10-Q 1 csco-20131027x10qq1.htm FORM 10-Q CSCO - 2013.10.27 - 10Q Q1


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 October 27, 2012
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
o
 
Non-accelerated filer
o
 
Smaller reporting company 
o
 
 
 
 
 
(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
Number of shares of the registrant’s common stock outstanding as of November 15, 2012: 5,309,248,366






Cisco Systems, Inc.
FORM 10-Q for the Quarter Ended October 27, 2012
INDEX
 
 
  
 
 
Page
Part I.
  
 
Item 1.
  
 
 
  
 
 
  
 
 
 
 
 
  
 
 
  
 
 
  
 
Item 2.
  
 
Item 3.
  
 
Item 4.
  
 
Part II.
  
 
Item 1.
  
 
Item 1A.
  
 
Item 2.
  
 
Item 3.
  
 
Item 4.
  
 
Item 5.
  
 
Item 6.
  
 
 
  
 
 
2




PART 1. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
 
October 27,
2012
 
July 28,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,773

 
$
9,799

Investments
40,227

 
38,917

Accounts receivable, net of allowance for doubtful accounts of $224 at October 27, 2012 and $207 at July 28, 2012
3,942

 
4,369

Inventories
1,709

 
1,663

Financing receivables, net
3,726

 
3,661

Deferred tax assets
2,253

 
2,294

Other current assets
1,277

 
1,230

Total current assets
57,907

 
61,933

Property and equipment, net
3,409

 
3,402

Financing receivables, net
3,695

 
3,585

Goodwill
20,443

 
16,998

Purchased intangible assets, net
3,449

 
1,959

Other assets
3,740

 
3,882

TOTAL ASSETS
$
92,643

 
$
91,759

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
55

 
$
31

Accounts payable
889

 
859

Income taxes payable
200

 
276

Accrued compensation
2,710

 
2,928

Deferred revenue
8,721

 
8,852

Other current liabilities
4,539

 
4,785

Total current liabilities
17,114

 
17,731

Long-term debt
16,272

 
16,297

Income taxes payable
1,577

 
1,844

Deferred revenue
3,902

 
4,028

Other long-term liabilities
1,077

 
558

Total liabilities
39,942

 
40,458

Commitments and contingencies (Note 12)

 

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; 5,311 and 5,298 shares issued and outstanding at October 27, 2012 and July 28, 2012, respectively
39,290

 
39,271

Retained earnings
12,563

 
11,354

Accumulated other comprehensive income
833

 
661

Total Cisco shareholders’ equity
52,686

 
51,286

Noncontrolling interests
15

 
15

Total equity
52,701

 
51,301

TOTAL LIABILITIES AND EQUITY
$
92,643

 
$
91,759

See Notes to Consolidated Financial Statements.

3


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited) 
 
Three Months Ended
 
October 27,
2012
 
October 29,
2011
NET SALES:
 
 
 
Product
$
9,297

 
$
8,952

Service
2,579

 
2,304

Total net sales
11,876

 
11,256

COST OF SALES:
 
 
 
Product
3,748

 
3,563

Service
889

 
803

Total cost of sales
4,637

 
4,366

GROSS MARGIN
7,239

 
6,890

OPERATING EXPENSES:
 
 
 
Research and development
1,431

 
1,375

Sales and marketing
2,416

 
2,452

General and administrative
560

 
552

Amortization of purchased intangible assets
122

 
99

Restructuring and other charges
59

 
202

Total operating expenses
4,588

 
4,680

OPERATING INCOME
2,651

 
2,210

Interest income
161

 
164

Interest expense
(148
)
 
(148
)
Other income (loss), net
(33
)
 
19

Interest and other income (loss), net
(20
)
 
35

INCOME BEFORE PROVISION FOR INCOME TAXES
2,631

 
2,245

Provision for income taxes
539

 
468

NET INCOME
$
2,092

 
$
1,777

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.39

 
$
0.33

Diluted
$
0.39

 
$
0.33

Shares used in per-share calculation:
 
 
 
Basic
5,301

 
5,394

Diluted
5,334

 
5,407

 
 
 
 
Cash dividends declared per common share
$
0.14

 
$
0.06

See Notes to Consolidated Financial Statements.

4



CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
October 27,
2012
 
October 29,
2011
Net income
$
2,092

 
$
1,777

Available-for-sale investments:
 
 
 
Change in net unrealized gains, net of tax benefit of $1 and $26 for the three months ended October 27, 2012 and October 29, 2011, respectively
4

 
(53
)
Net gains reclassified into earnings, net of tax effects of $10 and $2 for the three months ended October 27, 2012 and October 29, 2011, respectively
(17
)
 
(6
)
 
(13
)
 
(59
)
Cash flow hedging instruments:
 
 
 
Change in unrealized gains and losses
66

 
(50
)
Net losses reclassified into earnings
5

 

 
71

 
(50
)
Net change in cumulative translation adjustment and other, net of tax (expense) benefit of $(10) and $21 for the three months ended October 27, 2012 and October 29, 2011, respectively
114

 
(211
)
Other comprehensive income (loss)
172

 
(320
)
Comprehensive income
2,264

 
1,457

Comprehensive loss attributable to noncontrolling interests

 
7

Comprehensive income attributable to Cisco Systems, Inc.
$
2,264

 
$
1,464

See Notes to Consolidated Financial Statements.

5


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited) 
 
Three Months Ended
 
October 27,
2012
 
October 29,
2011
Cash flows from operating activities:
 
 
 
Net income
$
2,092

 
$
1,777

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
612

 
621

Share-based compensation expense
306

 
341

Provision for receivables
29

 
(13
)
Deferred income taxes
135

 
109

Excess tax benefits from share-based compensation
(15
)
 
(21
)
Net losses (gains) on investments
15

 
(13
)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
Accounts receivable
615

 
399

Inventories
42

 
(168
)
Financing receivables
(132
)
 
(9
)
Other assets
99

 
(374
)
Accounts payable
(19
)
 
36

Income taxes, net
(372
)
 
(38
)
Accrued compensation
(359
)
 
(548
)
Deferred revenue
(295
)
 
232

Other liabilities
(288
)
 
2

Net cash provided by operating activities
2,465

 
2,333

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of investments
(8,213
)
 
(11,770
)
Proceeds from sales of investments
2,447

 
7,721

Proceeds from maturities of investments
4,388

 
1,179

Acquisition of property and equipment
(265
)
 
(265
)
Acquisition of businesses, net of cash and cash equivalents acquired
(4,912
)
 
(38
)
Purchases of investments in privately held companies
(9
)
 
(153
)
Return of investments in privately held companies
12

 
58

Other
22

 
77

Net cash used in investing activities
(6,530
)
 
(3,191
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuances of common stock
117

 
203

Repurchases of stock - repurchase program
(183
)
 
(1,744
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(203
)
 
(137
)
Short-term borrowings, maturities less than 90 days, net
23

 

Excess tax benefits from share-based compensation
15

 
21

Dividends paid
(744
)
 
(322
)
Other
14

 
(78
)
Net cash used in financing activities
(961
)
 
(2,057
)
Net decrease in cash and cash equivalents
(5,026
)
 
(2,915
)
Cash and cash equivalents, beginning of period
9,799

 
7,662

Cash and cash equivalents, end of period
$
4,773

 
$
4,747

 
 
 
 
Cash paid for:
 
 
 
Interest
$
221

 
$
220

Income taxes
$
776

 
$
398

See Notes to Consolidated Financial Statements.

6


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per-share amounts)
(Unaudited)
Three Months Ended October 27, 2012
 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total  Equity
BALANCE AT JULY 28, 2012
 
5,298

 
$
39,271

 
$
11,354

 
$
661

 
$
51,286

 
$
15

 
$
51,301

Net income
 
 
 
 
 
2,092

 
 
 
2,092

 
 
 
2,092

Other comprehensive income
 
 
 
 
 
 
 
172

 
172

 

 
172

Issuance of common stock
 
39

 
117

 
 
 
 
 
117

 
 
 
117

Repurchase of stock - repurchase program
 
(15
)
 
(114
)
 
(139
)
 
 
 
(253
)
 
 
 
(253
)
Shares repurchased for tax withholdings on vesting of restricted stock units
 
(11
)
 
(203
)
 
 
 
 
 
(203
)
 
 
 
(203
)
Cash dividends declared ($0.14 per common share)
 
 
 
 
 
(744
)
 
 
 
(744
)
 
 
 
(744
)
Tax effects from employee stock incentive plans
 
 
 
(87
)
 
 
 
 
 
(87
)
 
 
 
(87
)
Share-based compensation expense
 
 
 
306

 
 
 
 
 
306

 
 
 
306

BALANCE AT OCTOBER 27, 2012
 
5,311

 
$
39,290

 
$
12,563

 
$
833

 
$
52,686

 
$
15

 
$
52,701


Three Months Ended October 29, 2011
 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total  Equity
BALANCE AT JULY 30, 2011
 
5,435

 
$
38,648

 
$
7,284

 
$
1,294

 
$
47,226

 
$
33

 
$
47,259

Net income
 
 
 
 
 
1,777

 
 
 
1,777

 
 
 
1,777

Other comprehensive loss
 
 
 
 
 
 
 
(313
)
 
(313
)
 
(7
)
 
(320
)
Issuance of common stock
 
45

 
203

 
 
 
 
 
203

 
 
 
203

Repurchase of common stock
 
(100
)
 
(715
)
 
(829
)
 
 
 
(1,544
)
 
 
 
(1,544
)
Shares repurchased for tax withholdings on vesting of restricted stock units
 
(9
)
 
(137
)
 
 
 
 
 
(137
)
 
 
 
(137
)
Cash dividends declared ($0.06 per common share)
 
 
 
 
 
(322
)
 
 
 
(322
)
 
 
 
(322
)
Tax effects from employee stock incentive plans
 
 
 
(43
)
 
 
 
 
 
(43
)
 
 
 
(43
)
Share-based compensation expense
 
 
 
341

 
 
 
 
 
341

 
 
 
341

BALANCE AT OCTOBER 29, 2011
 
5,371

 
$
38,297

 
$
7,910

 
$
981

 
$
47,188

 
$
26

 
$
47,214

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of October 27, 2012, the Company’s Board of Directors had authorized an aggregate repurchase of up to $82 billion of common stock under this program with no termination date. For additional information regarding stock repurchases, see Note 13 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impacts on Cisco shareholders’ equity are summarized in the following table (in millions):
 
 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Total Cisco
Shareholders’
Equity
Repurchases of common stock under the repurchase program
3,755

 
$
17,155

 
$
59,231

 
$
76,386

See Notes to Consolidated Financial Statements.

7


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 2013 and fiscal 2012 are each 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis in the following three geographic segments: the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia Pacific, Japan, and China ("APJC").
The accompanying financial data as of October 27, 2012 and for the three months ended October 27, 2012 and October 29, 2011 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 28, 2012 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 28, 2012.
The Company consolidates its investment in a venture fund managed by SOFTBANK Corp. and its affiliates ("SOFTBANK") and Insieme Networks, Inc. ("Insieme") as these are variable interest entities and the Company is the primary beneficiary. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Company's equity in the equity section of the Consolidated Balance Sheets. SOFTBANK's share of the earnings in the venture fund and the loss attributable to the noncontrolling interests in Insieme are not presented separately in the Consolidated Statements of Operations as these amounts are not material for any of the fiscal periods presented.
In the opinion of management, all adjustments (which include normal recurring adjustments, except as disclosed herein) necessary to present fairly the statement of financial position as of October 27, 2012 and the results of operations, cash flows, and equity for the three months ended October 27, 2012 and October 29, 2011, as applicable, have been made. The results of operations for the three months ended October 27, 2012 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Certain reclassifications have been made 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.

2.
Summary of Significant Accounting Policies
(a)
New Accounting Updates Recently Adopted
In June 2011, the FASB issued an accounting standard update to provide guidance on increasing the prominence of items reported in other comprehensive income, which eliminated the option to present components of other comprehensive income as part of the statement of equity. The Company adopted this accounting standard in the first quarter of fiscal 2013.
In August 2011, the FASB approved a revised accounting standard update intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This accounting standard update became effective for the Company beginning in the first quarter of fiscal 2013, and its adoption did not have any impact on the Company's Consolidated Financial Statements.

8


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(b)
Recent Accounting Standards or Updates Not Yet Effective
In December 2011, the FASB issued an accounting standard update requiring enhanced disclosures about certain financial instruments and derivative instruments that are offset in the statement of financial position or that are subject to enforceable master netting arrangements or similar agreements. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, at which time the Company will include the required disclosures.
In July 2012, the FASB issued an accounting standard update intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2014, and early adoption is permitted. The adoption of this accounting standard update is not expected to have a material impact on the Company's Consolidated Financial Statements.

3.
Business Combinations
(a)
Acquisition Summary
On July 30, 2012, the Company completed its acquisition of NDS Group Limited (“NDS”), a leading provider of video software and content security solutions that enable service providers and media companies to securely deliver and monetize new video entertainment experiences. The acquisition of NDS is expected to complement and accelerate the delivery of Cisco Videoscape, the Company's comprehensive content delivery platform that enables service providers and media companies to deliver next-generation entertainment experiences. With the NDS acquisition, the Company aims to broaden its opportunities in the service provider market and to expand its reach into emerging markets such as China and India, where NDS has an established customer presence.
Under the terms of the acquisition agreement, the Company paid total cash consideration of approximately $5.0 billion, which included the repayment of $993 million of pre-existing NDS debt to third party creditors at the closing of the acquisition. The following table summarizes the purchase consideration for the NDS acquisition (in millions):
 
 
Fair Value
Cash consideration to seller
 
$
4,012

Repayment of NDS debt to third party creditors
 
993

Total purchase consideration
 
$
5,005

The payment of the total purchase consideration of approximately $5.0 billion shown above, net of $98 million cash and cash equivalents acquired, is classified as a use of cash under investing activities in the Consolidated Statements of Cash Flows.
The Company's purchase price allocation for NDS is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but at that time was unknown to the Company, may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.
A summary of the preliminary allocation of the total purchase consideration for NDS is presented as follows (in millions):
 
 
Fair Value
Cash and cash equivalents
 
$
98

Accounts receivable, net
 
199

Other tangible assets
 
268

Goodwill
 
3,444

Purchased intangible assets
 
1,746

Deferred tax liabilities, net
 
(378
)
Liabilities assumed
 
(372
)
Total purchase consideration
 
$
5,005


9


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The Company completed three additional business combinations during the three months ended October 27, 2012 for a total cash consideration of $5 million. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
 
Purchase
Consideration
 
Net
Liabilities
Assumed
 
Purchased
Intangible
Assets
 
Goodwill
All other acquisitions
$
5

 
$
(3
)
 
$
7

 
$
1

The total cash and cash equivalents acquired from these business combinations were immaterial.
(b)
Other Acquisition Information
Total transaction costs related to the Company's business combination activities were $6 million and $2 million for the three months ended October 27, 2012 and October 29, 2011, respectively. These transaction costs were expensed as incurred as general and administrative ("G&A") expenses.
The goodwill generated from the Company's business combinations completed during the three months ended October 27, 2012 is primarily related to expected synergies. The goodwill is generally not deductible for U.S. federal income tax purposes.
The Consolidated Financial Statements include the operating results of each business combination from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three months ended October 27, 2012 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company's financial results.
(c)
Pending Acquisition of Meraki Inc.
On November 18, 2012, the Company announced that it had entered into a definitive agreement to acquire privately held Meraki Inc. (“Meraki”), a leader in cloud networking.  Meraki offers mid-market customers on-premise networking solutions centrally managed from the cloud that are easy to deploy and manage. With its acquisition of Meraki, the Company intends to address the rapidly occurring shift to cloud networking as a key part of the Company's overall strategy to accelerate the adoption of software-based business models that provide new consumption options for customers and revenue opportunities for partners.
Under the terms of the agreement, the Company will pay approximately $1.2 billion in cash to acquire Meraki. The acquisition is expected to close in the second quarter of fiscal year 2013 and is subject to customary closing conditions, including regulatory review.

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 three months ended October 27, 2012 (in millions):
 
 
Balance at
July 28, 2012
 
Acquisition of NDS
 
All Other Acquisitions
 
Balance at
October 27, 2012
Americas
 
$
11,755

 
$
1,230

 
$
1

 
$
12,986

EMEA
 
3,287

 
1,327

 

 
4,614

APJC
 
1,956

 
887

 

 
2,843

Total
 
$
16,998

 
$
3,444

 
$
1

 
$
20,443



10


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(b)
Purchased Intangible Assets
The following table presents details of the Company's intangible assets acquired through business combinations completed during the three months ended October 27, 2012 (in millions, except years):
 
FINITE LIVES
 
INDEFINITE
LIVES
 
TOTAL
 
TECHNOLOGY
 
CUSTOMER
RELATIONSHIPS
 
OTHER
 
IPR&D
 
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Amount
 
Amount
NDS Group Limited
6.4

 
$
807

 
6.7

 
$
818

 
7.4

 
$
27

 
$
94

 
$
1,746

All other acquisitions
3.0

 
7

 

 

 

 

 

 
7

Total
 
 
$
814

 
 
 
$
818

 
 
 
$
27

 
$
94

 
$
1,753


The following tables present details of the Company’s purchased intangible assets (in millions): 
October 27, 2012
 
Gross
 
Accumulated
Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,053

 
$
(1,027
)
 
$
2,026

Customer relationships
 
3,079

 
(1,780
)
 
1,299

Other
 
73

 
(43
)
 
30

Total purchased intangible assets with finite lives
 
6,205

 
(2,850
)
 
3,355

In-process research and development, with indefinite lives
 
94

 

 
94

Total
 
$
6,299

 
$
(2,850
)
 
$
3,449

July 28, 2012
 
Gross
 
Accumulated
Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
2,267

 
$
(908
)
 
$
1,359

Customer relationships
 
2,261

 
(1,669
)
 
592

Other
 
49

 
(41
)
 
8

Total
 
$
4,577

 
$
(2,618
)
 
$
1,959

 
Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses.
The following table presents the amortization of purchased intangible assets (in millions):
 
 
Three Months Ended
 
 
October 27, 2012
 
October 29, 2011
Amortization of purchased intangible assets:
 
 
 
 
Cost of sales
 
$
143

 
$
96

Operating expenses
 
122

 
99

Total
 
$
265

 
$
195

There were no impairment charges related to purchased intangible assets during the three months ended October 27, 2012 and October 29, 2011.

11


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The estimated future amortization expense of purchased intangible assets with finite lives as of October 27, 2012 is as follows (in millions):
Fiscal Year
 
Amount
2013 (remaining nine months)
 
$
702

2014
 
785

2015
 
701

2016
 
474

2017
 
325

Thereafter
 
368

Total
 
$
3,355


5.
Restructuring and Other Charges
In fiscal 2011, the Company initiated a number of key targeted actions to address several areas in its business model. These actions were intended to simplify and focus the Company's organization and operating model, align the Company's cost structure given transitions in the marketplace, divest or exit underperforming operations, and deliver value to the Company's shareholders. The Company initiated these actions to align its business based on its five foundational priorities: leadership in its core business (routing, switching, and associated services), which includes comprehensive security and mobility solutions; collaboration; data center virtualization and cloud; video; and architectures for business transformation.
Pursuant to the restructuring that the Company announced in July 2011, the Company has incurred cumulative charges of approximately $1.1 billion (included as part of the charges discussed below). The Company has substantially completed the July 2011 restructuring and does not expect significant remaining charges related to these actions.
The following table summarizes the activities related to the restructuring and other charges pursuant to the Company's July 2011 announcement related to the realignment and restructuring of the Company's business as well as certain consumer product lines as announced during April 2011 (in millions):
 
 
Voluntary Early
Retirement Program
 
Employee
Severance
 
Goodwill and
Intangible Assets
 
Other
 
Total
Gross charges in fiscal 2011
 
$
453

 
$
247

 
$
71

 
$
28

 
$
799

Cash payments
 
(436
)
 
(13
)
 

 

 
(449
)
Non-cash items
 

 

 
(71
)
 
(17
)
 
(88
)
BALANCE AT JULY 30, 2011
 
$
17

 
$
234

 
$

 
$
11

 
$
262

Gross charges in fiscal 2012
 

 
299

 

 
54

 
353

Change in estimate related to fiscal 2011 charges
 

 
(49
)
 

 

 
(49
)
Cash payments
 
(17
)
 
(401
)
 

 
(18
)
 
(436
)
Non-cash items
 

 

 

 
(20
)
 
(20
)
BALANCE AT JULY 28, 2012
 
$

 
$
83


$


$
27


$
110

Charges in fiscal 2013
 

 
65

 

 
(6
)
 
59

Cash payments
 

 
(89
)
 

 
(7
)
 
(96
)
Non-cash items
 

 

 

 
(1
)
 
(1
)
BALANCE AT OCTOBER 27, 2012
 
$

 
$
59

 
$

 
$
13

 
$
72






12


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


6.
Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
 
 
October 27,
2012
 
July 28,
2012
Inventories:
 
 
 
 
Raw materials
 
$
101

 
$
127

Work in process
 
36

 
35

Finished goods:
 
 
 
 
Distributor inventory and deferred cost of sales
 
671

 
630

Manufactured finished goods
 
615

 
597

Total finished goods
 
1,286

 
1,227

Service-related spares
 
237

 
213

Demonstration systems
 
49

 
61

 
 
 
 
 
Total
 
$
1,709

 
$
1,663

 
 
 
 
 
Property and equipment, net:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,458

 
$
4,363

Computer equipment and related software
 
1,491

 
1,469

Production, engineering, and other equipment
 
5,495

 
5,364

Operating lease assets (1)
 
312

 
300

Furniture and fixtures
 
494

 
487

 
 
12,250

 
11,983

Less accumulated depreciation and amortization (1)
 
(8,841
)
 
(8,581
)
Total
 
$
3,409

 
$
3,402

 
 
 
 
 
(1)      Accumulated depreciation related to operating lease assets was $192 and $181 as of October 27, 2012 and July 28, 2012, respectively.
 
 
 
 
 
 Other assets:
 
 
 
 
Deferred tax assets
 
$
2,061

 
$
2,270

Investments in privately held companies
 
830

 
858

Other
 
849

 
754

Total
 
$
3,740

 
$
3,882

 
 
 
 
 
Deferred revenue:
 
 
 
 
Service
 
$
8,753

 
$
9,173

Product:
 
 
 
 
Unrecognized revenue on product shipments and other deferred revenue
 
3,074

 
2,975

Cash receipts related to unrecognized revenue from two-tier distributors
 
796

 
732

Total product deferred revenue
 
3,870

 
3,707

Total
 
$
12,623

 
$
12,880

Reported as:
 
 
 
 
Current
 
$
8,721

 
$
8,852

Noncurrent
 
3,902

 
4,028

Total
 
$
12,623

 
$
12,880


13


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


7.
Financing Receivables and Guarantees
(a)
Financing Receivables
Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company's and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company's products and services, which may include additional funding for other costs associated with network installation and integration of the Company's products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.
A summary of the Company’s financing receivables is presented as follows (in millions):
October 27, 2012
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total Financing
Receivables
Gross
$
3,601

 
$
1,816

 
$
2,639

 
$
8,056

Unearned income
(261
)
 

 

 
(261
)
Allowance for credit loss
(248
)
 
(114
)
 
(12
)
 
(374
)
Total, net
$
3,092

 
$
1,702

 
$
2,627

 
$
7,421

Reported as:
 
 
 
 
 
 
 
Current
$
1,310

 
$
947

 
$
1,469

 
$
3,726

Noncurrent
1,782

 
755

 
1,158

 
3,695

Total, net
$
3,092

 
$
1,702

 
$
2,627

 
$
7,421

July 28, 2012
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total Financing
Receivables
Gross
$
3,429

 
$
1,796

 
$
2,651

 
$
7,876

Unearned income
(250
)
 

 

 
(250
)
Allowance for credit loss
(247
)
 
(122
)
 
(11
)
 
(380
)
Total, net
$
2,932

 
$
1,674

 
$
2,640

 
$
7,246

Reported as:
 
 
 
 
 
 
 
Current
1,200

 
968

 
1,493

 
3,661

Noncurrent
1,732

 
706

 
1,147

 
3,585

Total, net
$
2,932

 
$
1,674

 
$
2,640

 
$
7,246

As of October 27, 2012 and July 28, 2012, the deferred service revenue related to the financed service contracts and other was $1,810 million and $1,838 million, respectively.
Contractual maturities of the gross lease receivables at October 27, 2012 are summarized as follows (in millions):
Fiscal Year
 
Amount
2013 (remaining nine months)
 
$
1,199

2014
 
1,205

2015
 
732

2016
 
342

2017
 
123

Total
 
$
3,601


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

14


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(b)
Credit Quality of Financing Receivables
Financing receivables categorized by the Company's internal credit risk rating as of October 27, 2012 and July 28, 2012 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK
RATING
 
 
 
 
 
 
October 27, 2012
1 to 4
 
5 to 6
 
7 and
Higher
 
Total
 
Residual
Value
 
Gross Receivables,
Net of Unearned Income
Lease receivables
$
1,602

 
$
1,417

 
$
42

 
$
3,061

 
$
279

 
$
3,340

Loan receivables
945

 
834

 
37

 
1,816

 

 
1,816

Financed service contracts and other
1,531

 
1,010

 
98

 
2,639

 

 
2,639

Total
$
4,078

 
$
3,261

 
$
177

 
$
7,516

 
$
279

 
$
7,795

 
INTERNAL CREDIT RISK
RATING
 
 
 
 
 
 
July 28, 2012
1 to 4
 
5 to 6
 
7 and 
Higher
 
Total
 
Residual
Value
 
Gross Receivables,
Net of Unearned Income
Lease receivables
$
1,532

 
$
1,342

 
$
31

 
$
2,905

 
$
274

 
$
3,179

Loan receivables
831

 
921

 
44

 
1,796

 

 
1,796

Financed service contracts and other
1,552

 
1,030

 
69

 
2,651

 

 
2,651

Total
$
3,915

 
$
3,293

 
$
144

 
$
7,352

 
$
274

 
$
7,626

The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers: lease receivables, loan receivables, and financed service contracts and other.
The Company's internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings and constitute a relatively small portion of the Company's financing receivables.
In circumstances when collectability is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company's revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of October 27, 2012 and July 28, 2012 were $2,321 million, and $2,387 million, respectively, and they were associated with financing receivables (net of unearned income) of $7,795 million and $7,626 million as of their respective period ends. The losses that the Company has incurred historically, including in the periods presented with respect to its financing receivables, have been immaterial and consistent with the performance of an investment-grade portfolio. The Company did not modify any financing receivables during the periods presented.
The following tables present the aging analysis of financing receivables as of October 27, 2012 and July 28, 2012 (in millions):
 
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
October 27, 2012
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Gross Receivables,
Net of Unearned Income
 
Non-Accrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
88

 
$
76

 
$
206

 
$
370

 
$
2,970

 
$
3,340

 
$
23

 
$
15

Loan receivables
6

 

 
23

 
29

 
1,787

 
1,816

 
6

 
6

Financed service contracts and other
64

 
130

 
477

 
671

 
1,968

 
2,639

 
16

 
7

Total
$
158

 
$
206

 
$
706

 
$
1,070

 
$
6,725

 
$
7,795

 
$
45

 
$
28


15


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 28, 2012
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Gross Receivables,
Net of Unearned Income
 
Non-Accrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
151

 
$
69

 
$
173

 
$
393

 
$
2,786

 
$
3,179

 
$
23

 
$
14

Loan receivables
10

 
8

 
11

 
29

 
1,767

 
1,796

 
4

 
4

Financed service contracts and other
89

 
68

 
392

 
549

 
2,102

 
2,651

 
18

 
10

Total
$
250

 
$
145

 
$
576

 
$
971

 
$
6,655

 
$
7,626

 
$
45

 
$
28

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables is presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for lease receivables, loan receivables, and financed service contracts and other were, respectively, $157 million, $15 million, and $377 million as of October 27, 2012; and were, respectively, $139 million, $3 million, and $313 million as of July 28, 2012.
As of October 27, 2012, the Company had financing receivables of $140 million, net of unbilled or current receivables from the same contract, that were in the category for 91 days plus past due but remained on accrual status. Such balance was $109 million as of July 28, 2012. A financing receivable may be placed on nonaccrual status earlier if, in management's opinion, a timely collection of the full principal and interest becomes uncertain.
(c)
Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
 
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 28, 2012
$
247

 
$
122

 
$
11

 
$
380

Provisions, net
(2
)
 
(10
)
 
1

 
(11
)
Foreign exchange and other
3

 
2

 

 
5

Allowance for credit loss as of October 27, 2012
$
248

 
$
114

 
$
12

 
$
374

Gross receivables as of October 27, 2012, net of unearned income
$
3,340

 
$
1,816

 
$
2,639

 
$
7,795

 
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 30, 2011
$
237

 
$
103

 
$
27

 
$
367

Provisions, net
2

 
5

 
2

 
9

Foreign exchange and other
(6
)
 
(5
)
 

 
(11
)
Allowance for credit loss as of October 29, 2011
$
233

 
$
103

 
$
29

 
$
365

Gross receivables as of October 29, 2011, net of unearned income
$
2,849

 
$
1,468

 
$
2,557

 
$
6,874

The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company's historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer's ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, will be assessed and fully reserved at the customer level.

16


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. Financing receivables that were individually evaluated for impairment during the periods presented were not material and therefore are not presented separately in the preceding tables.
The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, the Company uses expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default, while also systematically giving effect to economic conditions, concentration of risk and correlation.
(d)
Financing Guarantees
In the ordinary course of business, the Company provides financing guarantees for various third-party financing arrangements extended to channel partners and end-user customers. Payments under these financing guarantee arrangements were not material for the periods presented.
Channel Partner Financing Guarantees   The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $5.6 billion and $5.3 billion for the three months ended October 27, 2012 and October 29, 2011, respectively. The balance of the channel partner financing subject to guarantees was $1.4 billion and $1.5 billion as of October 27, 2012 and October 29, 2011, respectively.
End-User Financing Guarantees   The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The volume of financing provided by third parties for leases and loans as to which the Company had provided guarantees was $44 million and $35 million for the three months ended October 27, 2012 and October 29, 2011, respectively.
Financing Guarantee Summary   The aggregate amounts of financing guarantees outstanding at October 27, 2012 and July 28, 2012, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):
 
 
October 27,
2012
 
July 28,
2012
Maximum potential future payments relating to financing guarantees:
 
 
 
Channel partner
$
372

 
$
277

End user
243

 
232

Total
$
615

 
$
509

Deferred revenue associated with financing guarantees:
 
 
 
Channel partner
$
(221
)
 
$
(193
)
End user
(215
)
 
(200
)
Total
$
(436
)
 
$
(393
)
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue
$
179

 
$
116



17


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

8.
Investments
(a)
Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
October 27, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
26,401

 
$
22

 
$
(9
)
 
$
26,414

U.S. government agency securities
4,441

 
14

 

 
4,455

Non-U.S. government and agency securities
1,388

 
8

 

 
1,396

Corporate debt securities
6,105

 
96

 
(2
)
 
6,199

Total fixed income securities
38,335

 
140

 
(11
)
 
38,464

Publicly traded equity securities
1,263

 
512

 
(12
)
 
1,763

Total
$
39,598

 
$
652

 
$
(23
)
 
$
40,227

July 28, 2012
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
24,201

 
$
41

 
$
(1
)
 
$
24,241

U.S. government agency securities
5,367

 
21

 

 
5,388

Non-U.S. government and agency securities
1,629

 
9

 

 
1,638

Corporate debt securities
5,959

 
74

 
(3
)
 
6,030

Total fixed income securities
37,156

 
145

 
(4
)
 
37,297

Publicly traded equity securities
1,107

 
524

 
(11
)
 
1,620

Total
$
38,263

 
$
669

 
$
(15
)
 
$
38,917

U.S. government agency securities include corporate debt securities that are guaranteed by the Federal Deposit Insurance Corporation ("FDIC"), while non-U.S. government and agency securities include agency and corporate debt securities that are guaranteed by non-U.S. governments.
(b)
Gains and Losses on Available-for-Sale Investments
The following table presents the gross realized gains and gross realized losses related to the Company’s available-for-sale investments (in millions):
Three Months Ended
October 27,
2012
 
October 29,
2011
Gross realized gains
$
72

 
$
236

Gross realized losses
(45
)
 
(227
)
Total
$
27

 
$
9

The following table presents the realized net gains (losses) related to the Company's available-for-sale investments by security type (in millions):
Three Months Ended
October 27,
2012
 
October 29,
2011
Net gains (losses) on investments in publicly traded equity securities
$
10

 
$
(16
)
Net gains on investments in fixed income securities
17

 
25

         Total
$
27

 
$
9

There were no impairment charges on available-for-sale investments for the periods presented.

18


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at October 27, 2012 and July 28, 2012 (in millions):
 
UNREALIZED LOSSES
LESS THAN 12 MONTHS
 
UNREALIZED LOSSES
12 MONTHS OR GREATER
 
TOTAL
October 27, 2012
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross 
Unrealized 
Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities 
$
12,477

 
$
(9
)
 
$

 
$

 
$
12,477

 
$
(9
)
Corporate debt securities
469

 
(2
)
 

 

 
469

 
(2
)
Total fixed income securities
12,946

 
(11
)
 

 

 
12,946

 
(11
)
Publicly traded equity securities
270

 
(12
)
 

 

 
270

 
(12
)
Total
$
13,216

 
$
(23
)
 
$

 
$

 
$
13,216

 
$
(23
)

 
UNREALIZED LOSSES
LESS THAN 12 MONTHS
 
UNREALIZED LOSSES
12 MONTHS OR GREATER
 
TOTAL
July 28, 2012
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross 
Unrealized 
Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency securities 
$
5,357

 
$
(1
)
 
$

 
$

 
$
5,357

 
$
(1
)
Corporate debt securities
603

 
(3
)
 
14

 

 
617

 
(3
)
Total fixed income securities
5,960

 
(4
)
 
14

 

 
5,974

 
(4
)
Publicly traded equity securities
167

 
(8
)
 
20

 
(3
)
 
187

 
(11
)
Total
$
6,127

 
$
(12
)
 
$
34

 
$
(3
)
 
$
6,161

 
$
(15
)
As of October 27, 2012, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of October 27, 2012, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended October 27, 2012.
The Company has evaluated its publicly traded equity securities as of October 27, 2012 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company's intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
(c)
Maturities of Fixed Income Securities
The following table summarizes the maturities of the Company’s fixed income securities at October 27, 2012 (in millions): 
 
Amortized Cost
 
Fair Value
Less than 1 year
$
17,224

 
$
17,238

Due in 1 to 2 years
10,763

 
10,798

Due in 2 to 5 years
10,265

 
10,339

Due after 5 years
83

 
89

Total
$
38,335

 
$
38,464


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

19


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(d)
Securities Lending
The Company periodically engages in securities lending activities with certain of its available-for-sale investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for the three months ended October 27, 2012 and October 29, 2011 was $0.8 billion and $0.6 billion, respectively. The Company requires collateral equal to at least 102% of the fair market value of the loaned security in the form of cash or liquid, high-quality assets. The Company engages in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify the Company against collateral losses. The Company did not experience any losses in connection with the secured lending of securities during the periods presented. As of October 27, 2012 and July 28, 2012, the Company had no outstanding securities lending transactions.

9.
Fair Value
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, the Company considers the principal or most advantageous market in which it would transact, and it also considers assumptions that market participants would use when pricing the asset or liability.
(a)
Fair Value Hierarchy
The accounting guidance for fair value measurement requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

20


CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(b)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of October 27, 2012 and July 28, 2012 were as follows (in millions):
 
OCTOBER 27, 2012
FAIR VALUE MEASUREMENTS
 
JULY 28, 2012
FAIR VALUE MEASUREMENTS
 
Level 1