,998 | ) | $ | 2,541 | |||||
|
|
|
|
|
|
Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses. All IPR&D projects outstanding at the end of fiscal 2011 were completed during fiscal 2012 and reclassified to technology purchased intangible assets with finite lives.
The following table presents the amortization of purchased intangible assets (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Amortization of purchased intangible assets: |
||||||||||||
Cost of sales |
$ | 424 | $ | 492 | $ | 277 | ||||||
Operating expenses: |
||||||||||||
Amortization of purchased intangible assets |
383 | 520 | 491 | |||||||||
Restructuring and other charges |
— | 8 | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 807 | $ | 1,020 | $ | 768 | ||||||
|
|
|
|
|
|
Amortization of purchased intangible assets for fiscal 2012, 2011, and 2010 included impairment charges of approximately $12 million, $164 million, and $28 million, respectively. The impairment charges of $12 million for fiscal 2012 were due to declines in estimated fair value resulting from reductions in expected future cash flows associated with certain of the Company’s technology assets. For fiscal 2011, the $164 million in impairment charges consisted of $64 million of charges to product cost of sales, $92 million of charges to amortization of purchased intangibles, and $8 million of charges to restructuring and other charges. These impairment charges were primarily due to declines in estimated fair value resulting from reductions in expected future cash flows associated with certain of the Company’s consumer products and were categorized as follows: $97 million in technology assets, $40 million in customer relationships, and $27 million in other purchased intangible assets. For fiscal 2010, the impairment charges were due to reductions in expected future cash flows related to certain of the Company’s technologies and customer relationships and were recorded as amortization of purchased intangible assets.
The estimated future amortization expense of purchased intangible assets with finite lives as of July 28, 2012 is as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | 706 | ||
2014 |
523 | |||
2015 |
444 | |||
2016 |
217 | |||
2017 |
69 | |||
|
|
|||
Total |
$ | 1,959 | ||
|
|
|
5. Restructuring and Other Charges
In fiscal 2011, the Company initiated a number of key targeted actions to address several areas in its business model. These actions were intended to simplify and focus the Company’s organization and operating model, align the Company’s cost structure given transitions in the marketplace, divest or exit underperforming operations, and deliver value to the Company’s shareholders. The Company is taking these actions to align its business based on its five foundational priorities: leadership in its core business (routing, switching, and associated services), which includes comprehensive security and mobility solutions; collaboration; data center virtualization and cloud; video; and architectures for business transformation.
Pursuant to the restructuring that the Company announced in July 2011, the Company has incurred cumulative charges of approximately $1.0 billion (included as part of the charges discussed below). The Company expects that the total pretax charges pursuant to these restructuring actions will be approximately $1.1 billion, and it expects the remaining charges to be incurred primarily in the first quarter of fiscal 2013. The following table summarizes the activities related to the restructuring and other charges pursuant to the Company’s July 2011 announcement related to the realignment and restructuring of the Company’s business as well as certain consumer product lines as announced during April 2011 (in millions):
Voluntary Early Retirement Program |
Employee Severance |
Goodwill and Intangible Assets |
Other | Total | ||||||||||||||||
Gross charges in fiscal 2011 |
$ | 453 | $ | 247 | $ | 71 | $ | 28 | $ | 799 | ||||||||||
Cash payments |
(436 | ) | (13 | ) | — | — | (449 | ) | ||||||||||||
Non-cash items |
— | — | (71 | ) | (17 | ) | (88 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of July 30, 2011 |
17 | 234 | — | 11 | 262 | |||||||||||||||
Gross charges in fiscal 2012 |
— | 299 | — | 54 | 353 | |||||||||||||||
Change in estimate related to fiscal 2011 charges |
— | (49 | ) | — | — | (49 | ) | |||||||||||||
Cash payments |
(17 | ) | (401 | ) | — | (18 | ) | (436 | ) | |||||||||||
Non-cash items |
— | — | — | (20 | ) | (20 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of July 28, 2012 |
$ | — | $ | 83 | $ | — | $ | 27 | $ | 110 | ||||||||||
|
|
|
|
|
|
|
|
|
|
During fiscal 2012, the Company incurred net restructuring charges within operating expenses of $304 million, consisting of $250 million of employee severance charges and $54 million of other restructuring charges. Other charges incurred during fiscal 2012 were primarily for the consolidation of excess facilities, as well as an incremental charge related to the sale of the Company’s Juarez, Mexico manufacturing operations, which sale was completed in the first quarter of fiscal 2012.
During fiscal 2011, the Company incurred a charge of approximately $63 million related to a reduction to goodwill as a result of the sale of its Juarez manufacturing operations and also recorded an intangible asset impairment of $8 million in connection with the restructuring of the Company’s consumer business related to the exit of the Flip Video camera product line. See Note 4. Other charges incurred during fiscal 2011 were primarily related to the consolidation of excess facilities and other charges associated with the realignment and restructuring of the Company’s consumer business.
During fiscal 2011, the Company also recorded charges of approximately $124 million, primarily related to inventory and supply chain charges in connection with restructuring related to the Company’s consumer product lines, most notably exiting the Flip Video camera product line, which were recorded in cost of sales and not included in the preceding table.
|
6. Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Inventories: |
||||||||
Raw materials |
$ | 127 | $ | 219 | ||||
Work in process |
35 | 52 | ||||||
Finished goods: |
||||||||
Distributor inventory and deferred cost of sales |
630 | 631 | ||||||
Manufactured finished goods |
597 | 331 | ||||||
|
|
|
|
|||||
Total finished goods |
1,227 | 962 | ||||||
|
|
|
|
|||||
Service-related spares |
213 | 182 | ||||||
Demonstration systems |
61 | 71 | ||||||
|
|
|
|
|||||
Total |
$ | 1,663 | $ | 1,486 | ||||
|
|
|
|
|||||
Property and equipment, net: |
||||||||
Land, buildings, and building and leasehold improvements |
$ | 4,363 | $ | 4,760 | ||||
Computer equipment and related software |
1,469 | 1,429 | ||||||
Production, engineering, and other equipment |
5,364 | 5,093 | ||||||
Operating lease assets (1) |
300 | 293 | ||||||
Furniture and fixtures |
487 | 491 | ||||||
|
|
|
|
|||||
11,983 | 12,066 | |||||||
Less accumulated depreciation and amortization (1) |
(8,581 | ) | (8,150 | ) | ||||
|
|
|
|
|||||
Total |
$ | 3,402 | $ | 3,916 | ||||
|
|
|
|
|||||
(1) Accumulated depreciation related to operating lease assets was $181 and $169 as of July 28, 2012 and July 30, 2011, respectively. |
|
|||||||
Other assets: |
||||||||
Deferred tax assets |
$ | 2,270 | $ | 1,864 | ||||
Investments in privately held companies |
858 | 796 | ||||||
Other |
754 | 441 | ||||||
|
|
|
|
|||||
Total |
$ | 3,882 | $ | 3,101 | ||||
|
|
|
|
|||||
Deferred revenue: |
||||||||
Service |
$ | 9,173 | $ | 8,521 | ||||
Product: |
||||||||
Unrecognized revenue on product shipments and other deferred revenue |
2,975 | 3,003 | ||||||
Cash receipts related to unrecognized revenue from two-tier distributors |
732 | 683 | ||||||
|
|
|
|
|||||
Total product deferred revenue |
3,707 | 3,686 | ||||||
|
|
|
|
|||||
Total |
$ | 12,880 | $ | 12,207 | ||||
|
|
|
|
|||||
Reported as: |
||||||||
Current |
$ | 8,852 | $ | 8,025 | ||||
Noncurrent |
4,028 | 4,182 | ||||||
|
|
|
|
|||||
Total |
$ | 12,880 | $ | 12,207 | ||||
|
|
|
|
|
7. Financing Receivables and Guarantees
(a) Financing Receivables
Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company’s products and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.
A summary of the Company’s financing receivables is presented as follows (in millions):
July 28, 2012 |
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total Financing Receivables |
||||||||||||
Gross |
$ | 3,429 | $ | 1,796 | $ | 2,651 | $ | 7,876 | ||||||||
Unearned income |
(250 | ) | — | — | (250 | ) | ||||||||||
Allowance for credit loss |
(247 | ) | (122 | ) | (11 | ) | (380 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,932 | $ | 1,674 | $ | 2,640 | $ | 7,246 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reported as: |
||||||||||||||||
Current |
$ | 1,200 | $ | 968 | $ | 1,493 | $ | 3,661 | ||||||||
Noncurrent |
1,732 | 706 | 1,147 | 3,585 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,932 | $ | 1,674 | $ | 2,640 | $ | 7,246 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
July 30, 2011 |
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total Financing Receivables |
||||||||||||
Gross |
$ | 3,111 | $ | 1,468 | $ | 2,637 | $ | 7,216 | ||||||||
Unearned income |
(250 | ) | — | — | (250 | ) | ||||||||||
Allowance for credit loss |
(237 | ) | (103 | ) | (27 | ) | (367 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,624 | $ | 1,365 | $ | 2,610 | $ | 6,599 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reported as: |
||||||||||||||||
Current |
$ | 1,087 | $ | 673 | $ | 1,351 | $ | 3,111 | ||||||||
Noncurrent |
1,537 | 692 | 1,259 | 3,488 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,624 | $ | 1,365 | $ | 2,610 | $ | 6,599 | ||||||||
|
|
|
|
|
|
|
|
As of July 28, 2012 and July 30, 2011, the deferred service revenue related to the financed service contracts and other was $1,838 million and $2,044 million, respectively.
Contractual maturities of the gross lease receivables at July 28, 2012 are summarized as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | 1,401 | ||
2014 |
1,055 | |||
2015 |
619 | |||
2016 |
276 | |||
2017 |
77 | |||
Thereafter |
1 | |||
|
|
|||
Total |
$ | 3,429 | ||
|
|
Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.
(b) Credit Quality of Financing Receivables
Financing receivables categorized by the Company’s internal credit risk rating as of July 28, 2012 and July 30, 2011 are summarized as follows (in millions):
INTERNAL CREDIT
RISK RATING |
||||||||||||||||||||||||
July 28, 2012 |
1 to 4 | 5 to 6 | 7 and Higher | Total | Residual Value |
Gross Receivables, Net of Unearned Income |
||||||||||||||||||
Lease receivables |
$ | 1,532 | $ | 1,342 | $ | 31 | $ | 2,905 | $ | 274 | $ | 3,179 | ||||||||||||
Loan receivables |
831 | 921 | 44 | 1,796 | — | 1,796 | ||||||||||||||||||
Financed service contracts and other |
1,552 | 1,030 | 69 | 2,651 | — | 2,651 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,915 | $ | 3,293 | $ | 144 | $ | 7,352 | $ | 274 | $ | 7,626 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
INTERNAL CREDIT
RISK RATING |
||||||||||||||||||||||||
July 30, 2011 |
1 to 4 | 5 to 6 | 7 and Higher | Total | Residual Value |
Gross Receivables, Net of Unearned Income |
||||||||||||||||||
Lease receivables |
$ | 1,249 | $ | 1,275 | $ | 41 | $ | 2,565 | $ | 296 | $ | 2,861 | ||||||||||||
Loan receivables |
662 | 767 | 39 | 1,468 | — | 1,468 | ||||||||||||||||||
Financed service contracts and other |
1,623 | 958 | 56 | 2,637 | — | 2,637 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,534 | $ | 3,000 | $ | 136 | $ | 6,670 | $ | 296 | $ | 6,966 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other. Effective in the second quarter of fiscal 2012, the Company combined its financing receivables into a single class as the two prior classes, Established Markets and Growth Markets, now exhibit similar risk characteristics as reflected by the Company’s historical losses. The Company has reclassified applicable financing receivables data for the prior periods presented to conform to the current year’s presentation. In addition, effective in the second quarter of fiscal 2012, the Company also refined its methodology for calculating its allowance for financing receivables as discussed in Note 2.
The Company’s internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings and constitute a relatively small portion of the Company’s financing receivables.
In circumstances when collectability is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company’s revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of July 28, 2012 and July 30, 2011 were $2,387 million and $2,793 million, respectively, and they were associated with financing receivables (net of unearned income) of $7,626 million and $6,966 million as of their respective period ends. The losses that the Company has incurred historically, including in the periods presented with respect to its financing receivables, have been immaterial and consistent with the performance of an investment-grade portfolio. The Company did not modify any financing receivables during the periods presented.
The following tables present the aging analysis of financing receivables as of July 28, 2012 and July 30, 2011 (in millions):
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED) |
||||||||||||||||||||||||||||||||
July 28, 2012 |
31-60 | 61-90 | 91+ | Total Past Due |
Current | Gross Receivables, Net of Unearned Income |
Non-Accrual Financing Receivables |
Impaired Financing Receivables |
||||||||||||||||||||||||
Lease receivables |
$ | 151 | $ | 69 | $ | 173 | $ | 393 | $ | 2,786 | $ | 3,179 | $ | 23 | $ | 14 | ||||||||||||||||
Loan receivables |
10 | 8 | 11 | 29 | 1,767 | 1,796 | 4 | 4 | ||||||||||||||||||||||||
Financed service contracts and other |
89 | 68 | 392 | 549 | 2,102 | 2,651 | 18 | 10 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 250 | $ | 145 | $ | 576 | $ | 971 | $ | 6,655 | $ | 7,626 | $ | 45 | $ | 28 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED) |
||||||||||||||||||||||||||||||||
July 30, 2011 |
31-60 | 61-90 | 91+ | Total Past Due |
Current | Gross Receivables, Net of Unearned Income |
Non-Accrual Financing Receivables |
Impaired Financing Receivables |
||||||||||||||||||||||||
Lease receivables |
$ | 89 | $ | 35 | $ | 152 | $ | 276 | $ | 2,585 | $ | 2,861 | $ | 34 | $ | 24 | ||||||||||||||||
Loan receivables |
8 | 7 | 21 | 36 | 1,432 | 1,468 | 4 | 4 | ||||||||||||||||||||||||
Financed service contracts and other |
68 | 33 | 265 | 366 | 2,271 | 2,637 | 17 | 6 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 165 | $ | 75 | $ | 438 | $ | 678 | $ | 6,288 | $ | 6,966 | $ | 55 | $ | 34 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables is presented by contract and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The preceding aging tables exclude pending adjustments on billed tax assessment in certain international markets. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for lease receivables, loan receivables, and financed service contracts and other were, respectively, $139 million, $3 million, and $313 million as of July 28, 2012; and were, respectively, $116 million, $15 million, and $230 million as of July 30, 2011.
As of July 28, 2012, the Company had financing receivables of $109 million, net of unbilled or current receivables from the same contract, that were in the category for 91 days plus past due but remained on accrual status. Such balance was $50 million as of July 30, 2011. A financing receivable may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain.
(c) Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
CREDIT LOSS ALLOWANCES | ||||||||||||||||
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total | |||||||||||||
Allowance for credit loss as of July 30, 2011 |
$ | 237 | $ | 103 | $ | 27 | $ | 367 | ||||||||
Provisions |
22 | 22 | (13 | ) | 31 | |||||||||||
Write-offs net of recoveries |
(2 | ) | — | (1 | ) | (3 | ) | |||||||||
Foreign exchange and other |
(10 | ) | (3 | ) | (2 | ) | (15 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for credit loss as of July 28, 2012 |
$ | 247 | $ | 122 | $ | 11 | $ | 380 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross receivables as of July 28, 2012, net of unearned income |
$ | 3,179 | $ | 1,796 | $ | 2,651 | $ | 7,626 |
CREDIT LOSS ALLOWANCES | ||||||||||||||||
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total | |||||||||||||
Allowance for credit loss as of July 31, 2010 |
$ | 207 | $ | 73 | $ | 21 | $ | 301 | ||||||||
Provisions |
31 | 43 | 8 | 82 | ||||||||||||
Write-offs net of recoveries |
(13 | ) | (18 | ) | (2 | ) | (33 | ) | ||||||||
Foreign exchange and other |
12 | 5 | — | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for credit loss as of July 30, 2011 |
$ | 237 | $ | 103 | $ | 27 | $ | 367 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross receivables as of July 30, 2011, net of unearned income |
$ | 2,861 | $ | 1,468 | $ | 2,637 | $ | 6,966 |
Financing receivables that were individually evaluated for impairment during the fiscal years presented were not material and therefore are not presented separately in the preceding table.
(d) Financing Guarantees
In the ordinary course of business, the Company provides financing guarantees for various third-party financing arrangements extended to channel partners and end-user customers. Payments under these financing guarantee arrangements were not material for the periods presented.
Channel Partner Financing Guarantees The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $21.3 billion, $18.2 billion and $17.2 billion for fiscal 2012, 2011, and 2010, respectively. The balance of the channel partner financing subject to guarantees was $1.2 billion and $1.4 billion as of July 28, 2012 and July 30, 2011, respectively.
End-User Financing Guarantees The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The volume of financing provided by third parties for leases and loans for which the Company had provided guarantees was $227 million for fiscal 2012, $247 million for fiscal 2011 and $180 million for fiscal 2010.
Financing Guarantee Summary The aggregate amounts of financing guarantees outstanding at July 28, 2012 and July 30, 2011, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Maximum potential future payments relating to financing guarantees: |
||||||||
Channel partner |
$ | 277 | $ | 336 | ||||
End user |
232 | 277 | ||||||
|
|
|
|
|||||
Total |
$ | 509 | $ | 613 | ||||
|
|
|
|
|||||
Deferred revenue associated with financing guarantees: |
||||||||
Channel partner |
$ | (193 | ) | $ | (248 | ) | ||
End user |
(200 | ) | (248 | ) | ||||
|
|
|
|
|||||
Total |
$ | (393 | ) | $ | (496 | ) | ||
|
|
|
|
|||||
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue |
$ | 116 | $ | 117 | ||||
|
|
|
|
|
(a) Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
July 28, 2012 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. government securities |
$ | 24,201 | $ | 41 | $ | (1 | ) | $ | 24,241 | |||||||
U.S. government agency securities |
5,367 | 21 | — | 5,388 | ||||||||||||
Non-U.S. government and agency securities |
1,629 | 9 | — | 1,638 | ||||||||||||
Corporate debt securities |
5,959 | 74 | (3 | ) | 6,030 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed income securities |
37,156 | 145 | (4 | ) | 37,297 | |||||||||||
Publicly traded equity securities |
1,107 | 524 | (11 | ) | 1,620 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 38,263 | $ | 669 | $ | (15 | ) | $ | 38,917 | |||||||
|
|
|
|
|
|
|
|
July 30, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. government securities |
$ | 19,087 | $ | 52 | $ | — | $ | 19,139 | ||||||||
U.S. government agency securities |
8,742 | 35 | (1 | ) | 8,776 | |||||||||||
Non-U.S. government and agency securities |
3,119 | 14 | (1 | ) | 3,132 | |||||||||||
Corporate debt securities |
4,333 | 65 | (4 | ) | 4,394 | |||||||||||
Asset-backed securities |
120 | 5 | (4 | ) | 121 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed income securities |
35,401 | 171 | (10 | ) | 35,562 | |||||||||||
Publicly traded equity securities |
734 | 639 | (12 | ) | 1,361 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 36,135 | $ | 810 | $ | (22 | ) | $ | 36,923 | |||||||
|
|
|
|
|
|
|
|
U.S. government agency securities include corporate debt securities that are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”), while non-U.S. government and agency securities include agency and corporate debt securities that are guaranteed by non-U.S. governments.
(b) Gains and Losses on Available-for-Sale Investments
The following table presents the gross realized gains and gross realized losses related to the Company’s available-for-sale investments (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Gross realized gains |
$ | 641 | $ | 348 | $ | 279 | ||||||
Gross realized losses |
(540 | ) | (169 | ) | (110 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 101 | $ | 179 | $ | 169 | ||||||
|
|
|
|
|
|
The following table presents the realized net gains (losses) related to the Company’s available-for-sale investments (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Net gains on investments in publicly traded equity securities |
$ | 43 | $ | 88 | $ | 66 | ||||||
Net gains on investments in fixed income securities |
58 | 91 | 103 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 101 | $ | 179 | $ | 169 | ||||||
|
|
|
|
|
|
Impairment charges on available-for-sale investments were not material for the periods presented.
The following table summarizes the activity related to credit losses for fixed income securities (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Balance at beginning of fiscal year |
$ | (23 | ) | $ | (95 | ) | ||
Sales of other-than-temporarily impaired fixed income securities |
23 | 72 | ||||||
|
|
|
|
|||||
Balance at end of fiscal year |
$ | — | $ | (23 | ) | |||
|
|
|
|
The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at July 28, 2012 and July 30, 2011 (in millions):
UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
July 28, 2012 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||
U.S. government agency securities |
$ | 5,357 | $ | (1 | ) | $ | — | $ | — | $ | 5,357 | $ | (1 | ) | ||||||||||
Corporate debt securities |
603 | (3 | ) | 14 | — | 617 | (3 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed income securities |
5,960 | (4 | ) | 14 | — | 5,974 | (4 | ) | ||||||||||||||||
Publicly traded equity securities |
167 | (8 | ) | 20 | (3 | ) | 187 | (11 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,127 | $ | (12 | ) | $ | 34 | $ | (3 | ) | $ | 6,161 | $ | (15 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
July 30, 2011 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||
U.S. government agency securities |
$ | 2,310 | $ | (1 | ) | $ | — | $ | — | $ | 2,310 | $ | (1 | ) | ||||||||||
Non-U.S. government and agency securities |
875 | (1 | ) | — | — | 875 | (1 | ) | ||||||||||||||||
Corporate debt securities |
548 | (2 | ) | 56 | (2 | ) | 604 | (4 | ) | |||||||||||||||
Asset-backed securities |
— | — | 105 | (4 | ) | 105 | (4 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed income securities |
3,733 | (4 | ) | 161 | (6 | ) | 3,894 | (10 | ) | |||||||||||||||
Publicly traded equity securities |
112 | (12 | ) | — | — | 112 | (12 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,845 | $ | (16 | ) | $ | 161 | $ | (6 | ) | $ | 4,006 | $ | (22 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of July 28, 2012, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of July 28, 2012, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the year ended July 28, 2012.
The Company has evaluated its publicly traded equity securities as of July 28, 2012 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
(c) Maturities of Fixed Income Securities
The following table summarizes the maturities of the Company’s fixed income securities at July 28, 2012 (in millions):
Amortized Cost |
Fair Value | |||||||
Less than 1 year |
$ | 16,257 | $ | 16,274 | ||||
Due in 1 to 2 years |
12,277 | 12,323 | ||||||
Due in 2 to 5 years |
8,549 | 8,623 | ||||||
Due after 5 years |
73 | 77 | ||||||
|
|
|
|
|||||
Total |
$ | 37,156 | $ | 37,297 | ||||
|
|
|
|
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 are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for fiscal 2012 and 2011 was $0.5 billion and $1.6 billion, respectively. 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 collateral losses. The Company did not experience any losses in connection with the secured lending of securities during the periods presented. As of July 28, 2012 and July 30, 2011, the Company had no outstanding securities lending transactions.
|
9. Fair Value
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability.
(a) Fair Value Hierarchy
The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
(b) Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of July 28, 2012 and July 30, 2011 were as follows (in millions):
JULY 28,
2012 FAIR VALUE MEASUREMENTS |
JULY 30,
2011 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 |
$ | 2,506 | $ | — | $ | — | $ | 2,506 | $ | 5,852 | $ | — | $ | — | $ | 5,852 | ||||||||||||||||
U.S. government agency securities |
— | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||
Available-for-sale investments: |
||||||||||||||||||||||||||||||||
U.S. government securities |
— | 24,241 | — | 24,241 | — | 19,139 | — | 19,139 | ||||||||||||||||||||||||
U.S. government agency securities |
— | 5,388 | — | 5,388 | — | 8,776 | — | 8,776 | ||||||||||||||||||||||||
Non-U.S. government and agency securities |
— | 1,638 | — | 1,638 | — | 3,132 | — | 3,132 | ||||||||||||||||||||||||
Corporate debt securities |
— | 6,030 | — | 6,030 | — | 4,394 | — | 4,394 | ||||||||||||||||||||||||
Asset-backed securities |
— | — | — | — | — | — | 121 | 121 | ||||||||||||||||||||||||
Publicly traded equity securities |
1,620 | — | — | 1,620 | 1,361 | — | — | 1,361 | ||||||||||||||||||||||||
Derivative assets |
— | 263 | 1 | 264 | — | 220 | 2 | 222 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 4,126 | $ | 37,560 | $ | 1 | $ | 41,687 | $ | 7,213 | $ | 35,662 | $ | 123 | $ | 42,998 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||
Derivative liabilities |
$ | — | $ | 42 | $ | — | $ | 42 | $ | — | $ | 24 | $ | — | $ | 24 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | — | $ | 42 | $ | — | $ | 42 | $ | — | $ | 24 | $ | — | $ | 24 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 fixed income securities are priced using quoted market prices for similar instruments or nonbinding market prices that are corroborated by observable market data. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Company’s derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.
Level 3 assets include certain derivative instruments, the values of which are determined based on discounted cash flow models using inputs that the Company could not corroborate with market data.
The following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended July 28, 2012 and July 30, 2011 (in millions):
Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
Balance at July 30, 2011 |
$ | 121 | $ | 2 | $ | 123 | ||||||
Total gains and losses (realized and unrealized): |
||||||||||||
Included in other income, net |
3 | — | 3 | |||||||||
Included in other comprehensive income |
(3 | ) | — | (3 | ) | |||||||
Sales |
(14 | ) | (1 | ) | (15 | ) | ||||||
Transfer into Level 2 |
(107 | ) | — | (107 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 28, 2012 |
$ | — | $ | 1 | $ | 1 | ||||||
|
|
|
|
|
|
The Company’s asset-backed securities, prior to being sold, were reclassified from Level 3 to Level 2 during fiscal 2012, as the Company observed an increase in market activity and that observable market data was available for these financial assets.
Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
Balance at July 31, 2010 |
$ | 149 | $ | 3 | $ | 152 | ||||||
Total gains and losses (realized and unrealized): |
||||||||||||
Included in other income, net |
3 | (1 | ) | 2 | ||||||||
Purchases, sales and maturities |
(31 | ) | — | (31 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 30, 2011 |
$ | 121 | $ | 2 | $ | 123 | ||||||
|
|
|
|
|
|
|||||||
Losses attributable to assets still held as of July 30, 2011 |
$ | — | $ | (1 | ) | $ | (1 | ) |
(c) Assets Measured at Fair Value on a Nonrecurring Basis
The following tables present the Company’s financial instruments and nonfinancial assets that were measured at fair value on a nonrecurring basis during the indicated periods and the related recognized gains and losses for the periods (in millions):
July 28, 2012 | July 30, 2011 | July 31, 2010 | ||||||||||||||||||||||
Net Carrying Value as of Year End |
Total Gains (Losses) for the Year Ended |
Net Carrying Value as of Year End |
Total Gains (Losses) for the Year Ended |
Net Carrying Value as of Year End |
Total Gains (Losses) for the Year Ended |
|||||||||||||||||||
Property held for sale |
$ | 63 | $ | (413 | ) | $ | 20 | $ | (38 | ) | $ | 25 | $ | (86 | ) | |||||||||
Investments in privately held companies |
$ | 47 | (23 | ) | $ | 13 | (10 | ) | $ | 45 | (25 | ) | ||||||||||||
Purchased intangible assets |
$ | — | (12 | ) | $ | — | (164 | ) | $ | — | (28 | ) | ||||||||||||
Manufacturing operations held for sale |
$ | — | — | $ | 167 | (61 | ) | $ | — | — | ||||||||||||||
Gains on assets no longer held at end of fiscal year |
14 | — | 2 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total losses for nonrecurring measurements |
$ | (434 | ) | $ | (273 | ) | $ | (137 | ) | |||||||||||||||
|
|
|
|
|
|
The assets in the preceding table were measured at fair value due to events or circumstances the Company identified as having significant impact on their fair value during the respective periods. To arrive at the valuation of these assets, the Company considers any significant changes in the financial metrics and economic variables and also uses third-party valuation reports to assist in the valuation as necessary. These assets were classified as Level 3 assets because the Company used unobservable inputs to value them.
The property held for sale represents land and buildings which met the criteria to be classified as held for sale. The fair value of property held for sale was measured with the assistance of third-party valuation models which used comparable property values or discounted cash flow techniques as part of its analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation report. The impairment charges as a result of the valuations, which represented the difference between the fair value less cost to sell and the carrying amount of the assets held for sale, were included in G&A expenses.
The fair value measurement of the impaired investments was classified as Level 3 because significant unobservable inputs were used in the valuation due to the absence of quoted market prices and inherent lack of liquidity. Significant unobservable inputs, which included financial metrics of comparable private and public companies, financial condition and near-term prospects of the investees, recent financing activities of the investee, and the investee’s capital structure as well as other economic variables, reflected the assumptions market participants would use in pricing these assets. The impairment charges, representing the difference between the cost and the fair value as a result of the evaluation, were recorded to other income, net.
The fair value of purchased intangible assets measured at fair value on a nonrecurring basis was categorized as Level 3 due to the use of significant unobservable inputs in the valuation. Significant unobservable inputs that were used included expected revenues and net income related to the assets and the expected life of the assets. The difference between the estimated fair value and the carrying value of the assets was recorded as an impairment charge. For the years ended July 28, 2012, July 30, 2011, and July 31, 2010, such impairment charges were recorded in cost of sales and operating expenses as appropriate. See Note 4.
The loss related to the manufacturing operations held for sale was primarily related to a reduction in goodwill related to the sale of the Company’s set-top box manufacturing operations in Juarez, Mexico. See Note 5. This goodwill reduction represents the difference between the carrying value and the implied fair value of the goodwill associated with the disposal group being evaluated.
(d) Other Fair Value Disclosures
As of July 28, 2012, the carrying value of the Company’s investments in privately held companies that were accounted for under the cost method was $249 million. It was not practicable to estimate the fair value of this portfolio.
The fair value of the Company’s short-term loan receivables and financed service contracts approximates their carrying value due to their short duration.
The aggregate carrying value of the Company’s long-term loan receivables and financed service contracts and other as of July 28, 2012 and July 30, 2011 was $1.9 billion and $2.0 billion, respectively. The estimated fair value of the Company’s long-term loan receivables and financed service contracts and other approximates their carrying value. The Company uses significant unobservable inputs in determining discounted cash flows to estimate the fair value of its long-term loan receivables and financed service contracts and therefore they are categorized as Level 3.
As of July 28, 2012, the fair value of the Company’s long-term debt was $18.8 billion with a carrying amount of $16.3 billion. This compares to a fair value of $17.4 billion and a carrying amount of $16.2 billion as of July 30, 2011. The fair value of the long-term debt was determined based on observable market prices in a less active market and was categorized as Level 2 in the fair value hierarchy.
|
10. Borrowings
(a) Short-Term Debt
The following table summarizes the Company’s short-term debt (in millions, except percentages):
July 28, 2012 | July 30, 2011 | |||||||||||||||
Amount | Weighted-Average Interest Rate |
Amount | Weighted-Average Interest Rate |
|||||||||||||
Commercial paper |
$ | — | — | $ | 500 | 0.14 | % | |||||||||
Other notes and borrowings |
31 | 6.72 | % | 88 | 4.59 | % | ||||||||||
|
|
|
|
|||||||||||||
Total short-term debt |
$ | 31 | $ | 588 | ||||||||||||
|
|
|
|
In fiscal 2011, the Company established a short-term debt financing program of up to $3.0 billion through the issuance of commercial paper notes. The Company uses the proceeds from the issuance of commercial paper notes for general corporate purposes.
Other notes and borrowings in the preceding table consist of notes and credit facilities established with a number of financial institutions that are available to certain foreign subsidiaries of the Company. These notes and credit facilities are subject to various terms and foreign currency market interest rates pursuant to individual financial arrangements between the financing institution and the applicable foreign subsidiary.
As of July 28, 2012 and July 30, 2011, the estimated fair value of the short-term debt approximates its carrying value due to the short maturities.
(b) Long-Term Debt
The following table summarizes the Company’s long-term debt (in millions, except percentages):
July 28, 2012 | July 30, 2011 | |||||||||||||||
Amount | Effective Rate | Amount | Effective Rate | |||||||||||||
Senior Notes: |
||||||||||||||||
Floating-rate notes, due 2014 |
$ | 1,250 | 0.81 | % | $ | 1,250 | 0.60 | % | ||||||||
1.625% fixed-rate notes, due 2014 |
2,000 | 0.84 | % | 2,000 | 0.58 | % | ||||||||||
2.90% fixed-rate notes, due 2014 |
500 | 3.11 | % | 500 | 3.11 | % | ||||||||||
5.50% fixed-rate notes, due 2016 |
3,000 | 3.16 | % | 3,000 | 3.06 | % | ||||||||||
3.15% fixed-rate notes, due 2017 |
750 | 1.03 | % | 750 | 0.81 | % | ||||||||||
4.95% fixed-rate notes, due 2019 |
2,000 | 5.08 | % | 2,000 | 5.08 | % | ||||||||||
4.45% fixed-rate notes, due 2020 |
2,500 | 4.50 | % | 2,500 | 4.50 | % | ||||||||||
5.90% fixed-rate notes, due 2039 |
2,000 | 6.11 | % | 2,000 | 6.11 | % | ||||||||||
5.50% fixed-rate notes, due 2040 |
2,000 | 5.67 | % | 2,000 | 5.67 | % | ||||||||||
|
|
|
|
|||||||||||||
Total |
16,000 | 16,000 | ||||||||||||||
Other long-term debt |
10 | 0.19 | % | — | ||||||||||||
Unaccreted discount |
(70 | ) | (73 | ) | ||||||||||||
Hedge accounting fair value adjustments |
357 | 307 | ||||||||||||||
|
|
|
|
|||||||||||||
Total long-term debt |
$ | 16,297 | $ | 16,234 | ||||||||||||
|
|
|
|
To achieve its interest rate risk management objectives, the Company entered into interest rate swaps with an aggregate notional amount of $4.25 billion designated as fair value hedges of certain fixed-rate senior notes. In effect, these swaps convert the fixed interest rates of the fixed-rate notes to floating interest rates based on the London InterBank Offered Rate (“LIBOR”). The gains and losses related to changes in the fair value of the interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market interest rates. See Note 11.
The effective rates for the fixed-rate debt include the interest on the notes, the accretion of the discount, and, if applicable, adjustments related to hedging. Interest is payable semiannually on each class of the senior fixed-rate notes and payable quarterly on the floating-rate notes. Each of the senior fixed-rate notes is redeemable by the Company at any time, subject to a make-whole premium.
The senior notes rank at par with the issued commercial paper notes, as well as any other commercial paper notes that may be issued in the future pursuant to the short-term debt financing program, as discussed earlier under “Short-Term Debt.” As of July 28, 2012, the Company was in compliance with all debt covenants.
Future principal payments for long-term debt as of July 28, 2012 are summarized as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | — | ||
2014 |
3,260 | |||
2015 |
500 | |||
2016 |
3,000 | |||
2017 |
750 | |||
Thereafter |
8,500 | |||
|
|
|||
Total |
$ | 16,010 | ||
|
|
(c) Credit Facility
On February 17, 2012, the Company entered into a credit agreement with certain institutional lenders that provides for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on February 17, 2017. Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50%, Bank of America’s “prime rate” as announced from time to time, or one-month LIBOR plus 1.00%, or (ii) LIBOR plus a margin that is based on the Company’s senior debt credit ratings as published by Standard & Poor’s Financial Services, LLC and Moody’s Investors Service, Inc. The credit agreement requires the Company to comply with certain covenants, including that it maintains an interest coverage ratio as defined in the agreement. As of July 28, 2012, the Company was in compliance with all such required covenants, and the Company had not borrowed any funds under the credit facility.
The Company may also, upon the agreement of either the then-existing lenders or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $2.0 billion and/or extend the expiration date of the credit facility up to February 17, 2019.
This credit facility replaces the Company’s prior credit facility that was entered into on August 17, 2007, which was terminated in connection with its entering into the new credit facility.
|
(a) Summary of Derivative Instruments
The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate, interest rate, and equity price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates, interest rates, and equity prices. The Company’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
The fair values of the Company’s derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded are summarized as follows (in millions):
DERIVATIVE ASSETS |
DERIVATIVE LIABILITIES |
|||||||||||||||||||||
Balance Sheet Line Item | July 28, 2012 |
July 30, 2011 |
Balance Sheet Line Item |
July 28, 2012 |
July 30, 2011 |
|||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||
Foreign currency derivatives |
Other current assets | $ | 24 | $ | 67 | Other current liabilities | $ | 26 | $ | 12 | ||||||||||||
Interest rate derivatives |
Other assets | 223 | 146 | Other long-term liabilities | — | — | ||||||||||||||||
Equity derivatives |
Other current assets | — | — | Other current liabilities | 4 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
247 | 213 | 30 | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||
Foreign currency derivatives |
Other current assets | 16 | 7 | Other current liabilities | 12 | 12 | ||||||||||||||||
Equity derivatives |
Other assets | 1 | 2 | Other long-term liabilities | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
17 | 9 | 12 | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 264 | $ | 222 | $ | 42 | $ | 24 | ||||||||||||||
|
|
|
|
|
|
|
|
The effects of the Company’s cash flow and net investment hedging instruments on OCI and the Consolidated Statements of Operations are summarized as follows (in millions):
GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES FOR THE YEARS ENDED (EFFECTIVE PORTION) |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR THE YEARS ENDED (EFFECTIVE PORTION) |
|||||||||||||||||||||||||
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
Line Item in
Statements of |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: |
||||||||||||||||||||||||||
Foreign currency derivatives |
$ | (131 | ) | $ | 87 | $ | 33 |
Operating expenses |
$ | (59 | ) | $ | 89 | $ | (1 | ) | ||||||||||
Cost of sales - service |
(14 | ) | 17 | — | ||||||||||||||||||||||
Interest rate derivatives |
— | — | 23 |
Interest expense |
1 | 2 | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | (131 | ) | $ | 87 | $ | 56 | $ | (72 | ) | $ | 108 | $ | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Derivatives designated as net investment hedging instruments: |
||||||||||||||||||||||||||
Foreign currency derivatives |
$ | 23 | $ | (10 | ) | $ | (2 | ) |
Other income, net |
$ | — | $ | — | $ | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
During each of the fiscal years presented, the amounts recognized in earnings on derivative instruments designated as cash flow hedges related to the ineffective portion were not material, and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of July 28, 2012, the Company estimates that approximately $41 million of net derivative gains related to its cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months.
The effect on the Consolidated Statements of Operations of derivative instruments designated as fair value hedges and the underlying hedged items is summarized as follows (in millions):
GAINS (LOSSES)
ON DERIVATIVES INSTRUMENTS FOR THE YEARS ENDED |
GAINS (LOSSES) RELATED TO HEDGED ITEMS FOR THE YEARS ENDED |
|||||||||||||||||||||||||
Derivatives Designated as
Fair Value |
Line Item in Statements of |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
|||||||||||||||||||
Equity derivatives |
Other income, net | $ | (4 | ) | $ | — | $ | 3 | $ | 4 | $ | — | $ | (3 | ) | |||||||||||
Interest rate derivatives |
Interest expense | 78 | 74 | 72 | (80 | ) | (77 | ) | (77 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 74 | $ | 74 | $ | 75 | $ | (76 | ) | $ | (77 | ) | $ | (80 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not exclude from the assessment of hedge effectiveness any component of the changes in fair value of the derivative instruments designated as fair value hedges.
The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as follows (in millions):
GAINS (LOSSES) FOR THE YEARS ENDED |
||||||||||||||
Derivatives Not Designated as Hedging Instruments |
Line Item in Statements of Operations |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
||||||||||
Foreign currency derivatives |
Other income, net | $ | (206 | ) | $ | 264 | $ | (100 | ) | |||||
Total return swaps - deferred compensation |
Cost of sales - product | 4 | — | — | ||||||||||
Total return swaps - deferred compensation |
Operating expenses | 3 | 33 | 18 | ||||||||||
Equity derivatives |
Other income, net | 6 | 25 | 12 | ||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | (193 | ) | $ | 322 | $ | (70 | ) | ||||||
|
|
|
|
|
|
The notional amounts of the Company’s outstanding derivatives are summarized as follows (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Derivatives designated as hedging instruments: |
||||||||
Foreign currency derivatives - cash flow hedges |
$ | 2,910 | $ | 3,433 | ||||
Interest rate derivatives |
4,250 | 4,250 | ||||||
Net investment hedging instruments |
468 | 73 | ||||||
Equity derivatives |
272 | — | ||||||
Derivatives not designated as hedging instruments: |
||||||||
Foreign currency derivatives |
6,241 | 4,565 | ||||||
Total return swaps-deferred compensation |
269 | 262 | ||||||
|
|
|
|
|||||
Total |
$ | 14,410 | $ | 12,583 | ||||
|
|
|
|
(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 forecasted foreign currency transactions related to certain operating expenses and service cost of sales with currency options and forward contracts. These currency option and forward contracts, designated as cash flow hedges, generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of the derivatives. The effective portion of the derivative instrument’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. During the fiscal years presented, the Company did not discontinue any cash flow hedges for which it was probable that a 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.
The Company hedges certain net investments in its foreign operations with forward contracts to reduce the effects of foreign currency fluctuations on the Company’s net investment in those foreign subsidiaries. These derivative instruments generally have maturities of up to six months.
(c) Interest Rate Risk
Interest Rate Derivatives, Investments The Company’s primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of July 28, 2012 and July 30, 2011, the Company did not have any outstanding interest rate derivatives related to its fixed income securities.
Interest Rate Derivatives Designated as Fair Value Hedge, Long-Term Debt In fiscal 2011, the Company entered into interest rate swaps designated as fair value hedges related to fixed-rate senior notes that were issued in March 2011 and are due in 2014 and 2017. In fiscal 2010, the Company entered into interest rate swaps designated as fair value hedges for a portion of senior fixed-rate notes that were issued in 2006 and are due in 2016. 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 such swaps is to convert the fixed interest rates of the senior fixed-rate notes to floating interest rates based on LIBOR. 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 debt that are attributable to the changes in market interest rates. The fair value of the interest rate swaps was reflected in other assets.
Interest Rate Derivatives Designated as Cash Flow Hedge, Long-Term Debt In fiscal 2010, the Company entered into contracts related to interest rate derivatives designated as cash flow hedges, with an aggregate notional amount of $3.7 billion, to hedge against interest rate movements in connection with its anticipated issuance of senior notes. These derivative instruments were settled in connection with the actual issuance of the senior notes. The effective portion of these hedges was recorded to AOCI, net of tax, and is being amortized to interest expense over the respective lives of the notes.
(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 are also included in other income, net.
The Company is also exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Although not designated as accounting hedges, the Company utilizes derivatives such as total return swaps to economically hedge this exposure.
(e) Credit-Risk-Related Contingent Features
Certain derivative instruments are executed under agreements that have provisions requiring the Company and the counterparty to maintain a specified credit rating from certain credit rating agencies. If the Company’s or the counterparty’s credit-rating falls below a specified credit rating, either party has the right to request collateral on the derivatives’ net liability position. Such provisions did not affect the Company’s financial position as of July 28, 2012 and July 30, 2011.
|
12. Commitments and Contingencies
(a) Operating Leases
The Company leases office space in many U.S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, China, Germany, India, Israel, Italy, Japan, Norway, and the United Kingdom. Rent expense for office space and equipment totaled $404 million, $428 million, and $364 million in fiscal 2012, 2011, and 2010, respectively. The Company also leases equipment and vehicles. Future minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of July 28, 2012 are as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | 328 | ||
2014 |
243 | |||
2015 |
199 | |||
2016 |
97 | |||
2017 |
70 | |||
Thereafter |
202 | |||
|
|
|||
Total |
$ | 1,139 | ||
|
|
(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 establish the parameters defining the Company’s requirements. A significant portion of the Company’s reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of July 28, 2012 and July 30, 2011, the Company had total purchase commitments for inventory of $3,869 million and $4,313 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 July 28, 2012 and July 30, 2011, the liability for these purchase commitments was $193 million and $168 million, respectively, and was included in other current liabilities.
(c) Other Commitments
In connection with the Company’s business combinations and asset purchases, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $50 million, $127 million, and $120 million during fiscal 2012, 2011, and 2010, respectively. As of July 28, 2012, the Company estimated that future compensation expense and contingent consideration of up to $789 million may be required to be recognized pursuant to the applicable business combination and asset purchase agreements, which included the $750 million milestone payments related to Insieme as discussed later.
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 $120 million and $192 million as of July 28, 2012 and July 30, 2011, respectively.
(d) Variable Interest Entities
VCE Joint Venture VCE is a joint venture that the Company formed in fiscal 2010 with EMC Corporation (“EMC”), with investments from VMware, Inc. (“VMware”) and Intel Corporation. VCE helps organizations leverage best-in-class technologies and disciplines from Cisco, EMC, and VMware to enable the transformation to cloud computing.
As of July 28, 2012, the Company’s cumulative gross investment in VCE was approximately $392 million, inclusive of accrued interest, and its ownership percentage was approximately 35%. The Company invested approximately $276 million in VCE during fiscal 2012 and $90 million during fiscal 2011.
The Company accounts for its investment in VCE under the equity method, and its portion of VCE’s net loss is recognized in other income, net. The Company’s consolidated share of VCE’s losses, based upon its portion of the overall funding, was approximately 36.8%, 36.8%, and 35.0% for the fiscal years ended July 28, 2012, July 30, 2011, and July 31, 2010, respectively. As of July 28, 2012, the Company has recorded cumulative losses from VCE of $239 million since inception, of which $160 million, $76 million, and $3 million were recorded for the fiscal years ended July 28, 2012, July 30, 2011, and July 31, 2010, respectively. The Company’s carrying value in VCE as of July 28, 2012 was $153 million and the balance was recorded in other assets.
Over the next 12 months, as VCE scales its operations, the Company expects that it will make additional investments in VCE and may incur additional losses proportionate with the Company’s share ownership.
From time to time, EMC and Cisco may enter into guarantee agreements on behalf of VCE to indemnify third parties, such as customers, for monetary damages. Such guarantees were not material as of July 28, 2012.
Insieme Networks, Inc. In the third quarter of fiscal 2012, the Company made an investment in Insieme Networks, Inc. (“Insieme”), an early stage company focused on research and development in the data center market. This investment includes $100 million of funding and a license to certain of the Company’s technology. As a result of this investment, the Company owns approximately 86% of Insieme and has consolidated the results of Insieme in its Consolidated Financial Statements beginning in the third quarter of fiscal 2012. The net loss attributable to the noncontrolling interests was not presented separately in the Consolidated Statements of Operations due to the amount being immaterial.
In connection with this investment, the Company and Insieme have entered into a put/call option agreement that provides the Company with the right to purchase the remaining interests in Insieme. In addition, the noncontrolling interest holders can require the Company to purchase their shares upon the occurrence of certain events. If the Company acquires the remaining interests of Insieme, the noncontrolling interest holders are eligible to receive two milestone payments, which will be determined using agreed-upon formulas based on revenue for certain of Insieme’s products. The Company will begin recognizing the amounts due under the milestone payments when it is determined that such payments are probable of being earned, which which the Company expects may be in fiscal 2014. When such a determination is made, the milestone payments will then be recorded as compensation expense by the Company based on an estimate of the fair value of the amounts probable of being earned, pursuant to a vesting schedule. Subsequent changes to the fair value of the amounts probable of being earned and the continued vesting will result in adjustments to the recorded compensation expense. The maximum amount that could be recorded as compensation expense by the Company is approximately $750 million. The milestone payments, if earned, are expected to be paid primarily during fiscal 2016 and fiscal 2017.
Other Variable Interest Entities In the ordinary course of business, the Company has investments in other privately held companies and provides financing to certain customers. These other privately held companies and customers may be considered to be variable interest entities. The Company evaluates on an ongoing basis its investments in these other privately held companies and its customer financings and has determined that as of July 28, 2012 there were no other variable interest entities that require to be consolidated in the Company’s Consolidated Financial Statements.
(e) Product Warranties and Guarantees
The following table summarizes the activity related to product warranty liability during fiscal 2012 and 2011 (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Balance at beginning of fiscal year |
$ | 342 | $ | 360 | ||||
Provision for warranties issued |
661 | 456 | ||||||
Payments |
(588 | ) | (474 | ) | ||||
|
|
|
|
|||||
Balance at end of fiscal year |
$ | 415 | $ | 342 | ||||
|
|
|
|
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 Amended and Restated 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 7. The Company’s other guarantee arrangements as of July 28, 2012 and July 30, 2011 that were 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 tax authorities have assessed claims against the Company’s Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes, interest, and penalties. In addition to claims asserted by the Brazilian federal tax authorities, tax authorities from the Brazilian state of Sao Paulo have asserted similar claims on the same legal basis. In the first quarter of fiscal 2013, the Brazilian federal tax authorities asserted an additional claim against the Company’s Brazilian subsidiary based on a theory of joint liability with respect to an alleged underpayment of income taxes, social taxes, interest, and penalties by a Brazilian distributor.
The asserted claims by Brazilian federal tax authorities are for calendar years 2003 through 2008, and the asserted claims by the tax authorities from the state of Sao Paulo, are for calendar years 2005 through 2007. The total asserted claims by Brazilian state and federal tax authorities aggregate to approximately $427 million for the alleged evasion of import and other taxes, approximately $1.0 billion for interest, and approximately $1.9 billion for various penalties, all determined using an exchange rate as of July 28, 2012. The Company has completed a thorough review of the matters and believes the asserted tax claims against it are without merit, and the Company is defending 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.
On March 31, 2011 and April 12, 2011, purported shareholder class action lawsuits were filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The lawsuits have been consolidated, and an amended consolidated complaint was filed on December 2, 2011. The consolidated action is purportedly brought on behalf of purchasers of the Company’s publicly traded securities between February 3, 2010 and May 11, 2011. Plaintiffs allege that defendants made false and misleading statements, purport to assert claims for violations of the federal securities laws, and seek unspecified compensatory damages and other relief. The Company believes the claims are without merit and intends to defend the actions vigorously. While the Company believes there is no legal basis for liability, due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate a range of loss, if any, at this time.
Beginning on April 8, 2011, a number of purported shareholder derivative lawsuits were filed in both the United States District Court for the Northern District of California and the California Superior Court for the County of Santa Clara against the Company’s Board of Directors and several of its officers. The federal lawsuits have been consolidated in the Northern District of California. Plaintiffs in both the federal and state derivative actions allege that the Board allowed certain officers to make allegedly false and misleading statements. The complaint includes claims for violation of the federal securities laws, breach of fiduciary duties, waste of corporate assets, unjust enrichment, and violations of the California Corporations Code. The complaint seeks compensatory damages, disgorgement, and other relief.
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.
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(a) Employee Stock Incentive Plans
Stock Incentive Plan Program Description As of July 28, 2012, 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.
Pursuant to an amendment approved by the Company’s shareholders on November 12, 2009, the number of shares available for issuance under the 2005 Plan was 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, restricted stock, restricted stock units (“RSU”), the vesting of which may be performance-based or market-based along with the requisite service requirement, 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 10 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. Time-based stock grants and time-based RSUs will generally vest with respect to 20% or 25% of the shares or share units 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 1996 Plan, have 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.
(b) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, which includes its subplan, the International Employee Stock Purchase Plan (together, the “Purchase Plan”), under which 471.4 million shares of the Company’s common stock have been reserved for issuance as of July 28, 2012. 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. The Purchase Plan is scheduled to terminate on January 3, 2020. The Company issued 35 million, 34 million, and 27 million shares under the Purchase Plan in fiscal 2012, 2011, and 2010, respectively. As of July 28, 2012, 87 million shares were available for issuance under the Purchase Plan.
(c) Summary of Share-Based Compensation Expense
Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and restricted stock units granted to employees. The following table summarizes share-based compensation expense (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Cost of sales—product |
$ | 53 | $ | 61 | $ | 57 | ||||||
Cost of sales—service |
156 | 177 | 164 | |||||||||
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Share-based compensation expense in cost of sales |
209 | 238 | 221 | |||||||||
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Research and development |
401 | 481 | 450 | |||||||||
Sales and marketing |
588 | 651 | 602 | |||||||||
General and administrative |
203 | 250 | 244 | |||||||||
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|
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|
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Share-based compensation expense in operating expenses |
1,192 | 1,382 | 1,296 | |||||||||
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|
|
|
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Total share-based compensation expense |
$ | 1,401 | $ | 1,620 | $ | 1,517 | ||||||
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As of July 28, 2012, the total compensation cost related to unvested share-based awards not yet recognized was $2.0 billion, which is expected to be recognized over approximately 2.4 years on a weighted-average basis. The income tax benefit for share-based compensation expense was $335 million, $444 million, and $415 million for fiscal 2012, 2011, and 2010, respectively.
(d) Share-Based Awards Available for Grant
A summary of share-based awards available for grant is as follows (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Balance at beginning of fiscal year |
255 | 295 | 253 | |||||||||
Options granted |
— | — | (4 | ) | ||||||||
Restricted stock, stock units, and other share-based awards granted |
(95 | ) | (82 | ) | (81 | ) | ||||||
Share-based awards canceled/forfeited/expired |
64 | 42 | 123 | |||||||||
Other |
(6 | ) | — | 4 | ||||||||
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|
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Balance at end of fiscal year |
218 | 255 | 295 | |||||||||
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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, an equivalent of 1.5 shares was deducted from the available share-based award balance. For restricted stock units that were awarded with vesting contingent upon the achievement of future financial performance or market-based metrics, the maximum awards that can be achieved upon full vesting of such awards were reflected in the preceding table.
(e) Restricted Stock and Stock Unit Awards
A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based restricted stock, is as follows (in millions, except per-share amounts):
Restricted Stock/ Stock Units |
Weighted-Average Grant Date Fair Value 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 | |||||||||
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BALANCE AT JULY 31, 2010 |
97 | 22.35 | ||||||||||
Granted and assumed |
56 | 20.62 | ||||||||||
Vested |
(27 | ) | 22.54 | $ | 529 | |||||||
Canceled/forfeited |
(10 | ) | 22.04 | |||||||||
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BALANCE AT JULY 30, 2011 |
116 | 21.50 | ||||||||||
Granted and assumed |
65 | 17.45 | ||||||||||
Vested |
(35 | ) | 21.94 | $ | 580 | |||||||
Canceled/forfeited |
(18 | ) | 20.38 | |||||||||
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BALANCE AT JULY 28, 2012 |
128 | $ | 19.46 | |||||||||
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(f) 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 | |||||
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BALANCE AT JULY 31, 2010 |
732 | 21.39 | ||||||
Exercised |
(80 | ) | 16.55 | |||||
Canceled/forfeited/expired |
(31 | ) | 25.91 | |||||
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BALANCE AT JULY 30, 2011 |
621 | 21.79 | ||||||
Assumed from acquisitions |
1 | 2.08 | ||||||
Exercised |
(66 | ) | 13.51 | |||||
Canceled/forfeited/expired |
(36 | ) | 23.40 | |||||
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BALANCE AT JULY 28, 2012 |
520 | $ | 22.68 | |||||
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The total pretax intrinsic value of stock options exercised during fiscal 2012, 2011, and 2010 was $333 million, $312 million, and $1.0 billion, respectively.
The following table summarizes significant ranges of outstanding and exercisable stock options as of July 28, 2012 (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 |
10 | 4.10 | $ | 6.95 | $ | 92 | 9 | $ | 7.18 | $ | 82 | |||||||||||||||||
15.01 – 18.00 |
83 | 2.12 | 17.79 | — | 83 | 17.79 | — | |||||||||||||||||||||
18.01 – 20.00 |
150 | 0.93 | 19.31 | — | 150 | 19.31 | — | |||||||||||||||||||||
20.01 – 25.00 |
143 | 2.87 | 22.75 | — | 141 | 22.76 | — | |||||||||||||||||||||
25.01 – 35.00 |
134 | 4.08 | 30.64 | — | 129 | 30.67 | — | |||||||||||||||||||||
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Total |
520 | 2.53 | $ | 22.68 | $ | 92 | 512 | $ | 22.65 | $ | 82 | |||||||||||||||||
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The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $15.69 as of July 27, 2012, which would have been received by the option holders had those option holders exercised their stock options as of that date. The total number of in-the-money stock options exercisable as of July 28, 2012 was 10 million. As of July 30, 2011, 575 million outstanding stock options were exercisable and the weighted-average exercise price was $21.37.
(g) Valuation of Employee Share-Based Awards
The valuation of time-based RSU’s and the underlying assumptions being used are summarized as follows:
RESTRICTED STOCK UNITS | ||||||||
Years Ended |
July 28, 2012 | July 30, 2011 | ||||||
Number of shares granted (in millions) |
62 | 54 | ||||||
Weighted-average assumptions/inputs: |
||||||||
Grant date fair value per share |
$ | 17.26 | $ | 20.59 | ||||
Expected dividend |
1.5 | % | 0.3 | % |
Prior to the initial declaration of a quarterly cash dividend on March 17, 2011, the fair value of time-based RSUs was measured based on the grant date share price, as the Company did not historically pay cash dividends on its common stock. For awards granted on or subsequent to March 17, 2011, the Company used the preceding assumptions, in addition to risk-free interest rates, to determine the grant date fair value of time-based restricted stock units.
In addition to the time-based RSUs in the preceding table, in fiscal 2012, the Company granted approximately 2 million performance-based stock unit awards (“PRSUs”), which are contingent on the achievement of the Company’s financial performance metrics or its market-based returns. On the date of grant, the Company estimated the fair value of restricted stock units with market-based conditions using a Monte Carlo simulation model. The Company used the assumptions in the preceding table to determine the grant date fair value of restricted stock units with performance metrics conditions.
The valuation of employee stock purchase rights and the underlying assumptions being used are summarized as follows:
EMPLOYEE STOCK PURCHASE RIGHTS | ||||||||||||
Years Ended |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
|||||||||
Weighted-average assumptions: |
||||||||||||
Expected volatility |
27.2 | % | 35.1 | % | 34.8 | % | ||||||
Risk-free interest rate |
0.2 | % | 0.9 | % | 0.4 | % | ||||||
Expected dividend |
1.5 | % | 0.0 | % | 0.0 | % | ||||||
Expected life (in years) |
0.8 | 1.8 | 0.8 | |||||||||
Weighted-average estimated grant date fair value per share |
$ | 3.81 | $ | 6.31 | $ | 5.03 |
The valuation of employee stock options and the underlying assumptions being used are summarized as follows:
Year Ended |
July 31, 2010 | |||
Weighted-average assumptions: |
||||
Expected volatility |
30.5 | % | ||
Risk-free interest rate |
2.3 | % | ||
Expected dividend |
0.0 | % | ||
Kurtosis |
4.1 | |||
Skewness |
0.20 | |||
Weighted-average expected life (in years) |
5.1 | |||
Weighted-average estimated grant date fair value per option |
$ | 6.50 |
The valuation of employee stock purchase rights and the related assumptions are for the employee stock purchases made during the respective fiscal years. The valuation of employee stock options and the related assumptions are for awards granted during the indicated fiscal year.
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 used the implied volatility for traded options (with contract terms corresponding to the expected life of the employee stock purchase rights) on the Company’s stock as the expected volatility assumption required in the Black-Scholes model. The implied volatility is more representative of future stock price trends than historical volatility. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock purchase rights. The dividend yield assumption is based on the history and expectation of dividend payouts at the grant date. Prior to the initial declaration of a quarterly cash dividend on March 17, 2011, the expected dividend yield was 0% as the Company did not historically pay cash dividends on its common stock. For awards granted on or subsequent to March 17, 2011, the Company used an annualized dividend yield based on the then current per-share dividend declared by its Board of Directors.
The use of the lattice-binomial model requires extensive actual employee exercise behavior data for the relative probability estimation purpose, and a number of complex assumptions as presented in the preceding table. The estimated kurtosis and skewness are technical measures of the distribution of stock price returns, which affect expected employee stock option exercise behaviors, and are based on the Company’s stock price return history as well as consideration of various academic analyses. The expected life of employee stock options is a derived output of the lattice-binomial model, which represents the weighted-average period the stock options are expected to remain outstanding.
(h) Employee 401(k) Plans
The Company sponsors the Cisco Systems, Inc. 401(k) Plan (the “Plan”) to provide retirement benefits for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides for tax-deferred salary contributions and after-tax contributions for eligible employees. The Plan allows employees to contribute from 1% to 75% of their annual compensation to the Plan on a pretax and after-tax basis, and effective January 1, 2011, the Plan also allows employees to make Roth contributions. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company matches pretax employee contributions up to 100% of the first 4.5% of eligible earnings that are contributed by employees. Therefore, the maximum matching contribution that the Company may allocate to each participant’s account will not exceed $11,250 for the 2012 calendar year due to the $250,000 annual limit on eligible earnings imposed by the Internal Revenue Code. All matching contributions vest immediately. The Company’s matching contributions to the Plan totaled $231 million, $239 million, and $210 million in fiscal 2012, 2011, and 2010, respectively.
The Plan allows employees who meet the age requirements and reach the Plan contribution limits to make a catch-up contribution not to exceed the lesser of 75% of their eligible compensation or the limit set forth in the Internal Revenue Code. The catch-up contributions are not eligible for matching contributions. In addition, the Plan provides for discretionary profit-sharing contributions as determined by the Board of Directors. Such contributions to the Plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. There were no discretionary profit-sharing contributions made in fiscal 2012, 2011, or 2010.
The Company also sponsors other 401(k) plans that arose from acquisitions of other companies. The Company’s contributions to these plans were not material to the Company on either an individual or aggregate basis for any of the fiscal years presented.
(i) Deferred Compensation Plans
The Cisco Systems, Inc. Deferred Compensation Plan (the “Deferred Compensation Plan”), a nonqualified deferred compensation plan, became effective in 2007. As required by applicable law, participation in the Deferred Compensation Plan is limited to a select group of the Company’s management employees. Under the Deferred Compensation Plan, which is an unfunded and unsecured deferred compensation arrangement, a participant may elect to defer base salary, bonus, and/or commissions, pursuant to such rules as may be established by the Company, up to the maximum percentages for each deferral election as described in the plan. The Company may also, at its discretion, make a matching contribution to the employee under the Deferred Compensation Plan. A matching contribution equal to 4.5% of eligible compensation in excess of the Internal Revenue Code limit for qualified plans for calendar year 2012 that is deferred by participants under the Deferred Compensation Plan (with a $1.5 million cap on eligible compensation) will be made to eligible participants’ accounts at the end of calendar year 2012. The deferred compensation liability under the Deferred Compensation Plan, together with a deferred compensation plan assumed from Scientific-Atlanta, was approximately $355 million and $375 million as of July 28, 2012 and July 30, 2011, respectively, and was recorded primarily in other long-term liabilities.
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(a) Provision for Income Taxes
The provision for income taxes consists of the following (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Federal: |
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Current |
$ | 1,836 | $ | 914 | $ | 1,469 | ||||||
Deferred |
(270 | ) | (168 | ) | (435 | ) | ||||||
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1,566 | 746 | 1,034 | ||||||||||
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State: |
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Current |
119 | 49 | 186 | |||||||||
Deferred |
(53 | ) | 83 | — | ||||||||
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66 | 132 | 186 | ||||||||||
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Foreign: |
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Current |
477 | 529 | 470 | |||||||||
Deferred |
9 | (72 | ) | (42 | ) | |||||||
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486 | 457 | 428 | ||||||||||
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Total |
$ | 2,118 | $ | 1,335 | $ | 1,648 | ||||||
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Income before provision for income taxes consists of the following (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
United States |
$ | 3,235 | $ | 1,214 | $ | 1,102 | ||||||
International |
6,924 | 6,611 | 8,313 | |||||||||
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Total |
$ | 10,159 | $ | 7,825 | $ | 9,415 | ||||||
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The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consist of the following:
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Effect of: |
||||||||||||
State taxes, net of federal tax benefit |
0.4 | 1.5 | 1.4 | |||||||||
Foreign income at other than U.S. rates |
(15.6 | ) | (19.4 | ) | (19.3 | ) | ||||||
Tax credits |
(0.4 | ) | (3.0 | ) | (0.5 | ) | ||||||
Transfer pricing adjustment related to share-based compensation |
— | — | (1.7 | ) | ||||||||
Nondeductible compensation |
1.8 | 2.5 | 2.0 | |||||||||
Other, net |
(0.4 | ) | 0.5 | 0.6 | ||||||||
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Total |
20.8 | % | 17.1 | % | 17.5 | % | ||||||
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During fiscal 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reinstated the U.S. federal R&D tax credit through December 31, 2011, retroactive to January 1, 2010. As a result, the tax provision in fiscal 2011 includes a tax benefit of $65 million related to the R&D tax credit for fiscal 2010.
During fiscal 2010, the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) withdrew its prior holding and reaffirmed the 2005 U.S. Tax Court ruling in Xilinx, Inc. v. Commissioner. This final decision impacted the tax treatment of share-based compensation expenses for the purpose of determining intangible development costs under a company’s research and development cost-sharing arrangement. While the Company was not a named party to the case, this decision resulted in a change in the Company’s tax benefits recognized in its financial statements. As a result of the decision, the Company recognized in fiscal 2011 a combined tax benefit of $724 million, of which $158 million was recorded as a reduction to the provision for income taxes and $566 million was recorded as an increase to additional paid-in capital.
U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $41.3 billion of undistributed earnings for certain foreign subsidiaries as of the end of fiscal 2012. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.
As a result of certain employment and capital investment actions, the Company’s income in certain foreign countries is subject to reduced tax rates and in some cases is wholly exempt from taxes. A portion of these tax incentives will expire at the end of fiscal 2015, and the majority of the remaining balance will expire at the end of fiscal 2025. The gross income tax benefit attributable to tax incentives were estimated to be $1.3 billion ($0.24 per diluted share) in fiscal 2012, of which, approximately $0.5 billion ($0.09 per diluted share) is based on tax incentives that will expire at the end of fiscal 2015. As of the end of fiscal 2011 and fiscal 2010, the gross income tax benefits attributable to tax incentives were estimated to be $1.3 billion ($0.24 per diluted share) and $1.7 billion ($0.30 per diluted share), for the respective years. The gross income tax benefits for the respective years were partially offset by accruals of U.S. income taxes on undistributed earnings.
(b) Unrecognized Tax Benefits
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Beginning balance |
$ | 2,948 | $ | 2,677 | $ | 2,816 | ||||||
Additions based on tax positions related to the current year |
155 | 374 | 246 | |||||||||
Additions for tax positions of prior years |
54 | 93 | 60 | |||||||||
Reductions for tax positions of prior years |
(226 | ) | (60 | ) | (250 | ) | ||||||
Settlements |
(41 | ) | (56 | ) | (140 | ) | ||||||
Lapse of statute of limitations |
(71 | ) | (80 | ) | (55 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,819 | $ | 2,948 | $ | 2,677 | ||||||
|
|
|
|
|
|
As of July 28, 2012, $2.4 billion of the unrecognized tax benefits would affect the effective tax rate if realized. During fiscal 2012, the Company recognized $146 million of net interest expense and $21 million of penalties. During fiscal 2011, the Company recognized $38 million of net interest expense and $9 million of penalties. The Company’s total accrual for interest and penalties was $381 million and $214 million as of the end of fiscal 2012 and 2011, respectively. The Company is no longer subject to U.S. federal income tax audit for returns covering tax years through fiscal 2001. With limited exceptions, the Company is no longer subject to foreign income tax audits for returns covering tax years through fiscal 2000 and state and local income tax audits for returns covering tax years through fiscal 1997.
During fiscal 2010, the Ninth Circuit withdrew its prior holding and reaffirmed the 2005 U.S. Tax Court ruling in Xilinx, Inc. v. Commissioner. As a result of this final decision in fiscal 2010, the Company decreased the amount of gross unrecognized tax benefits by approximately $220 million and decreased the amount of accrued interest by $218 million.
The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company believes 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 July 28, 2012 could be reduced by approximately $1.1 billion in the next 12 months.
(c) Deferred Tax Assets and Liabilities
The following table presents the breakdown between current and noncurrent net deferred tax assets (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Deferred tax assets—current |
$ | 2,294 | $ | 2,410 | ||||
Deferred tax liabilities—current |
(123 | ) | (131 | ) | ||||
Deferred tax assets—noncurrent |
2,270 | 1,864 | ||||||
Deferred tax liabilities—noncurrent |
(133 | ) | (264 | ) | ||||
|
|
|
|
|||||
Total net deferred tax assets |
$ | 4,308 | $ | 3,879 | ||||
|
|
|
|
The components of the deferred tax assets and liabilities are as follows (in millions):
July 28, 2012 | July 30, 2011 | |||||||
ASSETS |
||||||||
Allowance for doubtful accounts and returns |
$ | 433 | $ | 413 | ||||
Sales-type and direct-financing leases |
162 | 178 | ||||||
Inventory write-downs and capitalization |
127 | 160 | ||||||
Investment provisions |
261 | 226 | ||||||
IPR&D, goodwill, and purchased intangible assets |
119 | 106 | ||||||
Deferred revenue |
1,618 | 1,634 | ||||||
Credits and net operating loss carryforwards |
721 | 713 | ||||||
Share-based compensation expense |
1,059 | 1,084 | ||||||
Accrued compensation |
481 | 507 | ||||||
Other |
583 | 590 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
5,564 | 5,611 | ||||||
Valuation allowance |
(60 | ) | (82 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
5,504 | 5,529 | ||||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Purchased intangible assets |
(809 | ) | (997 | ) | ||||
Depreciation |
(131 | ) | (298 | ) | ||||
Unrealized gains on investments |
(222 | ) | (265 | ) | ||||
Other |
(34 | ) | (90 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(1,196 | ) | (1,650 | ) | ||||
|
|
|
|
|||||
Total net deferred tax assets |
$ | 4,308 | $ | 3,879 | ||||
|
|
|
|
As of July 28, 2012, the Company’s federal, state, and foreign net operating loss carryforwards for income tax purposes were $321 million, $1.5 billion, and $240 million, respectively. A significant amount of the federal net operating loss carryforwards relate to acquisitions and, as a result, is limited in the amount that can be recognized in any one year. If not utilized, the federal net operating loss will begin to expire in fiscal 2019 and the foreign and state net operating loss carryforwards will begin to expire in fiscal 2013. The Company has provided a valuation allowance of $55 million for deferred tax assets related to foreign net operating losses that are not expected to be realized.
As of July 28, 2012, the Company’s federal, state and foreign tax credit carryforwards for income tax purposes were approximately $6 million, $562 million and $4 million, respectively. The federal and foreign tax credit carryforwards will begin to expire in fiscal 2019 and 2027, respectively. The majority of state tax credits can be carried forward indefinitely.
|
16. Segment Information and Major Customers
(a) Net Sales and Gross Margin by Segment
The Company conducts business globally and is primarily managed on a geographic basis consisting of three segments: the Americas; EMEA; and APJC. In fiscal 2011, the Company had been organized into the following four segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. As a result of this segment change effective in the first quarter of fiscal 2012, countries within the former Emerging Markets segment were consolidated into either EMEA or the Americas segment depending on their respective geographic locations. The Company has reclassified the segment data for the prior period to conform to the current year’s presentation.
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 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 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 fiscal 2012, 2011, and 2010, 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):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Net sales: |
||||||||||||
Americas |
$ | 26,501 | $ | 25,015 | $ | 23,334 | ||||||
EMEA |
12,075 | 11,604 | 10,825 | |||||||||
APJC |
7,485 | 6,599 | 5,881 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 46,061 | $ | 43,218 | $ | 40,040 | ||||||
|
|
|
|
|
|
|||||||
Gross margin: |
||||||||||||
Americas |
16,639 | 15,766 | 15,042 | |||||||||
EMEA |
7,605 | 7,452 | 7,235 | |||||||||
APJC |
4,519 | 4,143 | 3,842 | |||||||||
|
|
|
|
|
|
|||||||
Segment total |
28,763 | 27,361 | 26,119 | |||||||||
|
|
|
|
|
|
|||||||
Unallocated corporate items |
(554 | ) | (825 | ) | (476 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 28,209 | $ | 26,536 | $ | 25,643 | ||||||
|
|
|
|
|
|
Net sales in the United States, which is included in the Americas, were $22.6 billion, $21.5 billion, and $20.4 billion for fiscal 2012, 2011, and 2010, respectively.
(b) Net Sales for Groups of Similar Products and Services
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. The Company formerly grouped its products and technologies into categories of Switches, Routers, New Products, and Other. Effective in the first quarter of fiscal 2012, the Company recategorized its products and technologies into the following categories: Switching, NGN Routing, Collaboration, Service Provider Video, Wireless, Security, Data Center, and Other Products. These products, primarily integrated by Cisco IOS Software, link geographically dispersed local-area networks (“LANs”), metropolitan-area networks (“MANs”), and wide-area networks (“WANs”). The Company has reclassified the prior periods to conform to the current year’s presentation.
The following table presents net sales for groups of similar products and services (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Net sales: |
||||||||||||
Switching |
$ | 14,531 | $ | 14,130 | $ | 14,074 | ||||||
NGN Routing |
8,425 | 8,264 | 7,868 | |||||||||
Collaboration |
4,139 | 4,013 | 2,981 | |||||||||
Service Provider Video |
3,858 | 3,483 | 3,294 | |||||||||
Wireless |
1,699 | 1,427 | 1,134 | |||||||||
Security |
1,349 | 1,200 | 1,302 | |||||||||
Data Center |
1,298 | 694 | 196 | |||||||||
Other |
1,027 | 1,315 | 1,571 | |||||||||
|
|
|
|
|
|
|||||||
Product |
36,326 | 34,526 | 32,420 | |||||||||
Service |
9,735 | 8,692 | 7,620 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 46,061 | $ | 43,218 | $ | 40,040 | ||||||
|
|
|
|
|
|
(c) Additional Segment Information
The majority of the Company’s assets, excluding cash and cash equivalents and investments, as of July 28, 2012 and July 30, 2011 were attributable to its U.S. operations. The Company’s total cash and cash equivalents and investments held by various foreign subsidiaries were $42.5 billion and $39.8 billion as of July 28, 2012 and July 30, 2011, respectively, and the remaining $6.2 billion and $4.8 billion at the respective fiscal year ends was available in the United States. In fiscal 2012, 2011, and 2010, 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):
July 28, 2012 | July 30, 2011 | July 31, 2010 | ||||||||||
Property and equipment, net: |
||||||||||||
United States |
$ | 2,842 | $ | 3,284 | $ | 3,283 | ||||||
International |
560 | 632 | 658 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 3,402 | $ | 3,916 | $ | 3,941 | ||||||
|
|
|
|
|
|
|
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Allowances For | ||||||||||||
Lease Receivables |
Loan Receivables |
Accounts Receivable |
||||||||||
Year ended July 31, 2010: |
||||||||||||
Balance at beginning of fiscal year |
$ | 213 | $ | 88 | $ | 216 | ||||||
Provisions |
25 | 43 | 44 | |||||||||
Write-offs net of recoveries |
(1 | ) | (69 | ) | (25 | ) | ||||||
Foreign exchange and other |
(30 | ) | 11 | — | ||||||||
|
|
|
|
|
|
|||||||
Balance at end of fiscal year |
$ | 207 | $ | 73 | $ | 235 | ||||||
|
|
|
|
|
|
|||||||
Year ended July 30, 2011: |
||||||||||||
Balance at beginning of fiscal year |
$ | 207 | $ | 73 | $ | 235 | ||||||
Provisions |
31 | 43 | 7 | |||||||||
Write-offs net of recoveries |
(13 | ) | (18 | ) | (38 | ) | ||||||
Foreign exchange and other |
12 | 5 | — | |||||||||
|
|
|
|
|
|
|||||||
Balance at end of fiscal year |
$ | 237 | $ | 103 | $ | 204 | ||||||
|
|
|
|
|
|
|||||||
Year ended July 28, 2012: |
||||||||||||
Balance at beginning of fiscal year |
$ | 237 | $ | 103 | $ | 204 | ||||||
Provisions |
22 | 22 | 19 | |||||||||
Write-offs net of recoveries |
(2 | ) | — | (16 | ) | |||||||
Foreign exchange and other |
(10 | ) | (3 | ) | — | |||||||
|
|
|
|
|
|
|||||||
Balance at end of fiscal year |
$ | 247 | $ | 122 | $ | 207 | ||||||
|
|
|
|
|
|
Foreign exchange and other includes the impact of foreign exchange and certain immaterial reclassifications.
|
(a) Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
(b) Available-for-Sale Investments The Company classifies its investments in both fixed income securities and publicly traded equity securities as available-for-sale investments. Fixed income securities primarily consist of U.S. government securities, U.S. government agency securities, non-U.S. government and agency securities, corporate debt securities, and asset-backed securities. These available-for-sale investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of fixed income and public equity securities sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments, to the extent the investments are unhedged, are included as a separate component of accumulated other comprehensive income (“AOCI”), net of tax. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.
(c) Other-than-Temporary Impairments on Investments When the fair value of a debt security is less than its amortized cost, it is deemed impaired, and the Company will assess whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If impairment is considered other than temporary based on condition (i) or (ii) described earlier, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (“OCI”).
The Company recognizes an impairment charge on publicly traded equity securities when a decline in the fair value of a security below the respective cost basis is judged to be other than temporary. The Company considers various factors in determining whether a decline in the fair value of these investments is other than temporary, including the length of time and extent to which the fair value of the security has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Investments in privately held companies are included in other assets in the Consolidated Balance Sheets and are primarily accounted for using either the cost or equity method. The Company monitors these investments for impairments and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based primarily on the financial condition and near-term prospects of these companies.
(d) Inventories Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. In addition, the Company records a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of the Company’s future demand forecasts consistent with its valuation of excess and obsolete inventory.
(e) Allowance for Doubtful Accounts The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, economic conditions that may affect a customer’s ability to pay, and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.
(f) Financing Receivables The Company provides financing arrangements, including leases, financed service contracts, and loans, for certain qualified end-user customers to build, maintain, and upgrade their networks. Lease receivables primarily represent sales-type and direct-financing leases. Leases have on average a four-year term and are usually collateralized by a security interest in the underlying assets, while loan receivables generally have terms of up to three years. Financed service contracts typically have terms of one to three years and primarily relate to technical support services.
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other. Effective in the second quarter of fiscal 2012, the Company combined its financing receivables into a single class as the two prior classes, Established Markets and Growth Markets, now exhibit similar risk characteristics as reflected by the Company’s historical losses. See Note 7.
The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company’s historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer’s ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, will be assessed and fully reserved at the customer level. Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. Effective at the beginning of the second quarter of fiscal 2012, the Company refined its methodology for determining the portion of its allowance for credit loss that is evaluated on a collective basis. The refinement consists of more systematically giving effect to economic conditions, concentration of risk, and correlation. The Company also began to use expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default. Previously the Company used only historical loss rates published by the same third-party credit-rating agency. These refinements are intended to better identify changes in macroeconomic conditions and credit risk. There was not a material change to the Company’s total allowance for credit loss related to financing receivables as a result of these methodology refinements.
Expected default frequency rates are published quarterly by a major third-party credit-rating agency, and the internal credit risk rating is derived by taking into consideration various customer-specific factors and macroeconomic conditions. These factors, which include the strength of the customer’s business and financial performance, the quality of the customer’s banking relationships, the Company’s specific historical experience with the customer, the performance and outlook of the customer’s industry, the customer’s legal and regulatory environment, the potential sovereign risk of the geographic locations in which the customer is operating, and independent third-party evaluations, are updated regularly or when facts and circumstances indicate that an update is deemed necessary. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.
Financing receivables are written off at the point when they are considered uncollectible and all outstanding balances, including any previously earned but uncollected interest income, will be reversed and charged against earnings. The Company does not typically have any partially written-off financing receivables.
Outstanding financing receivables that are aged 31 days or more from the contractual payment date are considered past due. The Company does not accrue interest on financing receivables that are considered impaired or more than 90 days past due unless either the receivable has not been collected due to administrative reasons or the receivable is well secured. Financing receivables may be placed on nonaccrual status earlier if, in management’s opinion, a timely collection of the full principal and interest becomes uncertain. After a financing receivable has been categorized as nonaccrual, interest will be recognized when cash is received. A financing receivable may be returned to accrual status after all of the customer’s delinquent balances of principal and interest have been settled and the customer remains current for an appropriate period.
The Company facilitates third-party financing arrangements for channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. In certain instances, these financing arrangements result in a transfer of the Company’s receivables to the third party. The receivables are derecognized upon transfer, as these transfers qualify as true sales, and the Company receives a payment for the receivables from the third party based on the Company’s standard payment terms. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The Company could be called upon to make payments under these guarantees in the event of nonpayment by the channel partners or end-user customers. Deferred revenue relating to these financing arrangements is recorded in accordance with revenue recognition policies or for the fair value of the financing guarantees.
(g) Depreciation and Amortization Property and equipment are stated at cost, less accumulated depreciation or amortization, whenever applicable. Depreciation and amortization expenses for property and equipment were approximately $1.1 billion, $1.1 billion, and $1.0 billion for fiscal 2012, 2011 and 2010, respectively. Depreciation and amortization are computed using the straight-line method, generally over the following periods:
Asset category |
Period |
|
Buildings |
25 years | |
Building improvements |
10 years | |
Furniture and fixtures |
5 years | |
Leasehold improvements |
Shorter of remaining lease term or 5 years | |
Computer equipment and related software |
30 to 36 months | |
Production, engineering, and other equipment |
Up to 5 years | |
Operating lease assets |
Based on lease term generally up to 3 years |
(h) Business Combinations The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over the asset’s estimated useful life. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.
(i) Goodwill and Purchased Intangible Assets Goodwill is tested for impairment on an annual basis in the fourth fiscal quarter and, when specific circumstances dictate, between annual tests. When impaired, the carrying value of goodwill is written down to fair value. The goodwill impairment test involves a two-step process. The first step, identifying a potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to seven years. See “Long-Lived Assets,” following, for the Company’s policy regarding impairment testing of purchased intangible assets with finite lives. Purchased intangible assets with indefinite lives are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired.
(j) Long-Lived Assets Long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the difference between the fair value of the asset and its carrying value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
(k) Derivative Instruments The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For a derivative instrument designated as a net investment hedge of the Company’s foreign operations, the gain or loss is recorded in the cumulative translation adjustment within AOCI together with the offsetting loss or gain of the hedged exposure of the underlying foreign operations. Any ineffective portion of the net investment hedges is reported in earnings during the period of change. For derivative instruments that are not designated as accounting hedges, changes in fair value are recognized in earnings in the period of change. The Company records derivative instruments in the statements of cash flows to operating, investing, or financing activities consistent with the cash flows of the hedged item.
(m) Concentrations of Risk Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company seeks to mitigate its credit risks by spreading such risks across multiple counterparties and monitoring the risk profiles of these counterparties.
The Company performs ongoing credit evaluations of its customers and, with the exception of certain financing transactions, does not require collateral from its customers. The Company receives certain of its components from sole suppliers. Additionally, the Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for its products. The inability of a contract manufacturer or supplier to fulfill supply requirements of the Company could materially impact future operating results.
(n) Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met. For hosting arrangements, the Company recognizes subscription revenue ratably over the subscription period, while usage revenue is recognized based on utilization. Technical support services revenue is deferred and recognized ratably over the period during which the services are to be performed, which is typically from one to three years. Advanced services transactional revenue is recognized upon delivery or completion of performance.
The Company uses distributors that stock inventory and typically sell to systems integrators, service providers, and other resellers. In addition, certain products are sold through retail partners. The Company refers to this as its two-tier system of sales to the end customer. Revenue from distributors and retail partners is recognized based on a sell-through method using information provided by them. Distributors and retail partners participate in various cooperative marketing and other programs, and the Company maintains estimated accruals and allowances for these programs. The Company accrues for warranty costs, sales returns, and other allowances based on its historical experience. Shipping and handling fees billed to customers are included in net sales, with the associated costs included in cost of sales.
Many of the Company’s products have both software and nonsoftware components that function together to deliver the products’ essential functionality. The Company’s product offerings fall into the following categories: Switching, Next-Generation Network (“NGN”) Routing, Collaboration, Service Provider Video, Wireless, Security, Data Center, and Other products. The Company also provides technical support and advanced services. The Company has a broad customer base that encompasses virtually all types of public and private entities, including enterprise businesses, service providers, commercial customers, and consumers. The Company and its salesforce are not organized by product divisions, and the Company’s products and services can be sold standalone or together in various combinations across the Company’s geographic segments or customer markets. For example, service provider arrangements are typically larger in scale with longer deployment schedules and involve the delivery of a variety of product technologies, including high-end routing, video and network management software, and other product technologies along with technical support and advanced services. The Company’s enterprise and commercial arrangements are unique for each customer and smaller in scale and may include network infrastructure products such as routers and switches or collaboration technologies such as unified communications and Cisco TelePresence systems products along with technical support services.
The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and the technical support services delivered across multiple reporting periods. Another customer may purchase networking products along with advanced service offerings, in which all the elements are delivered within the same reporting period. In addition, distributors and retail partners purchase products or technical support services on a standalone basis for resale to an end user or for purposes of stocking certain products, and these transactions would not result in a multiple-element arrangement.
In many instances, products are sold separately in standalone arrangements as customers may support the products themselves or purchase support on a time-and-materials basis. Advanced services are sometimes sold in standalone engagements such as general consulting, network management, or security advisory projects, and technical support services are sold separately through renewals of annual contracts. The Company determines its Vendor-Specific Objective Evidence (“VSOE”) based on its normal pricing and discounting practices for the specific product or service when sold separately. VSOE determination requires that a substantial majority of the historical standalone transactions have the selling prices for a product or service that fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups and customer classifications, and other environmental or marketing variables in determining VSOE.
When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain newly introduced product categories, the Company attempts to determine the selling price of each element based on third-party evidence of selling price (“TPE”). TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers, and its offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, the Company is typically not able to determine TPE.
When the Company is unable to establish fair value using VSOE or TPE, the Company uses estimated selling prices (“ESP”) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were regularly sold on a standalone basis. ESP is generally used for new or highly proprietary offerings and solutions, or for offerings not priced within a reasonably narrow range. The Company determines ESP for a product or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and formal approval by the Company’s management, taking into consideration the go-to-market strategy.
The Company regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material impacts during the fiscal year, nor does the Company currently expect a material impact in the near term from changes in VSOE, TPE, or ESP.
The Company’s arrangements with multiple deliverables may have a standalone software deliverable that is subject to the software revenue recognition guidance. In these cases, revenue for the software is generally recognized upon shipment or electronic delivery and granting of the license. The revenue for these multiple-element arrangements is allocated to the software deliverable and the nonsoftware deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the applicable accounting guidance. In the limited circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purposes of performing this allocation.
(o) Advertising Costs The Company expenses all advertising costs as incurred. Advertising costs included within sales and marketing expenses were approximately $218 million, $325 million, and $290 million for fiscal 2012, 2011, and 2010, respectively.
(p) Share-Based Compensation Expense The Company measures and recognizes the compensation expense for all share-based awards made to employees and directors, including employee stock options, stock grants, stock units, and employee stock purchases related to the Employee Stock Purchase Plan (“Employee Stock Purchase Rights”) based on estimated fair values. The fair value of employee stock options is estimated on the date of grant using a lattice-binomial option-pricing model (“Lattice-Binomial Model”), and for employee stock purchase rights the Company estimates the fair value using the Black-Scholes model. The fair value for time-based stock awards and stock awards that are contingent upon the achievement of financial performance metrics is based on the grant date share price reduced by the present value of the expected dividend yield prior to vesting. The fair value of market-based stock awards is estimated using an option-pricing model on the date of grant. Because share-based compensation expense is based on awards ultimately expected to vest, it has been reduced for forfeitures.
(q) Software Development Costs Software development costs required to be capitalized for software sold, leased, or otherwise marketed have not been material to date. Software development costs required to be capitalized for internal use software have also not been material to date.
(r) Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
(s) Computation of Net Income per Share Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options, unvested restricted stock, and restricted stock units. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are collectively assumed to be used to repurchase shares.
(t) Consolidation of Variable Interest Entities The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s Consolidated Financial Statements.
(u) Use of Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for the following, among others:
• |
Revenue recognition |
• |
Allowances for accounts receivable, sales returns, and financing receivables |
• |
Inventory valuation and liability for purchase commitments with contract manufacturers and suppliers |
• |
Warranty costs |
• |
Share-based compensation expense |
• |
Fair value measurements and other-than-temporary impairments |
• |
Goodwill and purchased intangible asset impairments |
• |
Income taxes |
• |
Loss contingencies |
The actual results experienced by the Company may differ materially from management’s estimates.
(v) New Accounting Update Recently Adopted
In May 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update to provide guidance on achieving a consistent definition of and common requirements for measurement of and disclosure concerning fair value as between U.S. GAAP and International Financial Reporting Standards (“IFRS”). This accounting standard update became effective for the Company beginning in the third quarter of fiscal 2012. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 9.
(w) Recent Accounting Standards or Updates Not Yet Effective
In June 2011, the FASB issued an accounting standard update to provide guidance on increasing the prominence of items reported in other comprehensive income. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires that the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This accounting standard update is effective for the Company beginning in the first quarter of fiscal 2013, and it will result in changes in the Company’s financial statement presentation.
In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2013, and the adoption is not expected to have any impact on the Company's Consolidated Financial Statements.
In December 2011, the FASB issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the required disclosures.
In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update in its 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 |
3,740 | $ | 17,041 | $ | 59,092 | $ | 76,133 |
|
Depreciation and amortization are computed using the straight-line method, generally over the following periods:
Asset category |
Period |
|
Buildings |
25 years | |
Building improvements |
10 years | |
Furniture and fixtures |
5 years | |
Leasehold improvements |
Shorter of remaining lease term or 5 years | |
Computer equipment and related software |
30 to 36 months | |
Production, engineering, and other equipment |
Up to 5 years | |
Operating lease assets |
Based on lease term generally up to 3 years |
|
A summary of the allocation of the total purchase consideration is presented as follows (in millions):
Fiscal 2012 |
Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | ||||||||||||
Lightwire, Inc. |
$ | 239 | $ | (15 | ) | $ | 97 | $ | 157 | |||||||
All others |
159 | (24 | ) | 103 | 80 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total acquisitions |
$ | 398 | $ | (39 | ) | $ | 200 | $ | 237 | |||||||
|
|
|
|
|
|
|
|
Fiscal 2011 |
Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | ||||||||||||
Total acquisitions |
$ | 288 | $ | (10 | ) | $ | 114 | $ | 184 |
Fiscal 2010 |
Purchase Consideration |
Net Tangible Assets Acquired/ (Liabilities Assumed) |
Purchased Intangible Assets |
Goodwill | ||||||||||||
ScanSafe, Inc. |
$ | 154 | $ | 2 | $ | 31 | $ | 121 | ||||||||
Starent Networks, Corp. |
2,636 | (17 | ) | 1,274 | 1,379 | |||||||||||
Tandberg ASA |
3,268 | 17 | 980 | 2,271 | ||||||||||||
All others |
128 | 2 | 95 | 31 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total acquisitions |
$ | 6,186 | $ | 4 | $ | 2,380 | $ | 3,802 | ||||||||
|
|
|
|
|
|
|
|
|
The following table presents the goodwill allocated to the Company’s reportable segments as of July 28, 2012 and July 30, 2011, as well as the changes to goodwill during fiscal 2012 and 2011 (in millions):
Balance at July 30, 2011 |
Acquisitions | Other | Balance at July 28, 2012 |
|||||||||||||
Americas |
$ | 11,627 | $ | 136 | $ | (8 | ) | $ | 11,755 | |||||||
EMEA |
3,272 | 64 | (49 | ) | 3,287 | |||||||||||
APJC |
1,919 | 37 | — | 1,956 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,818 | $ | 237 | $ | (57 | ) | $ | 16,998 | |||||||
|
|
|
|
|
|
|
|
Balance at July 31, 2010 |
Acquisitions | Other | Balance at July 30, 2011 |
|||||||||||||
Americas |
$ | 11,571 | $ | 122 | $ | (66 | ) | $ | 11,627 | |||||||
EMEA |
3,209 | 38 | 25 | 3,272 | ||||||||||||
APJC |
1,894 | 24 | 1 | 1,919 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,674 | $ | 184 | $ | (40 | ) | $ | 16,818 | |||||||
|
|
|
|
|
|
|
|
The following tables present details of the Company’s intangible assets acquired through business combinations completed during fiscal 2012 and 2011 (in millions, except years):
FINITE LIVES | INDEFINITE LIVES |
TOTAL | ||||||||||||||||||||||||||||||
TECHNOLOGY | CUSTOMER RELATIONSHIPS |
OTHER | IPR&D | |||||||||||||||||||||||||||||
Fiscal 2012 |
Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | Amount | ||||||||||||||||||||||||
Lightwire, Inc. |
5.0 | $ | 97 | — | $ | — | — | $ | — | $ | — | $ | 97 | |||||||||||||||||||
All others |
3.5 | 102 | 3.0 | 1 | — | — | — | 103 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Total |
$ | 199 | $ | 1 | $ | — | $ | — | $ | 200 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
FINITE LIVES | INDEFINITE LIVES |
TOTAL | ||||||||||||||||||||||||||||||
TECHNOLOGY | CUSTOMER RELATIONSHIPS |
OTHER | IPR&D | |||||||||||||||||||||||||||||
Fiscal 2011 |
Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Weighted- Average Useful Life (in Years) |
Amount | Amount | Amount | ||||||||||||||||||||||||
Total |
4.8 | $ | 92 | 6.4 | $ | 16 | 2.5 | $ | 1 | $ | 5 | $ | 114 |
The following tables present details of the Company’s purchased intangible assets (in millions):
July 28, 2012 |
Gross | Accumulated Amortization |
Net | |||||||||
Purchased intangible assets with finite lives: |
||||||||||||
Technology |
$ | 2,267 | $ | (908 | ) | $ | 1,359 | |||||
Customer relationships |
2,261 | (1,669 | ) | 592 | ||||||||
Other |
49 | (41 | ) | 8 | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,577 | $ | (2,618 | ) | $ | 1,959 | |||||
|
|
|
|
|
|
July 30, 2011 |
Gross | Accumulated Amortization |
Net | |||||||||
Purchased intangible assets with finite lives: |
||||||||||||
Technology |
$ | 1,961 | $ | (561 | ) | $ | 1,400 | |||||
Customer relationships |
2,277 | (1,346 | ) | 931 | ||||||||
Other |
123 | (91 | ) | 32 | ||||||||
Total purchased intangible assets with finite lives |
4,361 | (1,998 | ) | 2,363 | ||||||||
IPR&D, with indefinite lives |
178 | — | 178 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 4,539 | $ | (1,998 | ) | $ | 2,541 | |||||
|
|
|
|
|
|
The following table presents the amortization of purchased intangible assets (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Amortization of purchased intangible assets: |
||||||||||||
Cost of sales |
$ | 424 | $ | 492 | $ | 277 | ||||||
Operating expenses: |
||||||||||||
Amortization of purchased intangible assets |
383 | 520 | 491 | |||||||||
Restructuring and other charges |
— | 8 | — | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 807 | $ | 1,020 | $ | 768 | ||||||
|
|
|
|
|
|
The estimated future amortization expense of purchased intangible assets with finite lives as of July 28, 2012 is as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | 706 | ||
2014 |
523 | |||
2015 |
444 | |||
2016 |
217 | |||
2017 |
69 | |||
|
|
|||
Total |
$ | 1,959 | ||
|
|
|
The following table summarizes the activities related to the restructuring and other charges pursuant to the Company’s July 2011 announcement related to the realignment and restructuring of the Company’s business as well as certain consumer product lines as announced during April 2011 (in millions):
Voluntary Early Retirement Program |
Employee Severance |
Goodwill and Intangible Assets |
Other | Total | ||||||||||||||||
Gross charges in fiscal 2011 |
$ | 453 | $ | 247 | $ | 71 | $ | 28 | $ | 799 | ||||||||||
Cash payments |
(436 | ) | (13 | ) | — | — | (449 | ) | ||||||||||||
Non-cash items |
— | — | (71 | ) | (17 | ) | (88 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of July 30, 2011 |
17 | 234 | — | 11 | 262 | |||||||||||||||
Gross charges in fiscal 2012 |
— | 299 | — | 54 | 353 | |||||||||||||||
Change in estimate related to fiscal 2011 charges |
— | (49 | ) | — | — | (49 | ) | |||||||||||||
Cash payments |
(17 | ) | (401 | ) | — | (18 | ) | (436 | ) | |||||||||||
Non-cash items |
— | — | — | (20 | ) | (20 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of July 28, 2012 |
$ | — | $ | 83 | $ | — | $ | 27 | $ | 110 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
July 28, 2012 | July 30, 2011 | |||||||
Inventories: |
||||||||
Raw materials |
$ | 127 | $ | 219 | ||||
Work in process |
35 | 52 | ||||||
Finished goods: |
||||||||
Distributor inventory and deferred cost of sales |
630 | 631 | ||||||
Manufactured finished goods |
597 | 331 | ||||||
|
|
|
|
|||||
Total finished goods |
1,227 | 962 | ||||||
|
|
|
|
|||||
Service-related spares |
213 | 182 | ||||||
Demonstration systems |
61 | 71 | ||||||
|
|
|
|
|||||
Total |
$ | 1,663 | $ | 1,486 | ||||
|
|
|
|
Property and equipment, net: |
||||||||
Land, buildings, and building and leasehold improvements |
$ | 4,363 | $ | 4,760 | ||||
Computer equipment and related software |
1,469 | 1,429 | ||||||
Production, engineering, and other equipment |
5,364 | 5,093 | ||||||
Operating lease assets (1) |
300 | 293 | ||||||
Furniture and fixtures |
487 | 491 | ||||||
|
|
|
|
|||||
11,983 | 12,066 | |||||||
Less accumulated depreciation and amortization (1) |
(8,581 | ) | (8,150 | ) | ||||
|
|
|
|
|||||
Total |
$ | 3,402 | $ | 3,916 | ||||
|
|
|
|
|||||
(1) Accumulated depreciation related to operating lease assets was $181 and $169 as of July 28, 2012 and July 30, 2011, respectively. |
Other assets: |
||||||||
Deferred tax assets |
$ | 2,270 | $ | 1,864 | ||||
Investments in privately held companies |
858 | 796 | ||||||
Other |
754 | 441 | ||||||
|
|
|
|
|||||
Total |
$ | 3,882 | $ | 3,101 |
Deferred revenue: |
||||||||
Service |
$ | 9,173 | $ | 8,521 | ||||
Product: |
||||||||
Unrecognized revenue on product shipments and other deferred revenue |
2,975 | 3,003 | ||||||
Cash receipts related to unrecognized revenue from two-tier distributors |
732 | 683 | ||||||
|
|
|
|
|||||
Total product deferred revenue |
3,707 | 3,686 | ||||||
|
|
|
|
|||||
Total |
$ | 12,880 | $ | 12,207 | ||||
|
|
|
|
|||||
Reported as: |
||||||||
Current |
$ | 8,852 | $ | 8,025 | ||||
Noncurrent |
4,028 | 4,182 | ||||||
|
|
|
|
|||||
Total |
$ | 12,880 | $ | 12,207 |
|
A summary of the Company’s financing receivables is presented as follows (in millions):
July 28, 2012 |
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total Financing Receivables |
||||||||||||
Gross |
$ | 3,429 | $ | 1,796 | $ | 2,651 | $ | 7,876 | ||||||||
Unearned income |
(250 | ) | — | — | (250 | ) | ||||||||||
Allowance for credit loss |
(247 | ) | (122 | ) | (11 | ) | (380 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,932 | $ | 1,674 | $ | 2,640 | $ | 7,246 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reported as: |
||||||||||||||||
Current |
$ | 1,200 | $ | 968 | $ | 1,493 | $ | 3,661 | ||||||||
Noncurrent |
1,732 | 706 | 1,147 | 3,585 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,932 | $ | 1,674 | $ | 2,640 | $ | 7,246 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
July 30, 2011 |
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total Financing Receivables |
||||||||||||
Gross |
$ | 3,111 | $ | 1,468 | $ | 2,637 | $ | 7,216 | ||||||||
Unearned income |
(250 | ) | — | — | (250 | ) | ||||||||||
Allowance for credit loss |
(237 | ) | (103 | ) | (27 | ) | (367 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,624 | $ | 1,365 | $ | 2,610 | $ | 6,599 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Reported as: |
||||||||||||||||
Current |
$ | 1,087 | $ | 673 | $ | 1,351 | $ | 3,111 | ||||||||
Noncurrent |
1,537 | 692 | 1,259 | 3,488 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total, net |
$ | 2,624 | $ | 1,365 | $ | 2,610 | $ | 6,599 | ||||||||
|
|
|
|
|
|
|
|
Contractual maturities of the gross lease receivables at July 28, 2012 are summarized as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | 1,401 | ||
2014 |
1,055 | |||
2015 |
619 | |||
2016 |
276 | |||
2017 |
77 | |||
Thereafter |
1 | |||
|
|
|||
Total |
$ | 3,429 | ||
|
|
Financing receivables categorized by the Company’s internal credit risk rating as of July 28, 2012 and July 30, 2011 are summarized as follows (in millions):
INTERNAL CREDIT
RISK RATING |
||||||||||||||||||||||||
July 28, 2012 |
1 to 4 | 5 to 6 | 7 and Higher | Total | Residual Value |
Gross Receivables, Net of Unearned Income |
||||||||||||||||||
Lease receivables |
$ | 1,532 | $ | 1,342 | $ | 31 | $ | 2,905 | $ | 274 | $ | 3,179 | ||||||||||||
Loan receivables |
831 | 921 | 44 | 1,796 | — | 1,796 | ||||||||||||||||||
Financed service contracts and other |
1,552 | 1,030 | 69 | 2,651 | — | 2,651 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,915 | $ | 3,293 | $ | 144 | $ | 7,352 | $ | 274 | $ | 7,626 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
INTERNAL CREDIT
RISK RATING |
||||||||||||||||||||||||
July 30, 2011 |
1 to 4 | 5 to 6 | 7 and Higher | Total | Residual Value |
Gross Receivables, Net of Unearned Income |
||||||||||||||||||
Lease receivables |
$ | 1,249 | $ | 1,275 | $ | 41 | $ | 2,565 | $ | 296 | $ | 2,861 | ||||||||||||
Loan receivables |
662 | 767 | 39 | 1,468 | — | 1,468 | ||||||||||||||||||
Financed service contracts and other |
1,623 | 958 | 56 | 2,637 | — | 2,637 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,534 | $ | 3,000 | $ | 136 | $ | 6,670 | $ | 296 | $ | 6,966 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the aging analysis of financing receivables as of July 28, 2012 and July 30, 2011 (in millions):
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED) |
||||||||||||||||||||||||||||||||
July 28, 2012 |
31-60 | 61-90 | 91+ | Total Past Due |
Current | Gross Receivables, Net of Unearned Income |
Non-Accrual Financing Receivables |
Impaired Financing Receivables |
||||||||||||||||||||||||
Lease receivables |
$ | 151 | $ | 69 | $ | 173 | $ | 393 | $ | 2,786 | $ | 3,179 | $ | 23 | $ | 14 | ||||||||||||||||
Loan receivables |
10 | 8 | 11 | 29 | 1,767 | 1,796 | 4 | 4 | ||||||||||||||||||||||||
Financed service contracts and other |
89 | 68 | 392 | 549 | 2,102 | 2,651 | 18 | 10 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 250 | $ | 145 | $ | 576 | $ | 971 | $ | 6,655 | $ | 7,626 | $ | 45 | $ | 28 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED) |
||||||||||||||||||||||||||||||||
July 30, 2011 |
31-60 | 61-90 | 91+ | Total Past Due |
Current | Gross Receivables, Net of Unearned Income |
Non-Accrual Financing Receivables |
Impaired Financing Receivables |
||||||||||||||||||||||||
Lease receivables |
$ | 89 | $ | 35 | $ | 152 | $ | 276 | $ | 2,585 | $ | 2,861 | $ | 34 | $ | 24 | ||||||||||||||||
Loan receivables |
8 | 7 | 21 | 36 | 1,432 | 1,468 | 4 | 4 | ||||||||||||||||||||||||
Financed service contracts and other |
68 | 33 | 265 | 366 | 2,271 | 2,637 | 17 | 6 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 165 | $ | 75 | $ | 438 | $ | 678 | $ | 6,288 | $ | 6,966 | $ | 55 | $ | 34 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
CREDIT LOSS ALLOWANCES | ||||||||||||||||
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total | |||||||||||||
Allowance for credit loss as of July 30, 2011 |
$ | 237 | $ | 103 | $ | 27 | $ | 367 | ||||||||
Provisions |
22 | 22 | (13 | ) | 31 | |||||||||||
Write-offs net of recoveries |
(2 | ) | — | (1 | ) | (3 | ) | |||||||||
Foreign exchange and other |
(10 | ) | (3 | ) | (2 | ) | (15 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for credit loss as of July 28, 2012 |
$ | 247 | $ | 122 | $ | 11 | $ | 380 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross receivables as of July 28, 2012, net of unearned income |
$ | 3,179 | $ | 1,796 | $ | 2,651 | $ | 7,626 |
CREDIT LOSS ALLOWANCES | ||||||||||||||||
Lease Receivables |
Loan Receivables |
Financed Service Contracts and Other |
Total | |||||||||||||
Allowance for credit loss as of July 31, 2010 |
$ | 207 | $ | 73 | $ | 21 | $ | 301 | ||||||||
Provisions |
31 | 43 | 8 | 82 | ||||||||||||
Write-offs net of recoveries |
(13 | ) | (18 | ) | (2 | ) | (33 | ) | ||||||||
Foreign exchange and other |
12 | 5 | — | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Allowance for credit loss as of July 30, 2011 |
$ | 237 | $ | 103 | $ | 27 | $ | 367 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross receivables as of July 30, 2011, net of unearned income |
$ | 2,861 | $ | 1,468 | $ | 2,637 | $ | 6,966 |
The aggregate amounts of financing guarantees outstanding at July 28, 2012 and July 30, 2011, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Maximum potential future payments relating to financing guarantees: |
||||||||
Channel partner |
$ | 277 | $ | 336 | ||||
End user |
232 | 277 | ||||||
|
|
|
|
|||||
Total |
$ | 509 | $ | 613 | ||||
|
|
|
|
|||||
Deferred revenue associated with financing guarantees: |
||||||||
Channel partner |
$ | (193 | ) | $ | (248 | ) | ||
End user |
(200 | ) | (248 | ) | ||||
|
|
|
|
|||||
Total |
$ | (393 | ) | $ | (496 | ) | ||
|
|
|
|
|||||
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue |
$ | 116 | $ | 117 | ||||
|
|
|
|
|
The following tables summarize the Company’s available-for-sale investments (in millions):
July 28, 2012 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. government securities |
$ | 24,201 | $ | 41 | $ | (1 | ) | $ | 24,241 | |||||||
U.S. government agency securities |
5,367 | 21 | — | 5,388 | ||||||||||||
Non-U.S. government and agency securities |
1,629 | 9 | — | 1,638 | ||||||||||||
Corporate debt securities |
5,959 | 74 | (3 | ) | 6,030 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed income securities |
37,156 | 145 | (4 | ) | 37,297 | |||||||||||
Publicly traded equity securities |
1,107 | 524 | (11 | ) | 1,620 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 38,263 | $ | 669 | $ | (15 | ) | $ | 38,917 | |||||||
|
|
|
|
|
|
|
|
July 30, 2011 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. government securities |
$ | 19,087 | $ | 52 | $ | — | $ | 19,139 | ||||||||
U.S. government agency securities |
8,742 | 35 | (1 | ) | 8,776 | |||||||||||
Non-U.S. government and agency securities |
3,119 | 14 | (1 | ) | 3,132 | |||||||||||
Corporate debt securities |
4,333 | 65 | (4 | ) | 4,394 | |||||||||||
Asset-backed securities |
120 | 5 | (4 | ) | 121 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed income securities |
35,401 | 171 | (10 | ) | 35,562 | |||||||||||
Publicly traded equity securities |
734 | 639 | (12 | ) | 1,361 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 36,135 | $ | 810 | $ | (22 | ) | $ | 36,923 | |||||||
|
|
|
|
|
|
|
|
The following table presents the gross realized gains and gross realized losses related to the Company’s available-for-sale investments (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Gross realized gains |
$ | 641 | $ | 348 | $ | 279 | ||||||
Gross realized losses |
(540 | ) | (169 | ) | (110 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 101 | $ | 179 | $ | 169 | ||||||
|
|
|
|
|
|
The following table presents the realized net gains (losses) related to the Company’s available-for-sale investments (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Net gains on investments in publicly traded equity securities |
$ | 43 | $ | 88 | $ | 66 | ||||||
Net gains on investments in fixed income securities |
58 | 91 | 103 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 101 | $ | 179 | $ | 169 | ||||||
|
|
|
|
|
|
The following table summarizes the activity related to credit losses for fixed income securities (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Balance at beginning of fiscal year |
$ | (23 | ) | $ | (95 | ) | ||
Sales of other-than-temporarily impaired fixed income securities |
23 | 72 | ||||||
|
|
|
|
|||||
Balance at end of fiscal year |
$ | — | $ | (23 | ) | |||
|
|
|
|
The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at July 28, 2012 and July 30, 2011 (in millions):
UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
July 28, 2012 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||
U.S. government agency securities |
$ | 5,357 | $ | (1 | ) | $ | — | $ | — | $ | 5,357 | $ | (1 | ) | ||||||||||
Corporate debt securities |
603 | (3 | ) | 14 | — | 617 | (3 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed income securities |
5,960 | (4 | ) | 14 | — | 5,974 | (4 | ) | ||||||||||||||||
Publicly traded equity securities |
167 | (8 | ) | 20 | (3 | ) | 187 | (11 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,127 | $ | (12 | ) | $ | 34 | $ | (3 | ) | $ | 6,161 | $ | (15 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
UNREALIZED LOSSES LESS THAN 12 MONTHS |
UNREALIZED LOSSES 12 MONTHS OR GREATER |
TOTAL | ||||||||||||||||||||||
July 30, 2011 |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
Fair Value | Gross Unrealized Losses |
||||||||||||||||||
Fixed income securities: |
||||||||||||||||||||||||
U.S. government agency securities |
$ | 2,310 | $ | (1 | ) | $ | — | $ | — | $ | 2,310 | $ | (1 | ) | ||||||||||
Non-U.S. government and agency securities |
875 | (1 | ) | — | — | 875 | (1 | ) | ||||||||||||||||
Corporate debt securities |
548 | (2 | ) | 56 | (2 | ) | 604 | (4 | ) | |||||||||||||||
Asset-backed securities |
— | — | 105 | (4 | ) | 105 | (4 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed income securities |
3,733 | (4 | ) | 161 | (6 | ) | 3,894 | (10 | ) | |||||||||||||||
Publicly traded equity securities |
112 | (12 | ) | — | — | 112 | (12 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,845 | $ | (16 | ) | $ | 161 | $ | (6 | ) | $ | 4,006 | $ | (22 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the maturities of the Company’s fixed income securities at July 28, 2012 (in millions):
Amortized Cost |
Fair Value | |||||||
Less than 1 year |
$ | 16,257 | $ | 16,274 | ||||
Due in 1 to 2 years |
12,277 | 12,323 | ||||||
Due in 2 to 5 years |
8,549 | 8,623 | ||||||
Due after 5 years |
73 | 77 | ||||||
|
|
|
|
|||||
Total |
$ | 37,156 | $ | 37,297 | ||||
|
|
|
|
|
Assets and liabilities measured at fair value on a recurring basis as of July 28, 2012 and July 30, 2011 were as follows (in millions):
JULY 28,
2012 FAIR VALUE MEASUREMENTS |
JULY 30,
2011 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 |
$ | 2,506 | $ | — | $ | — | $ | 2,506 | $ | 5,852 | $ | — | $ | — | $ | 5,852 | ||||||||||||||||
U.S. government agency securities |
— | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||
Available-for-sale investments: |
||||||||||||||||||||||||||||||||
U.S. government securities |
— | 24,241 | — | 24,241 | — | 19,139 | — | 19,139 | ||||||||||||||||||||||||
U.S. government agency securities |
— | 5,388 | — | 5,388 | — | 8,776 | — | 8,776 | ||||||||||||||||||||||||
Non-U.S. government and agency securities |
— | 1,638 | — | 1,638 | — | 3,132 | — | 3,132 | ||||||||||||||||||||||||
Corporate debt securities |
— | 6,030 | — | 6,030 | — | 4,394 | — | 4,394 | ||||||||||||||||||||||||
Asset-backed securities |
— | — | — | — | — | — | 121 | 121 | ||||||||||||||||||||||||
Publicly traded equity securities |
1,620 | — | — | 1,620 | 1,361 | — | — | 1,361 | ||||||||||||||||||||||||
Derivative assets |
— | 263 | 1 | 264 | — | 220 | 2 | 222 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 4,126 | $ | 37,560 | $ | 1 | $ | 41,687 | $ | 7,213 | $ | 35,662 | $ | 123 | $ | 42,998 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||
Derivative liabilities |
$ | — | $ | 42 | $ | — | $ | 42 | $ | — | $ | 24 | $ | — | $ | 24 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | — | $ | 42 | $ | — | $ | 42 | $ | — | $ | 24 | $ | — | $ | 24 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
July 28, 2012 | July 30, 2011 | July 31, 2010 | ||||||||||||||||||||||
Net Carrying Value as of Year End |
Total Gains (Losses) for the Year Ended |
Net Carrying Value as of Year End |
Total Gains (Losses) for the Year Ended |
Net Carrying Value as of Year End |
Total Gains (Losses) for the Year Ended |
|||||||||||||||||||
Property held for sale |
$ | 63 | $ | (413 | ) | $ | 20 | $ | (38 | ) | $ | 25 | $ | (86 | ) | |||||||||
Investments in privately held companies |
$ | 47 | (23 | ) | $ | 13 | (10 | ) | $ | 45 | (25 | ) | ||||||||||||
Purchased intangible assets |
$ | — | (12 | ) | $ | — | (164 | ) | $ | — | (28 | ) | ||||||||||||
Manufacturing operations held for sale |
$ | — | — | $ | 167 | (61 | ) | $ | — | — | ||||||||||||||
Gains on assets no longer held at end of fiscal year |
14 | — | 2 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total losses for nonrecurring measurements |
$ | (434 | ) | $ | (273 | ) | $ | (137 | ) | |||||||||||||||
|
|
|
|
|
|
The following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended July 28, 2012 and July 30, 2011 (in millions):
Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
Balance at July 30, 2011 |
$ | 121 | $ | 2 | $ | 123 | ||||||
Total gains and losses (realized and unrealized): |
||||||||||||
Included in other income, net |
3 | — | 3 | |||||||||
Included in other comprehensive income |
(3 | ) | — | (3 | ) | |||||||
Sales |
(14 | ) | (1 | ) | (15 | ) | ||||||
Transfer into Level 2 |
(107 | ) | — | (107 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 28, 2012 |
$ | — | $ | 1 | $ | 1 | ||||||
|
|
|
|
|
|
Asset-Backed Securities |
Derivative Assets |
Total | ||||||||||
Balance at July 31, 2010 |
$ | 149 | $ | 3 | $ | 152 | ||||||
Total gains and losses (realized and unrealized): |
||||||||||||
Included in other income, net |
3 | (1 | ) | 2 | ||||||||
Purchases, sales and maturities |
(31 | ) | — | (31 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at July 30, 2011 |
$ | 121 | $ | 2 | $ | 123 | ||||||
|
|
|
|
|
|
|||||||
Losses attributable to assets still held as of July 30, 2011 |
$ | — | $ | (1 | ) | $ | (1 | ) |
|
The following table summarizes the Company’s short-term debt (in millions, except percentages):
July 28, 2012 | July 30, 2011 | |||||||||||||||
Amount | Weighted-Average Interest Rate |
Amount | Weighted-Average Interest Rate |
|||||||||||||
Commercial paper |
$ | — | — | $ | 500 | 0.14 | % | |||||||||
Other notes and borrowings |
31 | 6.72 | % | 88 | 4.59 | % | ||||||||||
|
|
|
|
|||||||||||||
Total short-term debt |
$ | 31 | $ | 588 | ||||||||||||
|
|
|
|
The following table summarizes the Company’s long-term debt (in millions, except percentages):
July 28, 2012 | July 30, 2011 | |||||||||||||||
Amount | Effective Rate | Amount | Effective Rate | |||||||||||||
Senior Notes: |
||||||||||||||||
Floating-rate notes, due 2014 |
$ | 1,250 | 0.81 | % | $ | 1,250 | 0.60 | % | ||||||||
1.625% fixed-rate notes, due 2014 |
2,000 | 0.84 | % | 2,000 | 0.58 | % | ||||||||||
2.90% fixed-rate notes, due 2014 |
500 | 3.11 | % | 500 | 3.11 | % | ||||||||||
5.50% fixed-rate notes, due 2016 |
3,000 | 3.16 | % | 3,000 | 3.06 | % | ||||||||||
3.15% fixed-rate notes, due 2017 |
750 | 1.03 | % | 750 | 0.81 | % | ||||||||||
4.95% fixed-rate notes, due 2019 |
2,000 | 5.08 | % | 2,000 | 5.08 | % | ||||||||||
4.45% fixed-rate notes, due 2020 |
2,500 | 4.50 | % | 2,500 | 4.50 | % | ||||||||||
5.90% fixed-rate notes, due 2039 |
2,000 | 6.11 | % | 2,000 | 6.11 | % | ||||||||||
5.50% fixed-rate notes, due 2040 |
2,000 | 5.67 | % | 2,000 | 5.67 | % | ||||||||||
|
|
|
|
|||||||||||||
Total |
16,000 | 16,000 | ||||||||||||||
Other long-term debt |
10 | 0.19 | % | — | ||||||||||||
Unaccreted discount |
(70 | ) | (73 | ) | ||||||||||||
Hedge accounting fair value adjustments |
357 | 307 | ||||||||||||||
|
|
|
|
|||||||||||||
Total long-term debt |
$ | 16,297 | $ | 16,234 | ||||||||||||
|
|
|
|
Future principal payments for long-term debt as of July 28, 2012 are summarized as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | — | ||
2014 |
3,260 | |||
2015 |
500 | |||
2016 |
3,000 | |||
2017 |
750 | |||
Thereafter |
8,500 | |||
|
|
|||
Total |
$ | 16,010 | ||
|
|
|
The fair values of the Company’s derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded are summarized as follows (in millions):
DERIVATIVE ASSETS |
DERIVATIVE LIABILITIES |
|||||||||||||||||||||
Balance Sheet Line Item | July 28, 2012 |
July 30, 2011 |
Balance Sheet Line Item |
July 28, 2012 |
July 30, 2011 |
|||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||||||||
Foreign currency derivatives |
Other current assets | $ | 24 | $ | 67 | Other current liabilities | $ | 26 | $ | 12 | ||||||||||||
Interest rate derivatives |
Other assets | 223 | 146 | Other long-term liabilities | — | — | ||||||||||||||||
Equity derivatives |
Other current assets | — | — | Other current liabilities | 4 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
247 | 213 | 30 | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||||||||
Foreign currency derivatives |
Other current assets | 16 | 7 | Other current liabilities | 12 | 12 | ||||||||||||||||
Equity derivatives |
Other assets | 1 | 2 | Other long-term liabilities | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
17 | 9 | 12 | 12 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 264 | $ | 222 | $ | 42 | $ | 24 | ||||||||||||||
|
|
|
|
|
|
|
|
The effects of the Company’s cash flow and net investment hedging instruments on OCI and the Consolidated Statements of Operations are summarized as follows (in millions):
GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES FOR THE YEARS ENDED (EFFECTIVE PORTION) |
GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME FOR THE YEARS ENDED (EFFECTIVE PORTION) |
|||||||||||||||||||||||||
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
Line Item in
Statements of |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
||||||||||||||||||||
Derivatives designated as cash flow hedging instruments: |
||||||||||||||||||||||||||
Foreign currency derivatives |
$ | (131 | ) | $ | 87 | $ | 33 |
Operating expenses |
$ | (59 | ) | $ | 89 | $ | (1 | ) | ||||||||||
Cost of sales - service |
(14 | ) | 17 | — | ||||||||||||||||||||||
Interest rate derivatives |
— | — | 23 |
Interest expense |
1 | 2 | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | (131 | ) | $ | 87 | $ | 56 | $ | (72 | ) | $ | 108 | $ | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Derivatives designated as net investment hedging instruments: |
||||||||||||||||||||||||||
Foreign currency derivatives |
$ | 23 | $ | (10 | ) | $ | (2 | ) |
Other income, net |
$ | — | $ | — | $ | — | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 DERIVATIVES INSTRUMENTS FOR THE YEARS ENDED |
GAINS (LOSSES) RELATED TO HEDGED ITEMS FOR THE YEARS ENDED |
|||||||||||||||||||||||||
Derivatives Designated as
Fair Value |
Line Item in Statements of |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
|||||||||||||||||||
Equity derivatives |
Other income, net | $ | (4 | ) | $ | — | $ | 3 | $ | 4 | $ | — | $ | (3 | ) | |||||||||||
Interest rate derivatives |
Interest expense | 78 | 74 | 72 | (80 | ) | (77 | ) | (77 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 74 | $ | 74 | $ | 75 | $ | (76 | ) | $ | (77 | ) | $ | (80 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The effect on the Consolidated Statements of Operations of derivative instruments not designated as hedges is summarized as follows (in millions):
GAINS (LOSSES) FOR THE YEARS ENDED |
||||||||||||||
Derivatives Not Designated as Hedging Instruments |
Line Item in Statements of Operations |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
||||||||||
Foreign currency derivatives |
Other income, net | $ | (206 | ) | $ | 264 | $ | (100 | ) | |||||
Total return swaps - deferred compensation |
Cost of sales - product | 4 | — | — | ||||||||||
Total return swaps - deferred compensation |
Operating expenses | 3 | 33 | 18 | ||||||||||
Equity derivatives |
Other income, net | 6 | 25 | 12 | ||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | (193 | ) | $ | 322 | $ | (70 | ) | ||||||
|
|
|
|
|
|
The notional amounts of the Company’s outstanding derivatives are summarized as follows (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Derivatives designated as hedging instruments: |
||||||||
Foreign currency derivatives - cash flow hedges |
$ | 2,910 | $ | 3,433 | ||||
Interest rate derivatives |
4,250 | 4,250 | ||||||
Net investment hedging instruments |
468 | 73 | ||||||
Equity derivatives |
272 | — | ||||||
Derivatives not designated as hedging instruments: |
||||||||
Foreign currency derivatives |
6,241 | 4,565 | ||||||
Total return swaps-deferred compensation |
269 | 262 | ||||||
|
|
|
|
|||||
Total |
$ | 14,410 | $ | 12,583 | ||||
|
|
|
|
|
Future minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of July 28, 2012 are as follows (in millions):
Fiscal Year |
Amount | |||
2013 |
$ | 328 | ||
2014 |
243 | |||
2015 |
199 | |||
2016 |
97 | |||
2017 |
70 | |||
Thereafter |
202 | |||
|
|
|||
Total |
$ | 1,139 | ||
|
|
The following table summarizes the activity related to product warranty liability during fiscal 2012 and 2011 (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Balance at beginning of fiscal year |
$ | 342 | $ | 360 | ||||
Provision for warranties issued |
661 | 456 | ||||||
Payments |
(588 | ) | (474 | ) | ||||
|
|
|
|
|||||
Balance at end of fiscal year |
$ | 415 | $ | 342 | ||||
|
|
|
|
|
The following table summarizes share-based compensation expense (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Cost of sales—product |
$ | 53 | $ | 61 | $ | 57 | ||||||
Cost of sales—service |
156 | 177 | 164 | |||||||||
|
|
|
|
|
|
|||||||
Share-based compensation expense in cost of sales |
209 | 238 | 221 | |||||||||
|
|
|
|
|
|
|||||||
Research and development |
401 | 481 | 450 | |||||||||
Sales and marketing |
588 | 651 | 602 | |||||||||
General and administrative |
203 | 250 | 244 | |||||||||
|
|
|
|
|
|
|||||||
Share-based compensation expense in operating expenses |
1,192 | 1,382 | 1,296 | |||||||||
|
|
|
|
|
|
|||||||
Total share-based compensation expense |
$ | 1,401 | $ | 1,620 | $ | 1,517 | ||||||
|
|
|
|
|
|
A summary of share-based awards available for grant is as follows (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Balance at beginning of fiscal year |
255 | 295 | 253 | |||||||||
Options granted |
— | — | (4 | ) | ||||||||
Restricted stock, stock units, and other share-based awards granted |
(95 | ) | (82 | ) | (81 | ) | ||||||
Share-based awards canceled/forfeited/expired |
64 | 42 | 123 | |||||||||
Other |
(6 | ) | — | 4 | ||||||||
|
|
|
|
|
|
|||||||
Balance at end of fiscal year |
218 | 255 | 295 | |||||||||
|
|
|
|
|
|
A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based restricted stock, is as follows (in millions, except per-share amounts):
Restricted Stock/ Stock Units |
Weighted-Average Grant Date Fair Value 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 |
56 | 20.62 | ||||||||||
Vested |
(27 | ) | 22.54 | $ | 529 | |||||||
Canceled/forfeited |
(10 | ) | 22.04 | |||||||||
|
|
|||||||||||
BALANCE AT JULY 30, 2011 |
116 | 21.50 | ||||||||||
Granted and assumed |
65 | 17.45 | ||||||||||
Vested |
(35 | ) | 21.94 | $ | 580 | |||||||
Canceled/forfeited |
(18 | ) | 20.38 | |||||||||
|
|
|||||||||||
BALANCE AT JULY 28, 2012 |
128 | $ | 19.46 | |||||||||
|
|
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 |
(80 | ) | 16.55 | |||||
Canceled/forfeited/expired |
(31 | ) | 25.91 | |||||
|
|
|||||||
BALANCE AT JULY 30, 2011 |
621 | 21.79 | ||||||
Assumed from acquisitions |
1 | 2.08 | ||||||
Exercised |
(66 | ) | 13.51 | |||||
Canceled/forfeited/expired |
(36 | ) | 23.40 | |||||
|
|
|||||||
BALANCE AT JULY 28, 2012 |
520 | $ | 22.68 | |||||
|
|
The following table summarizes significant ranges of outstanding and exercisable stock options as of July 28, 2012 (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 |
10 | 4.10 | $ | 6.95 | $ | 92 | 9 | $ | 7.18 | $ | 82 | |||||||||||||||||
15.01 – 18.00 |
83 | 2.12 | 17.79 | — | 83 | 17.79 | — | |||||||||||||||||||||
18.01 – 20.00 |
150 | 0.93 | 19.31 | — | 150 | 19.31 | — | |||||||||||||||||||||
20.01 – 25.00 |
143 | 2.87 | 22.75 | — | 141 | 22.76 | — | |||||||||||||||||||||
25.01 – 35.00 |
134 | 4.08 | 30.64 | — | 129 | 30.67 | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
520 | 2.53 | $ | 22.68 | $ | 92 | 512 | $ | 22.65 | $ | 82 | |||||||||||||||||
|
|
|
|
|
|
|
|
The valuation of time-based RSU’s and the underlying assumptions being used are summarized as follows:
RESTRICTED STOCK UNITS | ||||||||
Years Ended |
July 28, 2012 | July 30, 2011 | ||||||
Number of shares granted (in millions) |
62 | 54 | ||||||
Weighted-average assumptions/inputs: |
||||||||
Grant date fair value per share |
$ | 17.26 | $ | 20.59 | ||||
Expected dividend |
1.5 | % | 0.3 | % |
The valuation of employee stock purchase rights and the underlying assumptions being used are summarized as follows:
EMPLOYEE STOCK PURCHASE RIGHTS | ||||||||||||
Years Ended |
July 28, 2012 |
July 30, 2011 |
July 31, 2010 |
|||||||||
Weighted-average assumptions: |
||||||||||||
Expected volatility |
27.2 | % | 35.1 | % | 34.8 | % | ||||||
Risk-free interest rate |
0.2 | % | 0.9 | % | 0.4 | % | ||||||
Expected dividend |
1.5 | % | 0.0 | % | 0.0 | % | ||||||
Expected life (in years) |
0.8 | 1.8 | 0.8 | |||||||||
Weighted-average estimated grant date fair value per share |
$ | 3.81 | $ | 6.31 | $ | 5.03 |
The valuation of employee stock options and the underlying assumptions being used are summarized as follows:
Year Ended |
July 31, 2010 | |||
Weighted-average assumptions: |
||||
Expected volatility |
30.5 | % | ||
Risk-free interest rate |
2.3 | % | ||
Expected dividend |
0.0 | % | ||
Kurtosis |
4.1 | |||
Skewness |
0.20 | |||
Weighted-average expected life (in years) |
5.1 | |||
Weighted-average estimated grant date fair value per option |
$ | 6.50 |
|
The provision for income taxes consists of the following (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Federal: |
||||||||||||
Current |
$ | 1,836 | $ | 914 | $ | 1,469 | ||||||
Deferred |
(270 | ) | (168 | ) | (435 | ) | ||||||
|
|
|
|
|
|
|||||||
1,566 | 746 | 1,034 | ||||||||||
|
|
|
|
|
|
|||||||
State: |
||||||||||||
Current |
119 | 49 | 186 | |||||||||
Deferred |
(53 | ) | 83 | — | ||||||||
|
|
|
|
|
|
|||||||
66 | 132 | 186 | ||||||||||
|
|
|
|
|
|
|||||||
Foreign: |
||||||||||||
Current |
477 | 529 | 470 | |||||||||
Deferred |
9 | (72 | ) | (42 | ) | |||||||
|
|
|
|
|
|
|||||||
486 | 457 | 428 | ||||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 2,118 | $ | 1,335 | $ | 1,648 | ||||||
|
|
|
|
|
|
Income before provision for income taxes consists of the following (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
United States |
$ | 3,235 | $ | 1,214 | $ | 1,102 | ||||||
International |
6,924 | 6,611 | 8,313 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 10,159 | $ | 7,825 | $ | 9,415 | ||||||
|
|
|
|
|
|
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes consist of the following:
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Effect of: |
||||||||||||
State taxes, net of federal tax benefit |
0.4 | 1.5 | 1.4 | |||||||||
Foreign income at other than U.S. rates |
(15.6 | ) | (19.4 | ) | (19.3 | ) | ||||||
Tax credits |
(0.4 | ) | (3.0 | ) | (0.5 | ) | ||||||
Transfer pricing adjustment related to share-based compensation |
— | — | (1.7 | ) | ||||||||
Nondeductible compensation |
1.8 | 2.5 | 2.0 | |||||||||
Other, net |
(0.4 | ) | 0.5 | 0.6 | ||||||||
|
|
|
|
|
|
|||||||
Total |
20.8 | % | 17.1 | % | 17.5 | % | ||||||
|
|
|
|
|
|
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Beginning balance |
$ | 2,948 | $ | 2,677 | $ | 2,816 | ||||||
Additions based on tax positions related to the current year |
155 | 374 | 246 | |||||||||
Additions for tax positions of prior years |
54 | 93 | 60 | |||||||||
Reductions for tax positions of prior years |
(226 | ) | (60 | ) | (250 | ) | ||||||
Settlements |
(41 | ) | (56 | ) | (140 | ) | ||||||
Lapse of statute of limitations |
(71 | ) | (80 | ) | (55 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,819 | $ | 2,948 | $ | 2,677 | ||||||
|
|
|
|
|
|
The following table presents the breakdown between current and noncurrent net deferred tax assets (in millions):
July 28, 2012 | July 30, 2011 | |||||||
Deferred tax assets—current |
$ | 2,294 | $ | 2,410 | ||||
Deferred tax liabilities—current |
(123 | ) | (131 | ) | ||||
Deferred tax assets—noncurrent |
2,270 | 1,864 | ||||||
Deferred tax liabilities—noncurrent |
(133 | ) | (264 | ) | ||||
|
|
|
|
|||||
Total net deferred tax assets |
$ | 4,308 | $ | 3,879 | ||||
|
|
|
|
The components of the deferred tax assets and liabilities are as follows (in millions):
July 28, 2012 | July 30, 2011 | |||||||
ASSETS |
||||||||
Allowance for doubtful accounts and returns |
$ | 433 | $ | 413 | ||||
Sales-type and direct-financing leases |
162 | 178 | ||||||
Inventory write-downs and capitalization |
127 | 160 | ||||||
Investment provisions |
261 | 226 | ||||||
IPR&D, goodwill, and purchased intangible assets |
119 | 106 | ||||||
Deferred revenue |
1,618 | 1,634 | ||||||
Credits and net operating loss carryforwards |
721 | 713 | ||||||
Share-based compensation expense |
1,059 | 1,084 | ||||||
Accrued compensation |
481 | 507 | ||||||
Other |
583 | 590 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
5,564 | 5,611 | ||||||
Valuation allowance |
(60 | ) | (82 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
5,504 | 5,529 | ||||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Purchased intangible assets |
(809 | ) | (997 | ) | ||||
Depreciation |
(131 | ) | (298 | ) | ||||
Unrealized gains on investments |
(222 | ) | (265 | ) | ||||
Other |
(34 | ) | (90 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(1,196 | ) | (1,650 | ) | ||||
|
|
|
|
|||||
Total net deferred tax assets |
$ | 4,308 | $ | 3,879 | ||||
|
|
|
|
|
Summarized financial information by segment for fiscal 2012, 2011, and 2010, 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):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Net sales: |
||||||||||||
Americas |
$ | 26,501 | $ | 25,015 | $ | 23,334 | ||||||
EMEA |
12,075 | 11,604 | 10,825 | |||||||||
APJC |
7,485 | 6,599 | 5,881 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 46,061 | $ | 43,218 | $ | 40,040 | ||||||
|
|
|
|
|
|
|||||||
Gross margin: |
||||||||||||
Americas |
16,639 | 15,766 | 15,042 | |||||||||
EMEA |
7,605 | 7,452 | 7,235 | |||||||||
APJC |
4,519 | 4,143 | 3,842 | |||||||||
|
|
|
|
|
|
|||||||
Segment total |
28,763 | 27,361 | 26,119 | |||||||||
|
|
|
|
|
|
|||||||
Unallocated corporate items |
(554 | ) | (825 | ) | (476 | ) | ||||||
|
|
|
|
|
|
|||||||
Total |
$ | 28,209 | $ | 26,536 | $ | 25,643 | ||||||
|
|
|
|
|
|
The following table presents net sales for groups of similar products and services (in millions):
Years Ended |
July 28, 2012 | July 30, 2011 | July 31, 2010 | |||||||||
Net sales: |
||||||||||||
Switching |
$ | 14,531 | $ | 14,130 | $ | 14,074 | ||||||
NGN Routing |
8,425 | 8,264 | 7,868 | |||||||||
Collaboration |
4,139 | 4,013 | 2,981 | |||||||||
Service Provider Video |
3,858 | 3,483 | 3,294 | |||||||||
Wireless |
1,699 | 1,427 | 1,134 | |||||||||
Security |
1,349 | 1,200 | 1,302 | |||||||||
Data Center |
1,298 | 694 | 196 | |||||||||
Other |
1,027 | 1,315 | 1,571 | |||||||||
|
|
|
|
|
|
|||||||
Product |
36,326 | 34,526 | 32,420 | |||||||||
Service |
9,735 | 8,692 | 7,620 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 46,061 | $ | 43,218 | $ | 40,040 | ||||||
|
|
|
|
|
|
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):
July 28, 2012 | July 30, 2011 | July 31, 2010 | ||||||||||
Property and equipment, net: |
||||||||||||
United States |
$ | 2,842 | $ | 3,284 | $ | 3,283 | ||||||
International |
560 | 632 | 658 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 3,402 | $ | 3,916 | $ | 3,941 | ||||||
|
|
|
|
|
|
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