Cisco Systems 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended January 29, 2011
For the transition period from to
Commission file number 0-18225
CISCO SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(Registrants 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Number of shares of the registrants common stock outstanding as of February 17, 2011: 5,527,994,846
FORM 10-Q for the Quarter Ended January 29, 2011
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF EQUITY
In September 2001, the Companys Board of Directors authorized a stock repurchase program. As of January 29, 2011, the Companys Board of Directors had authorized an aggregate repurchase of up to $82 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 12 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impacts on Cisco shareholders equity are summarized in the following table (in millions):
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fiscal year for Cisco Systems, Inc. (the Company or Cisco) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2011 is a 52-week fiscal year and fiscal 2010 was a 53-week fiscal year with the extra week included in the third quarter of fiscal 2010. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis. In the first quarter of fiscal 2011, in order to achieve operational efficiencies, the Company combined its Asia Pacific and Japan operations. Following this change, the Company is organized into the following four geographic segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. The Company has reclassified the geographic segment data for the prior period to conform to the current periods presentation. The Emerging Markets segment remains unchanged and includes Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States.
The accompanying financial data as of January 29, 2011 and for the three and six months ended January 29, 2011 and January 23, 2010 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The July 31, 2010 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto, included in the Companys Annual Report on Form 10-K for the fiscal year ended July 31, 2010.
The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates (SOFTBANK) subject to the applicable accounting guidance. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Companys equity in the equity section of the Consolidated Balance Sheets. SOFTBANKs share of the earnings in the venture fund is not presented separately in the Consolidated Statements of Operations and is included in other income (loss), net, as this amount is not material for any of the fiscal periods presented.
In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the statement of financial position as of January 29, 2011, and results of operations for the three and six months ended January 29, 2011 and January 23, 2010, cash flows, and equity for the six months ended January 29, 2011 and January 23, 2010, as applicable, have been made. The results of operations for the three and six months ended January 29, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
In addition to the segment reporting change referred to above, the Company has made certain reclassifications to prior period amounts in order to conform to the current period presentation. These items include reclassifications to prior period amounts related to net sales for similar groups of products, gross margin by geographic segment, and the allocation of share-based compensation expense within operating expenses due to the refinement of these respective categories.
The Company has evaluated subsequent events through the date that the financial statements were issued.
New Accounting Standards or Updates Recently Adopted
In June 2009, the Financial Accounting Standards Board (FASB) issued revised guidance for the consolidation of variable interest entities. In February 2010, the FASB issued amendments to the consolidation requirements, exempting certain investment funds from the June 2009 guidance for the consolidation of variable interest entities. The June 2009 guidance for the consolidation of variable interest entities replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entitys 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 enterprises involvement in variable interest entities. This accounting guidance was effective for the Company beginning in the first quarter of fiscal 2011. The application of the revised guidance for the consolidation of variable interest entities did not have a material impact to the Companys 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 was effective for the Company beginning in the first quarter of fiscal 2011. The application of the revised guidance for the accounting of transfers of financial assets did not have a material impact to the Companys Consolidated Financial Statements.
In July 2010, the FASB issued an accounting standard update to provide guidance to enhance disclosure related to the credit quality of a companys financing receivables portfolio and the associated allowance for credit loss. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its financing receivables portfolio and its allowance for credit loss with the objective of facilitating users evaluation of the nature of credit risk inherent in the companys portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit loss, and the changes and reasons for those changes in the allowance for credit loss. Effective in the second quarter of fiscal 2011, the Company has included in Note 6 the expanded disclosure related to both the period end balances and activities during the reporting period as well as the related accounting policies.
The Company completed three business combinations during the six months ended January 29, 2011. A summary of the allocation of the aggregated purchase consideration is presented as follows (in millions):
The total purchase consideration related to the Companys business combinations completed during the six months ended January 29, 2011 consisted of either cash consideration or vested share-based awards assumed, or both. Total cash and cash equivalents acquired from these business combinations were $3 million.
Total transaction costs related to business combination activities for the six months ended January 29, 2011 were $13 million, which were expensed as incurred and recorded as general and administrative (G&A) expenses.
The Company continues to evaluate certain assets and liabilities related to business combinations completed during the recent periods. Additional information, which existed as of the acquisition date but was at that time unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Changes to amounts recorded as assets or liabilities may result in a corresponding adjustment to goodwill.
The goodwill generated from the Companys business combinations completed during the six months ended January 29, 2011 is primarily related to expected synergies. The goodwill is not deductible for U.S. federal income tax purposes.
The Consolidated Financial Statements include the operating results of each business from the date of acquisition. Pro forma results of operations for the acquisitions completed during the six months ended January 29, 2011 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Companys financial results.
In the first quarter of fiscal 2011, in order to achieve operational efficiencies, the Company combined its Asia Pacific and Japan operations. Following this change, the Company is organized into the following four geographic segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. The goodwill of the former Asia Pacific and Japan geographic segments as of July 31, 2010 was allocated to the combined segment Asia Pacific Markets.
The following table presents the goodwill allocated to the Companys reportable segments as of and during the six months ended January 29, 2011 (in millions):
In the preceding table, Other primarily includes foreign currency translation and purchase accounting adjustments.
(b) Purchased Intangible Assets
The following table presents details of the Companys intangible assets acquired through business combinations completed during the six months ended January 29, 2011 (in millions, except years):
The following tables present details of the Companys purchased intangible assets (in millions):
Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses.
The following table presents the amortization of purchased intangible assets (in millions):
The amortization of purchased intangible assets for the three and six months ended January 29, 2011 included impairment charges of approximately $155 million, of which $63 million was recorded to product cost of sales and $92 million was recorded to operating expenses. The fair value for purchased intangible assets for which the carrying amount was not deemed to be recoverable was determined using the future undiscounted cash flows that the assets are expected to generate. The impairment of purchased intangible assets was categorized as $96 million in technology, $40 million in customer relationships, and $19 million in other. These impairment charges were primarily due to declines in estimated fair value as a result of reductions in expected future cash flows associated with certain of the Companys consumer products. For the three and six months ended January 23, 2010, the Company had impairment charges of $8 million primarily related to technology.
The estimated future amortization expense of purchased intangible assets with finite lives as of January 29, 2011 is as follows (in millions):
The following tables provide details of selected balance sheet items (in millions):
(a) Financing Receivables Summary
Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Companys and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Both the lease receivables and loan receivables consist of arrangements with, on average, terms of three years. The financed service contracts and other category includes financing receivables related to technical support and other services, as well as an insignificant amount of receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue, and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years. As of January 29, 2011, the deferred service revenue related to these technical support services was $1,757 million.
A summary of the Companys financing receivables is presented as follows (in millions):
Contractual maturities of the gross lease receivables at January 29, 2011 are summarized as follows (in millions):
Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancing, or defaults.
(b) Credit Quality of Financing Receivables
The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables that are disaggregated by portfolio segment and class. The portfolio segment is based on the type of financing transactions: lease receivables, loan receivables, and financed service contracts and other. These financing receivables are further disaggregated by class based on their risk characteristics. The two classes that the Company has identified are Established Markets and Growth Markets. The Growth Markets class consists of countries in the Companys Emerging Markets segment as well as China and India, and the Established Markets class consists of the remaining geographies in which the Company has financing receivables.
In determining the allowance for credit loss for financing receivables, the Company applies the applicable loss factors to such receivables by class. The loss factors that the Company applies to the financing receivables for a given internal credit risk rating are developed using external data as benchmarks, such as the external long-term historical loss rates and expected default rates that are published annually, most recently in February 2010, by a major third party credit rating agency.
The internal credit risk rating for individual customers is derived by taking into consideration various customer specific factors and macroeconomic conditions. These factors include the strength of the customers business and financial performance, the quality of the customers banking relationships, the Companys specific historical experience with the customer, the performance and outlook of the customers industry, the customers legal and regulatory environment, the potential sovereign risk of the geographic locations in which the customer is operating, and independent third party evaluations. Such factors are updated regularly or when facts and circumstances indicate that an update is deemed necessary.
The Companys internal credit risk ratings applied for individual customers are categorized as 1 through 10 with the lowest credit risk rating representing the highest quality receivables in the portfolio. Credit risk ratings of 1 through 4 generally correspond to investment grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to sub-standard ratings and constitute a relatively small portion of the Companys financing receivables. The credit risk profile of the Companys financing receivables as of January 29, 2011 is not materially different than the credit risk profile as of July 31, 2010. Financing receivables categorized by the Companys internal credit risk rating for each portfolio segment and class as of January 29, 2011 are summarized as follows (in millions):
In circumstances when collectability is not deemed reasonably assured, the associated revenue is deferred in accordance with the Companys revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. The total of the allowances for credit loss and the deferred revenue associated with total financing receivables as of January 29, 2011, was $2,526 million, compared with a gross financing receivables balance (net of unearned income) of $6,092 million. The losses that the Company has incurred historically with respect to its financing receivables have been immaterial, consistent with the performance of an investment grade portfolio.
If a customers financial condition deteriorates to a risk rating of 8 or higher, all receivables due from the customer are deemed to be impaired. When evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment, the Company considers historical experience, credit quality, the age of the receivable balances, and economic conditions that may affect a customers ability to pay. The Company considers a financing receivable to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the financing agreement, including scheduled interest payments. When an individual loan receivable, lease receivable, or the earned portion of financed service contracts has been identified as being impaired, all the outstanding amounts due from the customer, including any accrued interest, are fully reserved. As of January 29, 2011, the portion of the portfolio that was deemed to be impaired was immaterial. Financing receivables are written off at the point when they are considered uncollectible. Total net write-offs of financing receivables were not material for the six months ended January 29, 2011. The Company does not typically have any partially written-off financing receivables. During the six months ended January 29, 2011, the Company did not modify any financing receivables.
The following table presents the aging analysis of financing receivables by portfolio segment and class as of January 29, 2011 (in millions):
The aging profile of the Companys financing receivables as of January 29, 2011 is not materially different than that of July 31, 2010. The Company does not accrue interest on financing receivables which are more than 90 days past due unless either the receivable has not been collected due to administrative reasons or the receivable is well secured. The Company also does not accrue interest on financing receivables which are considered impaired. As of January 29, 2011, the Company had financing receivables of $55 million, net of unbilled or current receivables from the same contract, that were in the greater than 90 days past due category but remained on accrual status. Financing receivables may be placed on non-accrual status earlier if in managements opinion, a timely collection of the full principal and interest becomes uncertain. After a financing receivable has been categorized as non-accrual, interest will be recognized when cash is received. Any previously earned but uncollected interest income on such financing receivables is reversed and charged against earnings. A financing receivable may be returned to accrual status after all of the customers delinquent balances of principal and interest have been settled and the customer remains current for an appropriate period.
(c) Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
The Companys write-offs associated with financing receivables for fiscal 2010 and 2009 were not material. Financing receivables which were individually evaluated for impairment during the six months ended January 29, 2011 were not material and therefore are not presented separately in the preceding table.
(d) Financing Guarantees
In the ordinary course of business, the Company provides financing guarantees that are generally for various third-party financing arrangements extended to channel partners and end-user customers.
Channel Partner Financing Guarantees
The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $4.5 billion and $4.0 billion for the three months ended January 29, 2011 and January 23, 2010, respectively, and $9.0 billion and $7.8 billion for the six months ended January 29, 2011 and January 23, 2010, respectively. The balance of the channel partner financing subject to guarantees was $1.3 billion and $1.4 billion as of January 29, 2011 and July 31, 2010, respectively. For the periods presented, payments under these guarantee arrangements were not material.
End-User Financing Guarantees
The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans that typically have terms of up to three years. The volume of financing provided by third parties for leases and loans on which the Company has provided guarantees was $278 million and $155 million for the three months ended January 29, 2011 and January 23, 2010, respectively, and $561 million and $410 million for the six months ended January 29, 2011 and January 23, 2010, respectively. For the periods presented, payments under these guarantee arrangements were not material.
Financing Guarantee Summary
The aggregate amount of financing guarantees outstanding at January 29, 2011 and July 31, 2010, representing the total maximum potential future payments under financing arrangements with third parties, and the related deferred revenue are summarized in the following table (in millions):
(a) Summary of Available-for-Sale Investments
The following tables summarize the Companys available-for-sale investments (in millions):
(b) Gains and Losses on Available-for-Sale Investments
The following table presents the realized net gains (losses) related to the Companys available-for-sale investments (in millions):
There were no impairment charges on available-for-sale investments for either the six months ended January 29, 2011 or the six months ended January 23, 2010.
The following table summarizes the activity related to credit losses for fixed income securities (in millions):
The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at January 29, 2011 and July 31, 2010 (in millions):
For fixed income securities that have unrealized losses as of January 29, 2011, 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 January 29, 2011, 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 six months ended January 29, 2011.
The Company has evaluated its publicly traded equity securities as of January 29, 2011 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Companys intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
(c) Maturities of Fixed Income Securities
The following table summarizes the maturities of the Companys fixed income securities at January 29, 2011 (in millions):
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
(d) Securities Lending
The Company periodically engages in securities lending activities with certain of its available-for-sale investments. These transactions, with a daily balance averaging less than 25% of the Companys total available-for-sale investments portfolio, are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The Company requires collateral equal to at least 102% of the fair market value of the loaned security in the form of cash or liquid, high-quality assets. The Company engages in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify the Company against any collateral losses. As of January 29, 2011 and July 31 2010, the Company had no outstanding securities lending transactions. The Company did not experience any losses in connection with the secured lending of securities during the periods presented.
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 instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
(b) Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of January 29, 2011 and July 31, 2010 were as follows (in millions):
Level 2 fixed income securities are priced using quoted market prices for similar instruments; nonbinding market prices that are corroborated by observable market data; or, in limited circumstances, discounted cash flow techniques. The Company uses inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, independent pricing vendors, or other sources to determine the ultimate fair value of these assets and liabilities. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is ultimately responsible for the financial statements and underlying estimates. The Companys 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 and six months ended January 29, 2011.
Level 3 assets include asset-backed securities and certain derivative instruments, the values of which are determined based on discounted cash flow models using inputs that the Company could not corroborate with market data.
The following tables present a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended January 29, 2011 and January 23, 2010 (in millions):
(c) Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following tables present the Companys financial instruments and nonfinancial assets that were measured at fair value on a nonrecurring basis during the indicated periods and the related recognized gains and losses for the periods (in millions):
The assets in the preceding tables were classified as Level 3 assets because the Company used unobservable inputs to value them, reflecting the Companys assessment of the assumptions market participants would use in pricing these assets due to the absence of quoted market prices and inherent lack of liquidity. These assets were measured at fair value due to events or circumstances the Company identified that significantly impacted the fair value of these investments during the three and six months ended January 29, 2011 and January 23, 2010.
The fair value for investments in privately held companies was measured using financial metrics, comparison to other private and public companies, and analysis of the financial condition and near-term prospects of the issuers, including recent financing activities and their capital structure as well as other economic variables. The losses for the investments in privately held companies were recorded to other income (loss), net.
The fair value for purchased intangible assets for which the carrying amount was not deemed to be recoverable was determined using the future undiscounted cash flows that the assets are expected to generate. The difference between the estimated fair value and the carrying value of the assets was recorded as an impairment charge and included in product cost of sales and operating expenses as indicated in Note 3.
The fair values for property held for sale were measured using discounted cash flow techniques. The net losses for property held for sale were included in G&A expenses.
The fair value of certain of the Companys 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 Companys loan receivables and financed service contracts also approximates the carrying amount. The fair value of the Companys debt is disclosed in Note 9 and was determined using quoted market prices for those securities.
The following table summarizes the Companys debt (in millions, except percentages):
The effective rates for the fixed-rate debt include the interest on the notes, the accretion of the discount, and, if applicable, adjustments related to hedging. Based on market prices, the fair value of the Companys senior notes was $16.0 billion and $16.3 billion as of January 29, 2011 and July 31, 2010, respectively. Interest is payable semiannually on each class of the senior fixed-rate notes. The notes are redeemable by the Company at any time, subject to a make-whole premium. The Company was in compliance with all covenants on the senior notes and other notes and borrowings as of January 29, 2011. 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.
On January 31, 2011, the Company announced that it had established a short-term debt financing program of up to $3.0 billion through the issuance of commercial paper notes. As of February 22, 2011, the Company had issued commercial paper notes for an aggregate principal amount of $2.0 billion under this program. The Company intends to use the proceeds from the issuance of commercial paper notes for general corporate purposes, which may include the repayment of other maturing debt. On February 22, 2011 the Company repaid the 2011 Notes upon their maturity for an aggregate principal amount of $3.0 billion.
(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 Americas prime rate as announced from time to time or (ii) the London Interbank Offered Rate (LIBOR) plus a margin that is based on the Companys senior debt credit ratings as published by Standard & Poors Ratings Services and Moodys Investors Service, Inc. The credit agreement requires the Company to comply with certain covenants, including that it maintain an interest coverage ratio as defined in the agreement. The Company was in compliance with the required interest coverage ratio and the other covenants as of January 29, 2011.
The Company may also, upon the agreement of either the then-existing lenders or additional lenders not currently parties to the agreement, increase the commitments under the credit facility by up to an additional $1.9 billion and/or extend the expiration date of the credit facility up to August 15, 2014. As of January 29, 2011, the Company had not borrowed any funds under the credit facility.
(a) Summary of Derivative Instruments
The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate, interest rate, and equity price risks. The Companys 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 Companys 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 Companys derivative instruments and the line items on the Consolidated Balance Sheets to which they were recorded are summarized as follows (in millions):