Cisco Systems (CSCO)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

(Mark one)

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

For the quarterly period ended May 1, 2010

OR

 

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

For the transition period from                      to                     

Commission file number 0-18225

 

 

CISCO SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

California		77-0059951
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

170 West Tasman Drive

San Jose, California 95134

(Address of principal executive office and zip code)

(408) 526-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

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

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

 

Large accelerated filer  x		Accelerated filer  ¨		Non-accelerated filer  ¨		Smaller reporting company  ¨
				(Do not check if a smaller reporting company)

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

As of May 20, 2010, 5,711,151,107 shares of the registrant’s common stock were outstanding.

 

 

 

---

Table of Contents

Cisco Systems, Inc.

FORM 10-Q for the Quarter Ended May 1, 2010

INDEX

 

				Page
Part I.		Financial Information		3
Item 1.		Financial Statements (Unaudited)		3
		Consolidated Balance Sheets at May 1, 2010 and July 25, 2009		3
		Consolidated Statements of Operations for the three and nine months ended May 1, 2010 and April 25, 2009		4
		Consolidated Statements of Cash Flows for the nine months ended May 1, 2010 and April 25, 2009		5
		Consolidated Statements of Equity for the nine months ended May 1, 2010 and April 25, 2009		6
		Notes to Consolidated Financial Statements		7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		66
Item 4.		Controls and Procedures		69
Part II.		Other Information		69
Item 1.		Legal Proceedings		69
Item 1A.		Risk Factors		70
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		86
Item 3.		Defaults Upon Senior Securities		86
Item 4.		Reserved		87
Item 5.		Other Information		87
Item 6.		Exhibits		87
		Signature		88

 

2

---

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

CISCO SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)

 

		May 1, 2010			July 25, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	3,961		$	5,718
Investments			35,145			29,283
Accounts receivable, net of allowance for doubtful accounts of $216 at May 1, 2010 and July 25, 2009			4,078			3,177
Inventories			1,250			1,074
Deferred tax assets			2,277			2,320
Other current assets			3,047			2,605
Total current assets			49,758			44,177
Property and equipment, net			3,994			4,043
Goodwill			16,668			12,925
Purchased intangible assets, net			3,448			1,702
Other assets			5,424			5,281
TOTAL ASSETS		$	79,292		$	68,128
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt		$	3,127		$	—
Accounts payable			902			675
Income taxes payable			167			166
Accrued compensation			2,709			2,535
Deferred revenue			7,154			6,438
Other current liabilities			4,380			3,841
Total current liabilities			18,439			13,655
Long-term debt			12,119			10,295
Income taxes payable			1,054			2,007
Deferred revenue			3,149			2,955
Other long-term liabilities			679			539
Total liabilities			35,440			29,451
Commitments and contingencies (Note 11)
Equity:
Cisco shareholders’ equity:
Preferred stock, no par value: 5 shares authorized; none issued and outstanding			—			—
Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 5,722 and 5,785 shares issued and outstanding at May 1, 2010 and July 25, 2009, respectively			37,584			34,344
Retained earnings			5,570			3,868
Accumulated other comprehensive income			676			435
Total Cisco shareholders’ equity			43,830			38,647
Noncontrolling interests			22			30
Total equity			43,852			38,677
TOTAL LIABILITIES AND EQUITY		$	79,292		$	68,128

See Notes to Consolidated Financial Statements.

 

3

---

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per-share amounts)

(Unaudited)

 

		Three Months Ended								Nine Months Ended
		May 1, 2010				April 25, 2009				May 1, 2010				April 25, 2009
NET SALES:
Product		$	8,436			$	6,420			$	23,612			$	22,402
Service			1,932				1,742				5,592				5,180
Total net sales			10,368				8,162				29,204				27,582
COST OF SALES:
Product			3,010				2,327				8,311				8,045
Service			728				606				2,043				1,904
Total cost of sales			3,738				2,933				10,354				9,949
GROSS MARGIN			6,630				5,229				18,850				17,633
OPERATING EXPENSES:
Research and development			1,411				1,243				3,882				3,928
Sales and marketing			2,260				1,956				6,365				6,394
General and administrative			497				302				1,404				1,077
Amortization of purchased intangible assets			117				121				360				369
In-process research and development			—				—				—				3
Total operating expenses			4,285				3,622				12,011				11,771
OPERATING INCOME			2,345				1,607				6,839				5,862
Interest income			158				194				481				675
Interest expense			(182	)			(105	)			(454	)			(232	)
Other income (loss), net			82				(9	)			131				(145	)
Interest and other income, net			58				80				158				298
INCOME BEFORE PROVISION FOR INCOME TAXES			2,403				1,687				6,997				6,160
Provision for income taxes			211				339				1,165				1,107
NET INCOME		$	2,192			$	1,348			$	5,832			$	5,053
Net income per share:
Basic		$	0.38			$	0.23			$	1.01			$	0.86
Diluted		$	0.37			$	0.23			$	0.99			$	0.86
Shares used in per-share calculation:
Basic			5,731				5,805				5,746				5,844
Diluted			5,869				5,818				5,869				5,871

See Notes to Consolidated Financial Statements.

 

4

---

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

 

		Nine Months Ended
		May 1, 2010				April 25, 2009
Cash flows from operating activities:
Net income		$	5,832			$	5,053
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other noncash items			1,415				1,244
Share-based compensation expense			1,126				901
Provision for doubtful accounts			18				36
Deferred income taxes			(256	)			(166	)
Excess tax benefits from share-based compensation			(177	)			(25	)
In-process research and development			—				3
Net (gains) losses on investments			(147	)			113
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			(662	)			1,337
Inventories			(86	)			199
Lease receivables, net			(263	)			(127	)
Accounts payable			160				(198	)
Income taxes payable			(204	)			274
Accrued compensation			138				120
Deferred revenue			740				9
Other assets			(544	)			(618	)
Other liabilities			(149	)			(243	)
Net cash provided by operating activities			6,941				7,912
Cash flows from investing activities:
Purchases of investments			(35,263	)			(31,865	)
Proceeds from sales of investments			12,193				17,291
Proceeds from maturities of investments			17,474				9,088
Acquisition of property and equipment			(699	)			(794	)
Acquisition of businesses, net of cash and cash equivalents acquired			(4,950	)			(338	)
Change in investments in privately held companies			(68	)			(78	)
Other			80				(54	)
Net cash used in investing activities			(11,233	)			(6,750	)
Cash flows from financing activities:
Issuance of common stock			2,780				486
Repurchase of common stock			(5,440	)			(2,807	)
Issuance of long-term debt			4,944				3,991
Short-term borrowings, net			62				—
Repayment of long-term debt			—				(500	)
Settlements of interest rate derivatives related to long-term debt			23				(42	)
Excess tax benefits from share-based compensation			177				25
Other			(11	)			(147	)
Net cash provided by financing activities			2,535				1,006
Net (decrease) increase in cash and cash equivalents			(1,757	)			2,168
Cash and cash equivalents, beginning of period			5,718				5,191
Cash and cash equivalents, end of period		$	3,961			$	7,359

See Notes to Consolidated Financial Statements.

 

5

---

Table of Contents

CISCO SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(in millions)

(Unaudited)

 

Nine Months Ended April 25, 2009		Shares of Common Stock			Common Stock and Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Cisco Shareholders’ Equity				Noncontrolling Interests				Total Equity
BALANCE AT JULY 26, 2008		5,893			$	33,505			$	120			$	728			$	34,353			$	49			$	34,402
Net income		—				—				5,053				—				5,053				—				5,053
Change in unrealized gains and losses on investments		—				—				—				(173	)			(173	)			(22	)			(195	)
Change in derivative instruments		—				—				—				(136	)			(136	)			—				(136	)
Change in cumulative translation adjustment and other		—				—				—				(429	)			(429	)			—				(429	)
Comprehensive income (loss)																		4,315				(22	)			4,293
Issuance of common stock		39				486				—				—				486				—				486
Repurchase of common stock		(160	)			(936	)			(1,881	)			—				(2,817	)			—				(2,817	)
Tax benefits from employee stock incentive plans		—				5				—				—				5				—				5
Purchase acquisitions		—				13				—				—				13				—				13
Share-based compensation expense		—				901				—				—				901				—				901
BALANCE AT APRIL 25, 2009		5,772			$	33,974			$	3,292			$	(10	)		$	37,256			$	27			$	37,283
Nine Months Ended May 1, 2010		Shares of Common Stock			Common Stock and Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Cisco Shareholders’ Equity				Noncontrolling Interests				Total Equity
BALANCE AT JULY 25, 2009		5,785			$	34,344			$	3,868			$	435			$	38,647			$	30			$	38,677
Net income		—				—				5,832				—				5,832				—				5,832
Change in unrealized gains and losses on investments		—				—				—				233				233				(8	)			225
Change in derivative instruments		—				—				—				(4	)			(4	)			—				(4	)
Change in cumulative translation adjustment and other		—				—				—				12				12				—				12
Comprehensive income (loss)																		6,073				(8	)			6,065
Issuance of common stock		167				2,780				—				—				2,780				—				2,780
Repurchase of common stock		(230	)			(1,458	)			(4,130	)			—				(5,588	)			—				(5,588	)
Tax benefits from employee stock incentive plans, including transfer pricing adjustments		—				710				—				—				710				—				710
Purchase acquisitions		—				82				—				—				82				—				82
Share-based compensation expense		—				1,126				—				—				1,126				—				1,126
BALANCE AT MAY 1, 2010		5,722			$	37,584			$	5,570			$	676			$	43,830			$	22			$	43,852

Supplemental Information

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of May 1, 2010, the Company’s Board of Directors had authorized an aggregate repurchase of up to $72 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 12 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impact on Cisco shareholders’ equity are summarized in the table below (in millions):

 

		Shares of Common Stock		Common Stock and Additional Paid-In Capital			Retained Earnings			Total Cisco Shareholders’ Equity
Repurchases of common stock under the repurchase program		3,028		$	12,113		$	50,569		$	62,682

See Notes to Consolidated Financial Statements.

 

6

---

Table of Contents

CISCO SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.	Basis of Presentation

The fiscal year for Cisco Systems, Inc. (the “Company” or “Cisco”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2010 is a 53-week fiscal year and fiscal 2009 was a 52-week fiscal year. The third quarter of fiscal 2010 consisted of 14 weeks, one week more than a typical quarter. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis in the following theaters: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. The Emerging Markets theater consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States.

The accompanying financial data as of May 1, 2010 and for the three and nine months ended May 1, 2010 and April 25, 2009 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The July 25, 2009 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 25, 2009.

In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the statement of financial position as of May 1, 2010, and results of operations for the three and nine months ended May 1, 2010 and April 25, 2009, cash flows, and equity for the nine months ended May 1, 2010 and April 25, 2009, as applicable, have been made. The results of operations for the three and nine months ended May 1, 2010 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

The Company has made certain reclassifications to prior period amounts relating to net sales for similar groups of products, and gross margin by theater, due to refinement of the respective categories. The Company has made certain other reclassifications to prior period amounts in order to conform to the current period’s presentation.

The Company has evaluated subsequent events through the date that the financial statements were issued based on the accounting guidance for subsequent events.

 

7

---

Table of Contents

2.	Summary of Significant Accounting Policies

(a) New Accounting Standards Recently Adopted

Revenue Recognition for Arrangements with Multiple Deliverables

In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for revenue recognition to remove from the scope of industry-specific software revenue recognition guidance, tangible products containing software components and nonsoftware components that function together to deliver the product’s essential functionality. In October 2009, the FASB also amended the accounting standards for multiple-deliverable revenue arrangements to:

 

(i)

provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

 

(ii)

require an entity to allocate revenue in an arrangement using estimated selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and

 

(iii)

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

The Company elected to early adopt this accounting guidance at the beginning of its first quarter of fiscal 2010 on a prospective basis for applicable transactions originating or materially modified after July 25, 2009.

This guidance does not generally change the units of accounting for the Company’s revenue transactions. Most products and services qualify as separate units of accounting. Products are typically considered delivered upon shipment. 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. 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. Consulting services for specific customer networking needs, which the Company refers to as advanced services, are recognized upon delivery or completion of performance. Advanced service arrangements are typically short term in nature and are largely completed within 90 days from the start of service. The Company’s arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

Many of the Company’s products have both software and nonsoftware components that function together to deliver the products’ essential functionality. The Company’s product offerings fall into the following categories: routing, switching, advanced technologies, and other products, which include emerging technologies. In addition to its product offerings, the Company provides a broad range of technical support and advanced services, as discussed above. 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 sales force are not organized by product divisions and all of the above described products and services can be sold standalone or together in various combinations across the Company’s geographic segments or customer markets. For example, service provider arrangements are typically larger in scale with longer deployment schedules and involve the delivery of a variety of product technologies, including high-end routing, video and network management software, among others, along with technical support and advanced services. The Company’s enterprise and commercial arrangements are typically unique for each customer and smaller in scale and may include network infrastructure products such as routers and switches or collaboration technologies such as Unified Communications and Cisco TelePresence systems along with technical support services. Consumer products, including Linksys wireless routers and Pure Digital video recorders, are sold in standalone arrangements directly to distributors and retailers without support, as customers generally only require repair or replacement of defective products or parts under warranty.

The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings due to the needs of its customers. For example, a customer may purchase routing products along with a contract for technical support services. This arrangement would consist of multiple elements, with the products delivered in one reporting period and the technical support services delivered across multiple reporting periods. Another customer may purchase networking products along with advanced service offerings, in which all the elements are delivered within the same reporting period. In addition, distributors and retail partners purchase products or services on a standalone basis for the purpose of stocking for resale to an end user, and these transactions would not result in a multiple element arrangement.

 

8

---

Table of Contents

For transactions entered into prior to the first quarter of fiscal 2010, the Company primarily recognized revenue based on software revenue recognition guidance. For the vast majority of the Company’s arrangements involving multiple deliverables, such as sales of products with services, the entire fee from the arrangement was allocated to each respective element based on its relative selling price, using VSOE. In the limited circumstances when the Company was not able to determine VSOE for all of the deliverables of the arrangement, but was able to obtain VSOE for any undelivered elements, revenue was allocated using the residual method. Under the residual method, the amount of revenue allocated to delivered elements equaled the total arrangement consideration less the aggregate selling price of any undelivered elements, and no revenue was recognized until all elements without VSOE had been delivered. If VSOE of any undelivered items did not exist, revenue from the entire arrangement was initially deferred and recognized at the earlier of (i) delivery of those elements for which VSOE did not exist or (ii) when VSOE can be established. However, in limited cases where technical support services were the only undelivered element without VSOE, the entire arrangement fee was recognized ratably as a single unit of accounting over the technical services contractual period. The residual and ratable revenue recognition methods were generally used in a limited number of arrangements containing advanced and emerging technologies, such as Cisco TelePresence systems. Several of these technologies are sold as solution offerings whereby products or services are not sold on a standalone basis.

In many instances, products are sold separately in standalone arrangements as customers may support the products themselves or purchase support on a time and materials basis. Advanced services are sold in standalone engagements such as general consulting, network management, or security advisory projects. Also, technical support services are sold separately through renewals of annual contracts. As a result, for substantially all of the arrangements with multiple deliverables pertaining to routing and switching products and related services, as well as most arrangements containing advanced and emerging technologies, the Company has used and intends to continue using VSOE to allocate the selling price to each deliverable. Consistent with its methodology under previous accounting guidance, the Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical standalone transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in which the products or services are sold, major product and service groups and customer classifications, and other environmental or marketing variables in determining VSOE.

In certain limited instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, such as in the case of certain advanced and emerging technologies. When VSOE cannot be established, the Company attempts to establish selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of customization and differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products’ selling prices are on a standalone basis. Therefore, the Company is typically not able to determine TPE.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a standalone basis. ESP is generally used for new or highly customized offerings and solutions or offerings not priced within a narrow range, and it applies to a small proportion of the Company’s arrangements with multiple deliverables.

The Company determines ESP for a product or service by considering multiple factors, including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. The determination of ESP is made through consultation with and formal approval by the Company’s management, taking into consideration the go-to-market strategy.

The Company regularly reviews VSOE, TPE, and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material impacts during the quarter nor does the Company currently expect a material impact in the near term from changes in VSOE, TPE, or ESP.

Net sales as reported and the Company’s estimate of the pro forma net sales that would have been reported during the three and nine months ended May 1, 2010, if the transaction entered into or materially modified after July 25, 2009 were subject to previous accounting guidance, are shown in the following table (in millions):

 

		Three Months Ended May 1, 2010						Nine Months Ended May 1, 2010
		As Reported			Pro Forma Basis as if the Previous Accounting Guidance Were in Effect			As Reported			Pro Forma Basis as if the Previous Accounting Guidance Were in Effect
Net sales		$	10,368		$	10,288		$	29,204		$	29,051

 

9

---

Table of Contents

The estimated impact to net sales of the accounting standard was primarily to net product sales.

The new accounting standards for revenue recognition if applied in the same manner to the year ended July 25, 2009 would not have had a material impact on net sales for that fiscal year. In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on net sales in periods after the initial adoption when applied to multiple-element arrangements based on current go-to-market strategies due to the existence of VSOE across most of the Company’s product and service offerings. However, the Company expects that this new accounting guidance will facilitate the Company’s efforts to optimize its offerings due to better alignment between the economics of an arrangement and the accounting. This may lead to the Company engaging in new go-to-market practices in the future. In particular, the Company expects that the new accounting standards will enable it to better integrate products and services without VSOE into existing offerings and solutions. As these go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP. As a result, the Company’s future revenue recognition for multiple-element arrangements could differ materially from the results in the current period. The Company is currently unable to determine the impact that the newly adopted accounting guidance could have on its revenue as these go-to-market strategies evolve.

The Company’s arrangements with multiple deliverables may have a standalone software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the nonsoftware deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue accounting guidance. In the limited circumstances where the Company cannot determine VSOE or TPE of the selling price for all of the deliverables in the arrangement, including the software deliverable, ESP is used for the purposes of performing this allocation.

Fair Value Measures

Effective as of the first quarter of fiscal 2010, the Company adopted revised accounting guidance for the fair value measurement and disclosure of its nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of this accounting guidance did not have a material impact on the Company’s financial position or results of operations. In January 2010, the FASB issued revised guidance intended to improve disclosures related to fair value measurements. This guidance requires new disclosures as well as clarifies certain existing disclosure requirements. New disclosures under this guidance require separate information about significant transfers in and out of Level 1 and Level 2 fair value measurement categories and the reason for such transfers and also require purchases, sales, issuances, and settlements information for Level 3 measurements to be included in the rollforward of activity on a gross basis. The guidance also clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and the requirement to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements in either Level 2 or Level 3. This accounting guidance was effective for the Company beginning in the third quarter of fiscal 2010, except for the rollforward of activity on a gross basis for Level 3 fair value measurement, which will be effective for the Company in the first quarter of fiscal 2012. The Company adopted the applicable portions of this guidance beginning in the third quarter of fiscal 2010, and it is currently evaluating the impact that the adoption of the remainder of this guidance might have on its financial statement disclosures in the first quarter of fiscal 2012.

Business Combinations and Noncontrolling Interests

Effective the first quarter of fiscal 2010, the Company adopted the revised accounting guidance for business combinations, which changed its previous accounting practices regarding business combinations. The more significant changes include an expanded definition of a business and a business combination; recognition of assets acquired, liabilities assumed and noncontrolling interests (including goodwill) measured at fair value at the acquisition date; recognition of acquisition-related expenses and restructuring costs separately from the business combination; recognition of assets acquired and liabilities assumed at their acquisition-date fair values with subsequent changes recognized in earnings; and capitalization of in-process research and development (IPR&D) at fair value as an indefinite-lived intangible asset. Such IPR&D will be assessed for impairment until completion and, following completion, will be amortized. The guidance also amends and clarifies the application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The impact of this accounting guidance and its relevant updates on the Company’s results of operations or financial position will vary depending on each specific business combination or asset purchase. See Note 3.

 

10

---

Table of Contents

Effective in the first quarter of fiscal 2010, the Company adopted revised accounting guidance which requires noncontrolling interests (formerly minority interest) to be presented as a separate component from the Company’s equity in the equity section of the Consolidated Balance Sheets. The net income attributable to the noncontrolling interests was not significant to the Company’s consolidated operating results and was not presented separately in the Consolidated Statements of Operations. In accordance with the adoption of this accounting guidance, the Company has expanded disclosures on noncontrolling interests in its consolidated financial statements where applicable, and the relevant presentation and disclosures have been applied retrospectively for all periods presented. The adoption of this accounting guidance had no impact on the Company’s results of operations and did not have a material impact on the Company’s financial position.

(b) Recent Accounting Standards Not Yet Effective

In June 2009, the FASB issued revised guidance for the accounting of variable interest entities. This revised guidance replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits from the entity that could be potentially significant to the variable interest entity. The accounting guidance also requires an ongoing reassessment of whether an enterprise is the primary beneficiary and requires additional disclosures about an enterprise’s involvement in variable interest entities. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2011. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements. In February 2010, the FASB issued amendments to the consolidation requirements for certain investment funds. The amendments specify the attributes that qualify an entity for deferral of the application of Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The amendments include guidance on the nature and characteristics, and on the applicable disclosure requirements, for entities that qualify for the deferral. The amendments further provide that if an entity that initially met the deferral requirements ceases to qualify for the deferral as a result of a change in facts and circumstances, the reporting entity shall initially measure the assets, liabilities, and noncontrolling interests of the variable interest entity as of the date the entity ceased to qualify for the deferral. The amendments also clarify that when performing an analysis on whether or not the fees paid to a legal entity’s decision maker or service provider are variable interests, a related party’s interest should be considered as though it were the reporting entity’s own interest. These amendments are effective for the Company beginning in the first quarter of fiscal 2011. The Company is currently evaluating the impact that the adoption of these amendments will have on its consolidated financial statements.

In June 2009, the FASB issued revised guidance for the accounting of transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity, removes the scope exception for qualifying special-purpose entities when applying the accounting guidance related to the consolidation of variable interest entities, changes the requirements for derecognizing financial assets, and requires enhanced disclosure. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2011. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

 

3.	Business Combinations

(a) Business Combinations Completed During the Period

A summary of the business combinations completed during the nine months ended May 1, 2010 is as follows (in millions):

 

		Purchase Consideration			Net Tangible Assets Acquired/(Liabilities Assumed) (1)				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
Other			3			(5	)			6			2
Total		$	6,061		$	(3	)		$	2,291		$	3,773

 

(1)	Net liabilities assumed for business combinations completed during the nine months ended May 1, 2010 primarily consist of net deferred tax liabilities, partially offset by $748 million of cash and cash equivalents acquired.

 

11

---

Table of Contents

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

 

•

In December 2009, the Company acquired ScanSafe, Inc., a provider of hosted web security to help build a borderless network security architecture that combines network and cloud-based services for advanced security enforcement.

 

•

In December 2009, the Company acquired Starent Networks, Corp. (“Starent”), a provider of IP-based mobile infrastructure for mobile and converged carriers, to enhance the Company’s portfolio of products to provide an integrated architecture to offer rich, quality multimedia experiences to mobile subscribers.

 

•

In April 2010, the Company acquired Tandberg ASA (“Tandberg”), a leader in video communications. With this acquisition, the Company expects that it will be able to combine innovations with multivendor interoperability capabilities to provide a platform significantly more attractive to its customers and partners.

The total purchase consideration related to the Company’s business combinations completed during the nine months ended May 1, 2010, consisted of approximately $6.0 billion in cash and $82 million in vested share-based awards assumed. For the April 2010 acquisition of Tandberg, of the total consideration of $3.3 billion, approximately $281 million (based on exchange rates in effect as of May 1, 2010) relating to the compulsory acquisition of non-tendered shares is expected to be paid during the fourth quarter of fiscal 2010.

The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for the acquisitions completed during the nine months ended May 1, 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. For the three and nine months ended May 1, 2010, the Company recorded business combination-related transaction costs of $10 million and $33 million, respectively, within general and administrative expenses.

(b) Cash Compensation Expense Related to Acquisitions and Investments

In connection with the Company’s business combinations and asset purchases, the Company has agreed to pay certain 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 following table presents the cash compensation expense related to acquisitions and investments (in millions):

 

		Three Months Ended						Nine Months Ended
		May 1, 2010			April 25, 2009			May 1, 2010			April 25, 2009
Cash compensation expense		$	19		$	98		$	85		$	257

The Company may be required to recognize future compensation expense pursuant to these agreements of up to $206 million, which includes the remaining potential amount of compensation expense related to Nuova Systems, Inc., as discussed below.

During fiscal 2008, the Company purchased the remaining interests in Nuova Systems, Inc. (“Nuova Systems”) not previously held by the Company, representing approximately 20% of Nuova Systems. Under the terms of the merger agreement, the former noncontrolling interest holders of Nuova Systems are eligible to receive up to three milestone payments based on agreed-upon formulas totaling up to a maximum of $678 million. During the first nine months of fiscal 2010, the Company recorded $65 million of compensation expense, and through May 1, 2010, the Company has recorded aggregate compensation expense of $487 million related to the fair value of amounts that are expected to be earned by the former noncontrolling interest holders pursuant to a vesting schedule. Of this compensation, approximately $261 million was paid during the third quarter of fiscal 2010, and the remainder is expected to be paid primarily in fiscal 2011 and fiscal 2012. Actual amounts payable to the former noncontrolling interest holders of Nuova Systems will depend upon achievement under the agreed-upon formulas and vesting.

 

12

---

Table of Contents

4.	Goodwill and Purchased Intangible Assets

(a) Goodwill

The following table presents the goodwill allocated to the Company’s reportable segments as of and during the nine months ended May 1, 2010 (in millions):

 

		Balance at July 25, 2009			Acquisitions			Other				Balance at May 1,  2010
United States and Canada		$	9,512		$	1,788		$	(5	)		$	11,295
European Markets			1,669			1,087			(26	)			2,730
Emerging Markets			437			322			1				760
Asia Pacific			506			462			—				968
Japan			801			114			—				915
Total		$	12,925		$	3,773		$	(30	)		$	16,668

In the table above, “Other” primarily includes foreign currency translation.

(b) Purchased Intangible Assets

The following table presents details of the Company’s purchased intangible assets acquired through business combinations during the nine months ended May 1, 2010 (in millions, except years):

 

		FINITE LIVES															INDEFINITE LIVES
		TECHNOLOGY					CUSTOMER RELATIONSHIPS					OTHER					IPR&D			TOTAL
		Weighted- Average Useful Life (in Years)		Amount			Weighted- Average Useful Life (in Years)		Amount			Weighted- Average Useful Life (in Years)		Amount			Amount			Amount
ScanSafe, Inc.		5.0		$	14		6.0		$	11		3.0		$	6		$	—		$	31
Starent Networks, Corp.		6.0			691		7.0			434		0.3			35			114			1,274
Tandberg ASA		5.0			709		7.0			179		3.0			21			71			980
Other		—			—		—			—		—			—			6			6
Total				$	1,414				$	624				$	62		$	191		$	2,291

 

13

---

Table of Contents

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

 

May 1, 2010		Gross			Accumulated Amortization				Net
Intangible assets with finite lives:
Technology		$	2,361		$	(563	)		$	1,798
Customer relationships			2,331			(966	)			1,365
Other			207			(113	)			94
Total intangible assets with finite lives			4,899			(1,642	)			3,257
IPR&D, with indefinite lives			191			—				191
Total intangible assets		$	5,090		$	(1,642	)		$	3,448
July 25, 2009		Gross			Accumulated Amortization				Net
Intangible assets with finite lives:
Technology		$	1,469		$	(803	)		$	666
Customer relationships			1,730			(768	)			962
Other			184			(110	)			74
Total intangible assets		$	3,383		$	(1,681	)		$	1,702

Purchased intangible assets include technology intangible assets acquired through business combinations as well as through technology licenses.

Effective the first quarter of fiscal 2010, with the adoption of revised accounting guidance for business combinations, IPR&D has been capitalized at fair value as an intangible asset with an indefinite life and will be assessed for impairment thereafter. Upon completion of the development of the underlying marketable products, the capitalized IPR&D asset will be amortized over its estimated useful life. Prior to the adoption of the revised accounting guidance, IPR&D was expensed upon acquisition if it had no alternative future use.

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

 

		Three Months Ended						Nine Months Ended
		May 1, 2010			April 25, 2009			May 1, 2010			April 25, 2009
Amortization of purchased intangible assets:
Cost of sales		$	69		$	48		$	178		$	166
Operating expenses			117			121			360			369
Total		$	186		$	169		$	538		$	535

The Company recorded impairment charges of $5 million and $13 million during the three and nine months ended May 1, 2010, respectively, and $11 million and $34 million during the three and nine months ended April 25, 2009, respectively. These impairment charges were due to reductions in expected future cash flows related to certain technologies and were recorded as amortization of purchased intangible assets.

The estimated future amortization expense of purchased intangible assets with finite lives as of May 1, 2010 is as follows (in millions):

 

Fiscal Year		Amount
2010 (remaining three months)		$	208
2011			827
2012			711
2013			600
2014			408
Thereafter			503
Total		$	3,257

 

14

---

Table of Contents

5.	Balance Sheet Details

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

 

		May 1, 2010				July 25, 2009
Inventories:
Raw materials		$	204			$	165
Work in process			43				33
Finished goods:
Distributor inventory and deferred cost of sales			530				382
Manufactured finished goods			280				310
Total finished goods			810				692
Service-related spares			143				151
Demonstration systems			50				33
Total		$	1,250			$	1,074
Property and equipment, net:
Land, buildings, and building & leasehold improvements		$	4,527			$	4,618
Computer equipment and related software			1,489				1,823
Production, engineering, and other equipment			4,891				5,075
Operating lease assets			256				227
Furniture and fixtures			474				465
			11,637				12,208
Less accumulated depreciation and amortization			(7,643	)			(8,165	)
Total		$	3,994			$	4,043
Other assets:
Deferred tax assets		$	1,800			$	2,122
Investments in privately held companies			763				709
Lease receivables, net(1)			1,126				966
Financed service contracts, net(1)			692				676
Loan receivables, net(1)			744				537
Other			299				271
Total		$	5,424			$	5,281
Deferred revenue:
Service		$	6,838			$	6,496
Product:
Unrecognized revenue on product shipments and other deferred revenue			2,737				2,490
Cash receipts related to unrecognized revenue from two-tier distributors			728				407
Total product deferred revenue			3,465				2,897
Total		$	10,303			$	9,393
Reported as:
Current		$	7,154			$	6,438
Noncurrent			3,149				2,955
Total		$	10,303			$	9,393

 

(1)	Amounts represent the noncurrent portions of the respective balances. See Note 6 for the current portions of the respective balances.

 

15

---

Table of Contents

6.	Financing Receivables and Guarantees

(a) Lease Receivables

Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products. These lease arrangements typically have terms of up to three years and are generally collateralized by a security interest in the underlying assets. The net lease receivables are summarized as follows (in millions):

 

		May 1, 2010				July 25, 2009
Gross lease receivables		$	2,294			$	1,996
Unearned income			(215	)			(191	)
Allowances			(199	)			(213	)
Lease receivables, net		$	1,880			$	1,592
Reported as:
Current		$	754			$	626
Noncurrent			1,126				966
Lease receivables, net		$	1,880			$	1,592

Contractual maturities of the gross lease receivables at May 1, 2010 are as follows (in millions):

 

Fiscal Year		Amount
2010 (remaining three months)		$	280
2011			850
2012			590
2013			366
2014			170
Thereafter			38
Total		$	2,294

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

(b) Financed Service Contracts

Financed service contracts are summarized as follows (in millions):

 

		May 1, 2010				July 25, 2009
Gross financed service contracts		$	1,676			$	1,642
Allowances			(19	)			(26	)
Financed service contracts, net		$	1,657			$	1,616
Reported as:
Current		$	965			$	940
Noncurrent			692				676
Financed service contracts, net		$	1,657			$	1,616

The revenue related to financed service contracts, which primarily relates to technical support services, is deferred and included in deferred service revenue. The revenue is recognized ratably over the period during which the related services are to be performed, which is typically from one to three years.

 

16

---

Table of Contents

(c) Loan Receivables

Loan receivables are summarized as follows (in millions):

 

		May 1, 2010				July 25, 2009
Gross loan receivables		$	1,271			$	861
Allowances			(104	)			(88	)
Loan receivables, net		$	1,167			$	773
Reported as:
Current		$	423			$	236
Noncurrent			744				537
Loan receivables, net		$	1,167			$	773

A portion of the revenue related to loan receivables is deferred and included in deferred product revenue based on revenue recognition criteria.

(d) Financing Guarantees

In the ordinary course of business, the Company provides financing guarantees that are generally for various third-party financing arrangements extended to channel partners and end-user customers.

Channel Partner Financing Guarantees

The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. During the three and nine months ended May 1, 2010, the volume of channel partner financing was $4.4 billion and $12.3 billion, respectively, compared with $3.0 billion and $10.7 billion for the three and nine months ended April 25, 2009, respectively. As of May 1, 2010 and July 25, 2009, the balance of the channel partner financing subject to guarantees was $1.4 billion and $1.1 billion, respectively.

End-User Financing Guarantees

The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans that typically have terms of up to three years. During the three and nine months ended May 1, 2010, the volume of financing provided by third parties for leases and loans on which the Company has provided guarantees was $215 million and $625 million, respectively, compared with $316 million and $960 million for the three and nine months ended April 25, 2009, respectively.

Financing Guarantee Summary

The aggregate amount of financing guarantees outstanding at May 1, 2010 and July 25, 2009, representing the total maximum potential future payments under financing arrangements with third parties and the related deferred revenue, are summarized in the following table (in millions):

 

		May 1, 2010			July 25, 2009
Maximum potential future payments relating to financing guarantees:
Channel partner		$	423		$	334
End user			313			405
Total		$	736		$	739
Deferred revenue associated with financing guarantees:
Channel partner		$	263		$	218
End user			287			378
Total		$	550		$	596

 

17

---

Table of Contents

7.	Investments

(a) Summary of Available-for-Sale Investments

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

 

May 1, 2010		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
Fixed income securities:
Government securities		$	19,402		$	26		$	(3	)		$	19,425
Government agency securities (1)			12,153			70			(2	)			12,221
Corporate debt securities			2,061			65			(18	)			2,108
Asset-backed securities			151			9			(6	)			154
Total fixed income securities			33,767			170			(29	)			33,908
Publicly traded equity securities			887			353			(3	)			1,237
Total		$	34,654		$	523		$	(32	)		$	35,145
July 25, 2009		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
Fixed income securities:
Government securities		$	10,266		$	23		$	(5	)		$	10,284
Government agency securities (1)			16,029			116			(2	)			16,143
Corporate debt securities			1,740			51			(86	)			1,705
Asset-backed securities			252			5			(34	)			223
Total fixed income securities			28,287			195			(127	)			28,355
Publicly traded equity securities			824			193			(89	)			928
Total		$	29,111		$	388		$	(216	)		$	29,283

 

(1)	In Note 7 and Note 8, government agency securities as of May 1, 2010 and July 25, 2009 include bank-issued securities that are guaranteed by the Federal Deposit Insurance Corporation (FDIC).

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

The following table summarizes the realized net gains (losses) associated with the Company’s available-for-sale investments (in millions):

 

		Three Months Ended							Nine Months Ended
		May 1, 2010			April 25, 2009				May 1, 2010			April 25, 2009
Net gains (losses) on investments in publicly traded equity securities		$	36		$	(10	)		$	64		$	58
Net gains (losses) on investments in fixed income securities			35			36				55			(123	)
Net gains (losses) on available-for-sale investments		$	71		$	26			$	119		$	(65	)

There were no impairment charges on investments in fixed income securities and publicly traded equity securities during the third quarter and first nine months of fiscal 2010. For the third quarter and first nine months of fiscal 2009, net gains (losses) on investments in fixed income securities included impairment charges of $17 million and $219 million, respectively, and net gains (losses) on investments in publicly traded equity securities included impairment charges of $4 million and $39 million, respectively. All such impairment charges were due to a decline in the fair value of the investments below their cost basis that were judged to be other than temporary and were recorded as a reduction to the amortized cost of the respective investments.

 

18

---

Table of Contents

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

 

		Three Months Ended May 1, 2010				Nine Months Ended May 1, 2010
Balance at beginning of period		$	(133	)		$	(153	)
Sales of other-than-temporarily-impaired fixed income securities			—				20
Balance at end of period		$	(133	)		$	(133	)

The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses have been unrealized at May 1, 2010 and July 25, 2009 (in millions):

 

		LESS THAN 12 MONTHS							12 MONTHS OR GREATER							TOTAL
May 1, 2010		Fair Value			Gross Unrealized Losses				Fair Value			Gross Unrealized Losses				Fair Value			Gross Unrealized Losses
Fixed income securities:
Government securities		$	5,461		$	(3	)		$	—		$	—			$	5,461		$	(3	)
Government agency securities (1)			2,734			(2	)			—			—				2,734			(2	)
Corporate debt securities			335			(1	)			306			(17	)			641			(18	)
Asset-backed securities			3			—				116			(6	)			119			(6	)
Total fixed income securities			8,533			(6	)			422			(23	)			8,955			(29	)
Publicly traded equity securities			36			(1	)			409			(2	)			445			(3	)
Total		$	8,569		$	(7	)		$	831		$	(25	)		$	9,400		$	(32	)
July 25, 2009		Fair Value			Gross Unrealized Losses				Fair Value			Gross Unrealized Losses				Fair Value			Gross Unrealized Losses
Fixed income securities:
Government securities		$	1,850		$	(5	)		$	—		$	—			$	1,850		$	(5	)
Government agency securities (1)			1,362			(2	)			5			—				1,367			(2	)
Corporate debt securities			123			(10	)			613			(76	)			736			(86	)
Asset-backed securities			41			(11	)			141			(23	)			182			(34	)
Total fixed income securities			3,376			(28	)			759			(99	)			4,135			(127	)
Publicly traded equity securities			25			(3	)			328			(86	)			353			(89	)
Total		$	3,401		$	(31	)		$	1,087		$	(185	)		$	4,488		$	(216	)

For fixed income securities that have unrealized losses as of May 1, 2010, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of May 1, 2010, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three and nine months ended May 1, 2010.

The Company has evaluated its publicly traded equity securities as of May 1, 2010 and has determined that there were no unrealized losses that indicate an other-than-temporary impairment. 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 and 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.

 

19

---

Table of Contents

(c) Maturities of Fixed Income Securities

The following table summarizes the maturities of the Company’s fixed income securities at May 1, 2010 (in millions):

 

		Amortized Cost			Fair Value
Less than 1 year		$	22,953		$	22,984
Due in 1 to 2 years			6,018			6,077
Due in 2 to 5 years			4,425			4,477
Due after 5 years			371			370
Total		$	33,767		$	33,908

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

 

8.	Fair Value

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

(a) Fair Value Hierarchy

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

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

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

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

 

20

---

Table of Contents

(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 May 1, 2010 and July 25, 2009 were as follows (in millions):

 

		May 1, 2010												July 25, 2009
		Fair Value Measurements												Fair Value Measurements
		Level 1			Level 2			Level 3			Total Balance			Level 1			Level 2			Level 3			Total Balance
Assets:
Money market funds		$	2,058		$	—		$	—		$	2,058		$	4,514		$	—		$	—		$	4,514
Government securities			—			19,524			—			19,524			—			10,345			—			10,345
Government agency securities(1)			—			12,423			—			12,423			—			16,455			—			16,455
Corporate debt securities			—			2,135			—			2,135			—			1,741			—			1,741
Asset-backed securities			—			—			154			154			—			—			223			223
Publicly traded equity securities			1,237			—			—			1,237			928			—			—			928
Derivative instruments and other assets (2)			—			27			14			41			—			109			4			113
Total		$	3,295		$	34,109		$	168		$	37,572		$	5,442		$	28,650		$	227		$	34,319
Liabilities:
Derivative liabilities		$	—		$	8		$	—		$	8		$	—		$	66		$	—		$	66
Total		$	—		$	8		$	—		$	8		$	—		$	66		$	—		$	66

 

(1)	Government agency securities as of May 1, 2010 and July 25, 2009 include bank-issued securities that are guaranteed by the FDIC.

(2)	Derivative instruments and other assets as of May 1, 2010 include derivative assets and property held for sale.

Government securities, government agency securities and corporate debt securities include an aggregate of $328 million and $409 million of cash equivalents as of May 1, 2010 and July 25, 2009, respectively.

Level 2 fixed income securities are priced using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data, or in limited circumstances, discounted cash flow techniques. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources, to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary inputs to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Company’s derivative instruments are primarily classified as Level 2, as they are not actively traded and are valued using pricing models that use observable market inputs. The Company did not have any transfers between Level 1 and Level 2 fair value measurements during the three or nine months ended May 1, 2010.

Level 3 assets include asset-backed securities, certain derivative instruments, and property held for sale, whose values are determined based on discounted cash flow models using inputs that the Company could not corroborate with market data.

 

21

---

Table of Contents

The following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended May 1, 2010 and April 25, 2009 (in millions):

 

		Asset-Backed Securities				Derivative Instruments and Other Assets (1)				Total
Balance at July 25, 2009		$	223			$	4			$	227
Transfers into Level 3			—				22				22
Total gains and losses (realized and unrealized):
Included in other income (loss), net			(6	)			—				(6	)
Included in operating expenses			—				(12	)			(12	)
Included in other comprehensive income			33				—				33
Purchases, sales and maturities			(96	)			—				(96	)
Balance at May 1, 2010		$	154			$	14			$	168
Losses attributable to assets still held as of May 1, 2010		$	—			$	(10	)		$	(10	)
		Asset-Backed Securities				Derivative Instruments and Other Assets				Total
Balance at July 27, 2008		$	—			$	—			$	—
Transfers into Level 3			618				6				624
Total gains and losses (realized and unrealized):
Included in other income (loss), net			(28	)			—				(28	)
Included in other comprehensive income			(12	)			—				(12	)
Purchases, sales and maturities			(340	)			—				(340	)
Balance at April 25, 2009		$	238			$	6			$	244
Losses attributable to assets still held as of April 25, 2009		$	(14	)		$	—			$	(14	)

 

(1)	Derivative instruments and other assets as of May 1, 2010 include derivative assets and property held for sale.

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

The following table presents the Company’s financial instruments and non-financial assets that were measured at fair value on a nonrecurring basis and the losses recorded for the periods presented (in millions):

 

		FAIR VALUE MEASUREMENTS
		Net Carrying Value as of May 1, 2010			Level 1			Level 2			Level 3			Total Losses for the Three Months Ended May 1, 2010				Total Losses for the Nine Months Ended May 1, 2010
Investments in privately held companies		$	27		$	—		$	—		$	27		$	(3	)		$	(17	)
Purchased intangible assets		$	—		$	—		$	—		$	—			(5	)			(13	)
Total losses for nonrecurring measurements														$	(8	)		$	(30	)

 

22

---

Table of Contents

The following table presents the Company’s financial instruments that were measured at fair value on a nonrecurring basis and the losses recorded for the periods presented (in millions):

 

		FAIR VALUE MEASUREMENTS
		Net Carrying Value as of April 25, 2009			Level 1			Level 2			Level 3			Total Losses for the Three Months Ended April 25, 2009				Total Losses for the Nine Months Ended April 25, 2009
Investments in privately held companies		$	37		$	—		$	—		$	37		$	(15	)		$	(66	)
Losses on assets no longer held															—				(2	)
Total losses for nonrecurring measurements														$	(15	)		$	(68	)

The losses for the investments in privately held companies were recorded to other income (loss), net, and the losses for purchased intangible assets were included in amortization of purchased intangible assets.

The assets in the preceding tables were measured at fair value due to events or circumstances the Company identified that significantly impacted the fair value of these assets during the periods presented. The Company measured the fair value for investments in privately held companies using financial metrics, comparison to other private and public companies, and analysis of the financial condition and near-term prospects of the issuer, including recent financing activities and their capital structure as well as other economic variables. These investments were classified as Level 3 assets because the Company used unobservable inputs to value them, reflecting the Company’s assessment of the assumptions market participants would use in pricing these investments due to the absence of quoted market prices and inherent lack of liquidity. The Company measured the fair value for these purchased intangible assets using discounted cash flow techniques, and these assets were classified as Level 3 assets because the Company used unobservable inputs to value them, reflecting the Company’s assessment of the assumptions market participants would use in valuing these purchased intangible assets.

(d) Other

The fair value of certain of the Company’s financial instruments that are not measured at fair value, including accounts receivable, accounts payable, accrued compensation, and other current liabilities, approximates the carrying amount because of their short maturities. In addition, the fair value of the Company’s loan receivables and financed service contracts also approximates the carrying amount. The fair value of the Company’s debt is disclosed in Note 9 and was determined using quoted market prices for those securities.

 

23

---

Table of Contents

9.	Borrowings

(a) Debt

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

 

		May 1, 2010							July 25, 2009
		Amount				Effective Rate			Amount				Effective Rate
Senior notes:
5.25% fixed-rate notes, due 2011 (“2011 Notes”)		$	3,000			3.12	%		$	3,000			3.12	%
2.90% fixed-rate notes, due 2014 (“2014 Notes”)			500			3.11	%			—			—
5.50% fixed-rate notes, due 2016 (“2016 Notes”)			3,000			3.71	%			3,000			4.34	%
4.95% fixed-rate notes, due 2019 (“2019 Notes”)			2,000			5.08	%			2,000			5.08	%
4.45% fixed-rate notes, due 2020 (“2020 Notes”)			2,500			4.50	%			—			—
5.90% fixed-rate notes, due 2039 (“2039 Notes”)			2,000			6.11	%			2,000			6.11	%
5.50% fixed-rate notes, due 2040 (“2040 Notes”)			2,000			5.67	%			—			—
Total senior notes			15,000							10,000
Other notes and borrowings			73							2
Unaccreted discount			(74	)						(21	)
Hedge accounting adjustment			247							314
Total		$	15,246						$	10,295
Reported as:
Short-term debt		$	3,127						$	—
Long-term debt			12,119							10,295
Total		$	15,246						$	10,295

In November 2009, the Company issued senior unsecured notes in an aggregate principal amount of $5.0 billion. Of these notes, $500 million will mature in 2014 and bear interest at a fixed rate of 2.90% per annum (the “2014 Notes”), $2.5 billion will mature in 2020 and bear interest at a fixed rate of 4.45% per annum (the “2020 Notes”), and $2.0 billion will mature in 2040 and bear interest at a fixed rate of 5.50% per annum (the “2040 Notes”). To achieve its interest rate risk management objectives, during the three months ended May 1, 2010, the Company entered into a $750 million notional amount interest rate swap designated as a fair value hedge of a portion of the 2016 Notes. Subsequent to May 1, 2010, the Company entered into an additional $750 million notional amount interest rate swap, designated as a fair value hedge of an additional portion of the 2016 Notes. In effect, these swaps convert the fixed interest rates of a portion of the 2016 Notes to floating interest rates based on the London InterBank Offered Rate (“LIBOR”) plus a fixed number of basis points. Gains and losses in the value of the interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt.

The effective rates for the fixed-rate debt include the interest on the notes, the accretion of the discount, and adjustments related to hedging, if applicable. Based on market prices, the fair value of the Company’s senior notes was $15.8 billion and $10.5 billion as of May 1, 2010 and July 25, 2009, respectively. Interest is payable semiannually on each class of the senior fixed-rate notes. The notes are redeemable by the Company at any time, subject to a make-whole premium. The Company was in compliance with all debt covenants as of May 1, 2010.

Interest expense and cash paid for interest are summarized as follows (in millions):

 

		Three Months Ended						Nine Months Ended
		May 1, 2010			April 25, 2009			May 1, 2010			April 25, 2009
Interest expense		$	182		$	105		$	454		$	232
Cash paid for interest		$	270		$	164		$	575		$	333

 

24

---

Table of Contents

(b) Credit Facility

The Company has a credit agreement with certain institutional lenders providing for a $3.0 billion unsecured revolving credit facility that is scheduled to expire on August 17, 2012. Any advances under the credit agreement will accrue interest at rates that are equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50% or Bank of America’s “prime rate” as announced from time to time or (ii) LIBOR plus a margin that is based on the Company’s senior debt credit ratings as published by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. The credit agreement requires that the Company comply with certain covenants, including that it maintains an interest coverage ratio as defined in the agreement.

The Company may also, upon the agreement of either the then-existing lenders or of additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $1.9 billion and/or extend the expiration date of the credit facility up to August 15, 2014. As of May 1, 2010, the Company was in compliance with the required interest coverage ratio and the other covenants, and the Company had not borrowed any funds under the credit facility.

Other notes and borrowings include notes and credit facilities with a number of financial institutions that are available to certain foreign subsidiaries of the Company. The amount of borrowings outstanding under these arrangements was $72 million and $2 million at May 1, 2010 and July 25, 2009, respectively.

10. Derivative Instruments

(a) Summary of Derivative Instruments

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

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

 

		DERIVATIVE ASSETS								DERIVATIVE LIABILITIES
		Balance Sheet Line Item		May 1,     2010			July 25,     2009			Balance Sheet Line Item		May 1,     2010			July 25,     2009
Derivatives designated as hedging instruments:
Foreign currency derivatives		Other current assets		$	18		$	87		Other current liabilities		$	6		$	36
Interest rate derivatives		Other assets			1			—		Other long-term liabilities			—			—
Total					19			87					6			36
Derivatives not designated as hedging instruments:
Foreign currency derivatives		Other current assets			8			22		Other current liabilities			2			30
Equity derivatives		Other current assets			—			2		Other current liabilities			—			—
Equity derivatives		Other assets			2			2		Other long-term liabilities			—			—
Total					10			26					2			30
Total				$	29		$	113				$	8		$	66

 

25

---

Table of Contents

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

 

		GAINS (LOSSES) RECOGNIZED IN OCI ON DERIVATIVES (EFFECTIVE PORTION)								GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME (EFFECTIVE PORTION)
Three Months Ended		May 1, 2010				April 25, 2009						May 1, 2010				April 25, 2009
Derivatives Designated as Cash Flow Hedging Instruments										Line Item in Statements of Operations
Foreign currency derivatives		$	(21	)		$	16			Operating expenses		$	(2	)		$	(38	)
										Cost of sales-service							(5	)
Interest rate derivatives			—				(42	)		Interest expense			—				—
Other derivatives			—				(2	)		Operating expenses			—				(1	)
Total		$	(21	)		$	(28	)				$	(2	)		$	(44	)
		GAINS (LOSSES) RECOGNIZED IN  OCI ON DERIVATIVES (EFFECTIVE PORTION)								GAINS (LOSSES) RECLASSIFIED FROM AOCI INTO INCOME (EFFECTIVE PORTION)
Nine Months Ended		May 1, 2010				April 25, 2009						May 1, 2010				April 25, 2009
Derivatives Designated as Cash Flow Hedging Instruments										Line Item in Statements of Operations
Foreign currency derivatives		$	(12	)		$	(174	)		Operating expenses		$	5			$	(73	)
										Cost of sales-service			1				(10	)
Interest rate derivatives			23				(42	)		Interest expense			—				—
Other derivatives			—				(2	)		Operating expenses			—				(1	)
Total		$	11			$	(218	)				$	6			$	(84	)

During the three and nine months ended May 1, 2010 and April 25, 2009, the amounts recognized in earnings on derivative instruments designated as cash flow hedges related to the ineffective portion were not material, and the Company did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

As of May 1, 2010, the Company estimates that approximately $13 million of net derivative losses related to its cash flow hedges included in accumulated other comprehensive income (AOCI) will be reclassified into earnings within the next 12 months.

The effect on the Consolidated Statement of Operations of derivative instruments designated as fair value hedges is summarized as follows (in millions):

 

				Gains (Losses) for the  Three Months Ended						Gains (Losses) for the  Nine Months Ended
Derivatives Designated as Fair Value Hedging Instruments		Line Item in Statements of Operations		May 1, 2010			April 25, 2009			May 1, 2010			April 25, 2009
Equity derivatives		Other income (loss), net		$	3		$	—		$	2		$	16
Interest rate derivatives		Other income (loss), net			—			—			—			(7	)
Interest rate derivatives		Interest expense			1			—			1			—
Total				$	4		$	—		$	3		$	9

 

26

---

Table of Contents

The effect on the Consolidated Statement of Operations of derivative instruments not designated as hedges is summarized as follows (in millions):

 

				Gains (Losses) for the  Three Months Ended								Gains (Losses) for the  Nine Months Ended
Derivatives not Designated as Hedging Instruments		Line Item in Statements of Operations		May 1, 2010				April 25, 2009				May 1, 2010				April 25, 2009
Foreign currency derivatives		Other income (loss), net		$	(118	)		$	(20	)		$	(69	)		$	(134	)
Equity derivatives		Operating expenses			5				—				23				(22	)
Equity derivatives		Other income (loss), net			5				2				12				4
Total				$	(108	)		$	(18	)		$	(34	)		$	(152	)

(b) Foreign Currency Exchange Risk

The Company conducts business globally in numerous currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The Company does not enter into such contracts for trading purposes.

The Company hedges foreign currency forecasted transactions related to certain operating expenses and service cost of sales with currency options and forward contracts. These currency option and forward contracts, designated as cash flow hedges, generally have maturities of less than 18 months. The Company assesses effectiveness based on changes in total fair value of the derivatives. The effective portion of the derivative instrument’s gain or loss is initially reported as a component of AOCI and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion, if any, of the gain or loss is reported in earnings immediately. The Company did not discontinue any hedges during any of the periods presented because it was probable that the original forecasted transaction would not occur.

The Company enters into foreign exchange forward and option contracts to reduce the short-term effects of foreign currency fluctuations on assets and liabilities such as foreign currency receivables, including long-term customer financings, investments, and payables. These derivatives are not designated as hedging instruments. Gains and losses on the contracts are included in other income (loss), net, and substantially offset foreign exchange gains and losses from the remeasurement of intercompany balances or other current assets, investments, or liabilities denominated in currencies other than the functional currency of the reporting entity.

During the nine months ended May 1, 2010, the Company entered into foreign exchange forward and options contracts denominated in Norwegian kroner to hedge against a portion of the foreign currency exchange risk associated with the purchase consideration for the acquisition of Tandberg. These contracts were not designated as hedging instruments. Gains and losses on such contracts are included in other income (loss), net. The Company recognized net losses of $14 million and $10 million for the third quarter and first nine months of fiscal 2010, respectively, relating to such contracts denominated in Norwegian kroner.

The Company hedges certain net investments in its foreign subsidiaries with forward contracts, which generally have maturities of up to six months. The Company recognized a loss of $4 million in OCI for the effective portion of its net investment hedges for the nine months ended May 1, 2010. The Company’s net investment hedges are not included in the preceding tables.

The notional amounts of the Company’s foreign currency derivatives are summarized as follows (in millions):

 

		May 1, 2010			July 25, 2009
Derivatives designated as cash flow hedging instruments		$	1,720		$	2,965
Derivatives not designated as hedging instruments			3,280			4,423
Derivatives designated as net investment hedging instruments			107			103
Total		$	5,107		$	7,491

(c) Interest Rate Risk

Interest Rate Derivatives, Investments

The Company’s primary objective for holding fixed income securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. To realize these objectives, the Company may utilize interest rate swaps or other derivatives designated as fair value or cash flow hedges. As of May 1, 2010 and July 25, 2009, the Company did not have any outstanding interest rate derivatives related to its fixed income securities.

 

27

---

Table of Contents

Interest Rate Derivatives, Long-Term Debt

During the nine months ended May 1, 2010, the Company entered into $3.7 billion of interest rate derivatives designated as cash flow hedges to hedge against interest rate movements in connection with the anticipated issuance of senior notes in November 2009. The effective portion of these hedges was recorded to AOCI, net of tax, and is being amortized to interest expense over the respective lives of the notes. These derivative instruments were settled in connection with the actual issuance of the senior notes in November 2009.

During the third quarter of fiscal 2010, the Company entered into a $750 million notional amount interest rate swap designated as a fair value hedge of a portion of the 2016 Notes. Subsequent to May 1, 2010, the Company entered into an additional $750 million notional amount interest rate swap, designated as a fair value hedge of an additional portion of the 2016 Notes. Under these interest rate swap contracts, the Company receives fixed-rate interest payments and makes interest payments based on LIBOR plus a fixed number of basis points. The effect of these swaps is to convert fixed-rate interest expense on a portion of the 2016 Notes to a floating rate interest expense. The gains and losses related to changes in the fair value of the interest rate swaps are included in interest expense in the Consolidated Statements of Operations and substantially offset changes in the fair value of the hedged portion of the underlying hedged debt. As of May 1, 2010 the fair value of the interest rate swaps was $1 million and was reflected in other assets in the Consolidated Balance Sheet.

(d) Equity Price Risk

The Company may hold equity securities for strategic purposes or to diversify its overall investment portfolio. The publicly traded equity securities in the Company’s portfolio are subject to price risk. To manage its exposure to changes in the fair value of certain equity securities, the Company may enter into equity derivatives that are designated as fair value or cash flow hedges. The changes in the value of the hedging instruments are included in other income (loss), net, and offset the change in the fair value of the underlying hedged investment. The Company did not have any equity derivatives outstanding as of May 1, 2010 and July 25, 2009.

In addition, the Company periodically manages the risk of its investment portfolio by entering into equity derivatives that are not designated as accounting hedges. The changes in the fair value of these derivatives were also included in other income (loss), net. The Company is also exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Although not designated as accounting hedges, the Company utilizes equity derivatives to economically hedge this exposure. As of May 1, 2010 and July 25, 2009, the notional amount of the derivative instruments used to hedge such liabilities was $167 million and $91 million, respectively.

(e) Credit-Risk-Related Contingent Features

Certain derivative instruments are executed under agreements that have provisions requiring the Company and counterparty to maintain a specified credit rating from certain credit rating agencies. If the Company’s or counterparty’s credit rating falls below a specified credit rating, either party has the right to request collateral on the derivatives’ net liability position. Such provisions did not affect the Company’s financial position as of May 1, 2010 and July 25, 2009.

 

11.	Commitments and Contingencies

(a) Operating Leases

The Company leases office space in several U.S. locations. Outside the United States, larger leased sites include sites in Australia, Belgium, China, France, Germany, India, Israel, Italy, Japan, and the United Kingdom. The Company also leases equipment and vehicles. Future minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of May 1, 2010 are as follows (in millions):

 

Fiscal Year		Amount
2010 (remaining three months)		$	81
2011			324
2012			216
2013			150
2014			111
Thereafter			399
Total		$	1,281

 

28

---

Table of Contents

(b) Purchase Commitments with Contract Manufacturers and Suppliers

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by the Company or that establish the parameters defining the Company’s requirements. A significant portion of the Company’s reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of May 1, 2010 and July 25, 2009, the Company had total purchase commitments for inventory of $4.3 billion and $2.2 billion, respectively.

The Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of the Company’s excess and obsolete inventory. As of May 1, 2010 and July 25, 2009, the liability for these purchase commitments was $148 million and $175 million, respectively, and was included in other current liabilities.

(c) Other Commitments

In connection with the Company’s business combinations and asset purchases, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with the Company of certain employees of acquired entities. See Note 3.

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 approximately $299 million and $313 million as of May 1, 2010 and July 25, 2009, respectively.

(d) Variable Interest Entities

In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers. These privately held companies and customers may be considered to be variable interest entities. The Company has evaluated its investments in these privately held companies and its customer financings and has determined that there were no significant unconsolidated variable interest entities as of May 1, 2010.

(e) Product Warranties and Guarantees

The following table summarizes the activity related to the product warranty liability during the nine months ended May 1, 2010 and April 25, 2009 (in millions):

 

		Nine Months Ended
		May 1, 2010				April 25, 2009
Balance at beginning of period		$	321			$	399
Provision for warranties issued			342				282
Payments			(328	)			(343	)
Fair value of warranty liability acquired			7				—
Balance at end of period		$	342			$	338

The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The Company’s products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime warranty.

In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows.

 

29

---

Table of Contents

The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other end-user customers. See Note 6. The Company’s other guarantee arrangements as of May 1, 2010 and July 25, 2009 that are subject to recognition and disclosure requirements were not material.

(f) Legal Proceedings

Brazilian authorities have investigated the Company’s Brazilian subsidiary and certain of its current and former employees, as well as a Brazilian importer of the Company’s products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer. Brazilian authorities have assessed claims against the Company’s Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes and related penalties. The claims are for calendar years 2003 through 2007 and aggregate to approximately $190 million for the alleged evasion of import taxes, $85 million for interest, and approximately $1.6 billion for various penalties, all determined using an exchange rate as of May 1, 2010. The Company has completed a thorough review of the matter and believes the asserted tax claims against it are without merit, and the Company intends to defend the claims vigorously. While the Company believes there is no legal basis for its alleged liability, due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims asserting joint liability with the importer, the Company is unable to determine the likelihood of an unfavorable outcome against it and is unable to reasonably estimate a range of loss, if any. The Company does not expect a final judicial determination for several years.

The Company has investigated the alleged improper transactions referred to above. The Company communicated with United States authorities to provide information and report on its findings and the United States authorities have investigated such allegations.

The Company and other defendants are also subject to patent claims asserted by Network-1 Security Solutions, Inc. on February 7, 2008 in the Federal District Court for the Eastern District of Texas. Network-1 alleges that various Cisco products implement a method for remotely powering equipment that infringes U.S. Patent No. 6,218,930. Network-1 seeks monetary damages. The trial on these claims is scheduled to begin in July 2010. The Company believes it has strong arguments that its products do not use the technology described in the patent and that the patent is, in any case, invalid. If the jury were to find that Cisco’s products infringe this patent and find that the patent is valid, the Company believes damages are not likely to be material given the limited contribution it believes is played by the technology the plaintiff claims is covered by the patent. However, due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the ultimate outcome of this litigation at this time.

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.

 

12.	Shareholders’ Equity

(a) Stock Repurchase Program

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of May 1, 2010, the Company’s Board of Directors had authorized an aggregate repurchase of up to $72 billion of common stock under this program and the remaining authorized repurchase amount was $9.3 billion with no termination date. The stock repurchase activity under the stock repurchase program during the nine months ended May 1, 2010 is summarized as follows (in millions, except per-share amounts):

 

Nine Months Ended May 1, 2010		Shares Repurchased		Weighted- Average Price per Share			Amount Repurchased
Cumulative balance at July 25, 2009		2,802		$	20.41		$	57,179
Repurchase of common stock under the stock repurchase program		226			24.33			5,503
Cumulative balance at May 1, 2010		3,028		$	20.70		$	62,682

The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity. The Company is required to allocate the purchase price of the repurchased shares as (i) a reduction to retained earnings until retained earnings are zero and then as an increase to accumulated deficit and (ii) a reduction of common stock and additional paid-in capital. Issuance of common stock and the tax benefit related to employee stock incentive plans are recorded as an increase to common stock and additional paid-in capital.

(b) Other Repurchases of Common Stock

For the nine months ended May 1, 2010 and April 25, 2009, the Company repurchased approximately 3.7 million and 0.8 million shares, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock or stock units.

 

30

---

Table of Contents

(c) Comprehensive Income

The components of comprehensive income, net of tax, are as follows (in millions):

 

		Three Months Ended								Nine Months Ended
		May 1, 2010				April 25, 2009				May 1, 2010				April 25, 2009
Net income		$	2,192			$	1,348			$	5,832			$	5,053
Other comprehensive income:
Change in unrealized gains and losses on investments, net of tax benefit (expense) of $(67) and $(93), for the three and nine months ended May 1, 2010, respectively, and $(8) and $86 for the corresponding periods of fiscal 2009			30				(19	)			225				(195	)
Change in derivative instruments			(19	)			17				(4	)			(136	)
Change in cumulative translation adjustment and other			(72	)			5				12				(429	)
Comprehensive income			2,131				1,351				6,065				4,293
Comprehensive (income) loss attributable to noncontrolling interests			(2	)			(9	)			8				22
Comprehensive income attributable to Cisco Systems, Inc.		$	2,129			$	1,342			$	6,073			$	4,315

The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as the Company is the primary beneficiary. As a result, SOFTBANK’s interest in the change in the unrealized gains and losses on the investments in the venture fund is shown as comprehensive income attributable to noncontrolling interests.

The components of AOCI, net of tax, are summarized as follows (in millions):

 

		May 1, 2010				July 25, 2009
Net unrealized gains on investments		$	371			$	138
Net unrealized losses on derivative instruments			(25	)			(21	)
Cumulative translation adjustment and other			330				318
Total		$	676			$	435

 

13.	Employee Benefit Plans

(a) Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan, which includes its subplan, the International Employee Stock Purchase Plan (together, the “Purchase Plan”), under which 471.4 million shares of the Company’s common stock had been reserved for issuance as of May 1, 2010. Effective July 1, 2009, eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited number of shares of the Company’s stock at a discount of up to 15% of the lesser of the market value at the beginning of the offering period or the end of each 6-month purchase period. Prior to July 1, 2009 the offering period was six months. The purchase plan is scheduled to terminate on January 3, 2020. For the nine months ended both May 1, 2010 and April 25, 2009, the Company issued 14 million shares under the Purchase Plan. As of May 1, 2010, 169 million shares were available for issuance under the Purchase Plan.

 

31

---

Table of Contents

(b) Employee Stock Incentive Plans

Stock Incentive Plan Program Description

As of May 1, 2010, the Company had five stock incentive plans: the 2005 Stock Incentive Plan (the “2005 Plan”); the 1996 Stock Incentive Plan (the “1996 Plan”); the 1997 Supplemental Stock Incentive Plan (the “Supplemental Plan”); the Cisco Systems, Inc. SA Acquisition Long-Term Incentive Plan (the “SA Acquisition Plan”); and the Cisco Systems, Inc. WebEx Acquisition Long-Term Incentive Plan (the “WebEx Acquisition Plan”). In addition, the Company has, in connection with the acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to the Company and provide incentives for them to remain with the Company. The number and frequency of share-based awards are based on competitive practices, operating results of the Company, government regulations, and other factors. Since the inception of the stock incentive plans, the Company has granted share-based awards to a significant percentage of its employees, and the majority has been granted to employees below the vice president level. The Company’s primary stock incentive plans are summarized as follows:

2005 Plan

As amended on November 15, 2007, the maximum number of shares issuable under the 2005 Plan over its term is 559 million shares plus the amount of any shares underlying awards outstanding on November 15, 2007 under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that are forfeited or are terminated for any other reason before being exercised or settled. If any awards granted under the 2005 Plan are forfeited or are terminated for any other reason before being exercised or settled, then the shares underlying the awards will again be available under the 2005 Plan.

Prior to November 12, 2009, the number of shares available for issuance under the 2005 Plan was reduced by 2.5 shares for each share awarded as a stock grant or stock unit. Pursuant to an amendment approved by the Company’s shareholders on November 12, 2009, following that amendment the number of shares available for issuance under the 2005 Plan is reduced by 1.5 shares for each share awarded as a stock grant or a stock unit, and any shares underlying awards outstanding under the 1996 Plan, the SA Acquisition Plan, and the WebEx Acquisition Plan that expire unexercised at the end of their maximum terms become available for reissuance under the 2005 Plan. The 2005 Plan permits the granting of stock options, stock, stock units, and stock appreciation rights to employees (including employee directors and officers), consultants of the Company and its subsidiaries and affiliates, and non-employee directors of the Company. Stock options and stock appreciation rights granted under the 2005 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and prior to November 12, 2009 have an expiration date no later than nine years from the grant date. The expiration date for stock options and stock appreciation rights granted subsequent to the amendment approved on November 12, 2009 shall be no later than ten years from the grant date. The stock options will generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Stock grants and stock units will generally vest with respect to 20% or 25% of the shares covered by the grant on each of the first through fifth or fourth anniversaries of the date of the grant, respectively. The Compensation and Management Development Committee of the Board of Directors has the discretion to use different vesting schedules. Stock appreciation rights may be awarded in combination with stock options or stock grants, and such awards shall provide that the stock appreciation rights will not be exercisable unless the related stock options or stock grants are forfeited. Stock grants may be awarded in combination with non-statutory stock options, and such awards may provide that the stock grants will be forfeited in the event that the related non-statutory stock options are exercised.

1996 Plan

The 1996 Plan expired on December 31, 2006, and the Company can no longer make equity awards under the 1996 Plan. The maximum number of shares issuable over the term of the 1996 Plan was 2.5 billion shares. Stock options granted under the 1996 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than nine years from the grant date. The stock options generally become exercisable for 20% or 25% of the option shares one year from the date of grant and then ratably over the following 48 or 36 months, respectively. Certain other grants have utilized a 60-month ratable vesting schedule. In addition, the Board of Directors or other committees administering the plan 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.

 

32

---

Table of Contents

Acquisition Plans

In connection with the Company’s acquisitions of Scientific-Atlanta, Inc. (“Scientific-Atlanta”) and WebEx Communications, Inc. (“WebEx”), the Company adopted the SA Acquisition Plan and the WebEx Acquisition Plan, respectively, each effective upon completion of the applicable acquisition. These plans constitute assumptions, amendments, restatements, and renamings of the 2003 Long-Term Incentive Plan of Scientific-Atlanta and the WebEx Communications, Inc. Amended and Restated 2000 Stock Incentive Plan, respectively. The plans permit the grant of stock options, stock, stock units, and stock appreciation rights to certain employees of the Company and its subsidiaries and affiliates who had been employed by Scientific-Atlanta or its subsidiaries or WebEx or its subsidiaries, as applicable. As a result of the shareholder approval of the amendment and extension of the 2005 Plan, as of November 15, 2007, the Company will no longer make stock option grants or direct share issuances under either the SA Acquisition Plan or the WebEx Acquisition Plan.

General Share-Based Award Information