10-Q 1 csco-20131026x10qq1fy14.htm FORM 10-Q CSCO - 2013.10.26 - 10Q Q1FY14
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 26, 2013
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 (Do not check if a smaller reporting company)
o
 
Smaller reporting company 
o
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, 2013: 5,346,617,505


1


Cisco Systems, Inc.
FORM 10-Q for the Quarter Ended October 26, 2013
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 26,
2013
 
July 27,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,254

 
$
7,925

Investments
42,947

 
42,685

Accounts receivable, net of allowance for doubtful accounts of $245 at October 26, 2013 and $228 at July 27, 2013
5,188

 
5,470

Inventories
1,466

 
1,476

Financing receivables, net
4,132

 
4,037

Deferred tax assets
2,333

 
2,616

Other current assets
1,476

 
1,312

Total current assets
62,796

 
65,521

Property and equipment, net
3,273

 
3,322

Financing receivables, net
3,893

 
3,911

Goodwill
23,804

 
21,919

Purchased intangible assets, net
3,835

 
3,403

Other assets
3,140

 
3,115

TOTAL ASSETS
$
100,741

 
$
101,191

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
3,279

 
$
3,283

Accounts payable
1,025

 
1,029

Income taxes payable

 
192

Accrued compensation
2,771

 
3,182

Deferred revenue
9,212

 
9,262

Other current liabilities
5,441

 
5,048

Total current liabilities
21,728

 
21,996

Long-term debt
12,947

 
12,928

Income taxes payable
1,575

 
1,748

Deferred revenue
3,995

 
4,161

Other long-term liabilities
1,587

 
1,230

Total liabilities
41,832

 
42,063

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; 5,351 and 5,389 shares issued and outstanding at October 26, 2013 and July 27, 2013, respectively
42,166

 
42,297

Retained earnings
15,959

 
16,215

Accumulated other comprehensive income
772

 
608

Total Cisco shareholders’ equity
58,897

 
59,120

Noncontrolling interests
12

 
8

Total equity
58,909

 
59,128

TOTAL LIABILITIES AND EQUITY
$
100,741

 
$
101,191

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 26,
2013
 
October 27,
2012
REVENUE:
 
 
 
Product
$
9,397

 
$
9,297

Service
2,688

 
2,579

Total revenue
12,085

 
11,876

COST OF SALES:
 
 
 
Product
3,747

 
3,748

Service
931

 
889

Total cost of sales
4,678

 
4,637

GROSS MARGIN
7,407

 
7,239

OPERATING EXPENSES:
 
 
 
Research and development
1,724

 
1,431

Sales and marketing
2,411

 
2,416

General and administrative
515

 
560

Amortization of purchased intangible assets
65

 
122

Restructuring and other charges
237

 
59

Total operating expenses
4,952

 
4,588

OPERATING INCOME
2,455

 
2,651

Interest income
169

 
161

Interest expense
(140
)
 
(148
)
Other income (loss), net
56

 
(33
)
Interest and other income (loss), net
85

 
(20
)
INCOME BEFORE PROVISION FOR INCOME TAXES
2,540

 
2,631

Provision for income taxes
544

 
539

NET INCOME
$
1,996

 
$
2,092

 
 
 
 
Net income per share:
 
 
 
Basic
$
0.37

 
$
0.39

Diluted
$
0.37

 
$
0.39

Shares used in per-share calculation:
 
 
 
Basic
5,378

 
5,301

Diluted
5,430

 
5,334

 
 
 
 
Cash dividends declared per common share
$
0.17

 
$
0.14

See Notes to Consolidated Financial Statements.

4


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
October 26,
2013
 
October 27,
2012
Net income
$
1,996

 
$
2,092

Available-for-sale investments:
 
 
 
Change in net unrealized gains, net of tax benefit (expense) of $(53) and $1 for the three months ended October 26, 2013 and October 27, 2012, respectively
121

 
4

Net gains reclassified into earnings, net of tax expense of $31 and $10 for the three months ended October 26, 2013 and October 27, 2012, respectively
(52
)
 
(17
)
 
69

 
(13
)
Cash flow hedging instruments:
 
 
 
Change in unrealized gains and losses, net of tax expense of $3 and $0 for the three months ended October 26, 2013 and October 27, 2012, respectively
35

 
66

Net (gains) losses reclassified into earnings
(9
)
 
5

 
26

 
71

Net change in cumulative translation adjustment and other, net of tax expense of $3 and $10 for the three months ended October 26, 2013 and October 27, 2012, respectively
73

 
114

Other comprehensive income
168

 
172

Comprehensive income
2,164

 
2,264

Comprehensive income attributable to noncontrolling interests
(4
)
 

Comprehensive income attributable to Cisco Systems, Inc.
$
2,160

 
$
2,264


See Notes to Consolidated Financial Statements.


5


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited) 
 
Three Months Ended
 
October 26,
2013
 
October 27,
2012
Cash flows from operating activities:
 
 
 
Net income
$
1,996

 
$
2,092

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
591

 
615

Share-based compensation expense
309

 
306

Provision for receivables
23

 
7

Deferred income taxes
130

 
135

Excess tax benefits from share-based compensation
(55
)
 
(15
)
(Gains) losses on investments and other, net
(108
)
 
12

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
Accounts receivable
361

 
615

Inventories
22

 
42

Financing receivables
(37
)
 
(110
)
Other assets
28

 
99

Accounts payable
(29
)
 
(19
)
Income taxes, net
(389
)
 
(372
)
Accrued compensation
(460
)
 
(359
)
Deferred revenue
(307
)
 
(295
)
Other liabilities
574

 
(288
)
Net cash provided by operating activities
2,649

 
2,465

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of investments
(8,835
)
 
(8,213
)
Proceeds from sales of investments
4,733

 
2,447

Proceeds from maturities of investments
4,058

 
4,388

Acquisition of property and equipment
(315
)
 
(265
)
Acquisition of businesses, net of cash and cash equivalents acquired
(2,447
)
 
(4,912
)
Purchases of investments in privately held companies
(134
)
 
(9
)
Return of investments in privately held companies
33

 
12

Proceeds from sales of property and equipment
156

 
24

Other
(4
)
 
(2
)
Net cash used in investing activities
(2,755
)
 
(6,530
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Issuances of common stock
444

 
117

Repurchases of common stock - repurchase program
(1,898
)
 
(183
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(286
)
 
(203
)
Short-term borrowings, maturities less than 90 days, net
(2
)
 
23

Issuances of debt, maturities greater than 90 days
4

 

Excess tax benefits from share-based compensation
55

 
15

Dividends paid
(914
)
 
(744
)
Other
32

 
14

Net cash used in financing activities
(2,565
)
 
(961
)
Net decrease in cash and cash equivalents
(2,671
)
 
(5,026
)
Cash and cash equivalents, beginning of period
7,925

 
9,799

Cash and cash equivalents, end of period
$
5,254

 
$
4,773

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
221

 
$
221

Cash paid for income taxes, net
$
803

 
$
776

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 26, 2013
 
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 27, 2013
 
5,389

 
$
42,297

 
$
16,215

 
$
608

 
$
59,120

 
$
8

 
$
59,128

Net income
 
 
 
 
 
1,996

 
 
 
1,996

 
 
 
1,996

Other comprehensive income
 
 
 
 
 
 
 
164

 
164

 
4

 
168

Issuance of common stock
 
58

 
444

 
 
 
 
 
444

 
 
 
444

Repurchase of common stock
 
(84
)
 
(662
)
 
(1,338
)
 
 
 
(2,000
)
 
 
 
(2,000
)
Shares repurchased for tax withholdings on vesting of restricted stock units
 
(12
)
 
(286
)
 
 
 
 
 
(286
)
 
 
 
(286
)
Cash dividends declared ($0.17 per common share)
 
 
 
 
 
(914
)
 
 
 
(914
)
 
 
 
(914
)
Tax effects from employee stock incentive plans
 
 
 
35

 
 
 
 
 
35

 
 
 
35

Share-based compensation expense
 
 
 
309

 
 
 
 
 
309

 
 
 
309

Purchase acquisitions and other
 
 
 
29

 
 
 
 
 
29

 
 
 
29

BALANCE AT OCTOBER 26, 2013
 
5,351

 
$
42,166

 
$
15,959

 
$
772

 
$
58,897

 
$
12

 
$
58,909


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 common stock
 
(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

In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of October 26, 2013, 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.
In November 2013, the Company’s Board of Directors authorized up to $15 billion in additional repurchases of common stock under this program, with no termination date. 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
3,952

 
$
18,664

 
$
62,242

 
$
80,906

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 2014 and fiscal 2013 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 26, 2013 and for the three months ended October 26, 2013 and October 27, 2012 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 27, 2013 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 27, 2013.
The Company consolidates its investments 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 26, 2013 and the results of operations, cash flows and equity for the three months ended October 26, 2013 and October 27, 2012, as applicable, have been made. The results of operations for the three months ended October 26, 2013 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.
Recent Accounting Pronouncements
(a)
New Accounting Updates Recently Adopted
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 became effective for the Company in the first quarter of fiscal 2014. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 11.
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 became effective for the Company beginning in the first quarter of fiscal 2014, and its adoption did not have any impact on the Company’s Consolidated Financial Statements.
In February 2013, the FASB issued an accounting standard update to require reclassification adjustments from other comprehensive income to be presented either in the financial statements or in the notes to the financial statements. This accounting standard became effective for the Company in the first quarter of fiscal 2014. As a result of the application of this accounting standard update, the Company has provided additional disclosures in Note 15.

8

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

(b)
Recent Accounting Standards or Updates Not Yet Effective
In March 2013, the FASB issued an accounting standard update requiring an entity to release into net income the entire amount of a cumulative translation adjustment related to its investment in a foreign entity when as a parent it either sells a part or all of its investment in the foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within the foreign entity. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2015. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
In July 2013, the FASB issued an accounting standard update that provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. Under the new standard update, unrecognized tax benefit, or a portion of an unrecognized tax benefit, is to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. This accounting standard update will be effective for the Company beginning in the first quarter fiscal 2015 and applied prospectively with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

3.
Business Combinations
(a)
Acquisition Summary
The Company completed two business combinations during the three months ended October 26, 2013. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
 
Purchase Consideration
 
Net Tangible Assets Acquired (Liabilities Assumed)
 
Purchased Intangible Assets
 
Goodwill
Sourcefire, Inc.
$
2,449

 
$
81

 
$
577

 
$
1,791

Composite Software, Inc.
160

 
(10
)
 
75

 
95

   Total
$
2,609

 
$
71

 
$
652

 
$
1,886

On October 7, 2013, the Company completed its acquisition of Sourcefire, Inc. (“Sourcefire”), a leader in intelligent cybersecurity solutions. Sourcefire delivers innovative, highly automated security through continuous awareness, threat detection and protection across its portfolio, including next-generation intrusion prevention systems, next-generation firewalls, and advanced malware protection. With the Sourcefire acquisition, the Company aims to accelerate its security strategy of defending, discovering, and remediating advanced threats to provide continuous security solutions to the Company’s customers in more places across the network. Product revenue from the Sourcefire acquisition has been included in the Company's Security product category.
On July 29, 2013, the Company completed its acquisition of privately held Composite Software, Inc. (“Composite Software”), a provider of data virtualization software and services. Composite Software provides technology that connects many types of data from across the network and makes it appear as if the data is in one place. With its acquisition of Composite Software, the Company intends to extend its next-generation services platform by connecting data and infrastructure. Revenue from the Composite Software acquisition has been included in the Company's Services category.
The total purchase consideration related to the Company’s business combinations completed during the three months ended October 26, 2013 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations was approximately $132 million. Total transaction costs related to the Company’s business combination activities were $6 million for each of the three months ended October 26, 2013 and October 27, 2012. These transaction costs were expensed as incurred in general and administrative (“G&A”) expenses in the Consolidated Statements of Operations.
The Company’s purchase price allocation for business combinations completed during recent periods 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.

9

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

The goodwill generated from the Company’s business combinations completed during the three months ended October 26, 2013 is primarily related to expected synergies. The goodwill is generally not deductible for 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 26, 2013 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.
(b)
Acquisition of WhipTail Technologies, Inc.
On October 28, 2013 the Company completed its acquisition of privately held WhipTail Technologies, Inc. (“WhipTail”). The Company agreed to pay approximately $0.4 billion in cash and retention-based incentives to acquire WhipTail. WhipTail is a leader in high performance, scalable solid state memory systems that enable organizations to simplify data center and virtualized environments and process more data in less time. With its WhipTail acquisition, the Company aims to strengthen its Unified Computing System (UCS) strategy and enhance application performance by integrating scalable solid state memory into the UCS’s fabric computing architecture. Revenue from the WhipTail acquisition will be included in the Company's Data Center product category. The Company expects that most of the purchase price will be allocated to goodwill and purchased intangible assets.

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 26, 2013 (in millions):
 
 
Balance at
July 27, 2013
 
Acquisitions
 
Other
 
Balance at
October 26, 2013
Americas
 
$
13,800

 
$
1,012

 
$

 
$
14,812

EMEA
 
5,037

 
575

 
(1
)
 
5,611

APJC
 
3,082

 
299

 

 
3,381

Total
 
$
21,919

 
$
1,886

 
$
(1
)
 
$
23,804

(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 26, 2013 (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
Sourcefire, Inc.
7.0
 
$
400

 
5.0
 
$
129

 
3.0
 
$
26

 
$
22

 
$
577

Composite Software, Inc.
6.0
 
60

 
3.9
 
14

 
0.0
 

 
1

 
75

Total
 
 
$
460

 
 
 
$
143

 
 
 
$
26

 
$
23

 
$
652


10

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

The following tables present details of the Company’s purchased intangible assets (in millions): 
October 26, 2013
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
4,034

 
$
(1,529
)
 
$
2,505

Customer relationships
 
1,698

 
(516
)
 
1,182

Other
 
55

 
(11
)
 
44

Total purchased intangible assets with finite lives
 
5,787

 
(2,056
)
 
3,731

In-process research and development, with indefinite lives
 
104

 

 
104

Total
 
$
5,891

 
$
(2,056
)
 
$
3,835

July 27, 2013
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,563

 
$
(1,366
)
 
$
2,197

Customer relationships
 
1,566

 
(466
)
 
1,100

Other
 
30

 
(10
)
 
20

Total purchased intangible assets with finite lives
 
5,159

 
(1,842
)
 
3,317

In-process research and development, with indefinite lives
 
86

 

 
86

Total
 
$
5,245

 
$
(1,842
)
 
$
3,403

 
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 26,
2013
 
October 27,
2012
Amortization of purchased intangible assets:
 
 
 
 
Cost of sales
 
$
174

 
$
143

Operating expenses
 
65

 
122

Total
 
$
239

 
$
265

There were no impairment charges related to purchased intangible assets during the periods presented.
The estimated future amortization expense of purchased intangible assets with finite lives as of October 26, 2013 is as follows (in millions):
Fiscal Year
 
Amount
2014 (remaining nine months)
 
$
764

2015
 
934

2016
 
704

2017
 
530

2018
 
380

Thereafter
 
419

Total
 
$
3,731



11

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

5.
Restructuring and Other Charges
August Fiscal 2014 Plan

In August 2013 the Company announced a workforce reduction plan. The Company is rebalancing its resources with a workforce reduction plan that will impact approximately 4,000 employees, or 5%, of the Company’s global workforce. This workforce reduction plan is designed to enable the Company to rebalance its workforce in order to reinvest in key growth areas such as the cloud, data center, mobility, services, software and security and to drive operational efficiencies. As the Company intends to reinvest in the above areas, it does not expect significant overall cost savings as a result of this rebalancing of its resources.

In connection with this restructuring action, the Company incurred cumulative charges of $237 million for the first quarter of fiscal 2014. The Company expects total pre-tax charges pursuant to these restructuring actions of approximately $550 million and it expects the remaining charges to be incurred though the end of fiscal 2014.
The following table summarizes the activities related to the restructuring and other charges pursuant to the August Fiscal 2014 Plan (in millions):
August Fiscal 2014 Plan
 
Employee
Severance
 
Other
 
Total
Gross charges in fiscal 2014
 
$
240

 
$
(3
)
 
$
237

Cash payments
 
(70
)
 

 
(70
)
Non-cash items
 

 
3

 
3

Liability as of October 26, 2013
 
$
170

 
$

 
$
170

Fiscal 2011 Plans
The Fiscal 2011 Plans consist primarily of the realignment and restructuring of the Company’s business announced in July 2011 and of certain consumer product lines as announced during April 2011. The Company has completed the Fiscal 2011 Plans and does not expect any remaining charges related to these actions. The Company incurred cumulative charges of approximately $1.1 billion in connection with these plans. There were no charges incurred during the three months ended October 26, 2013 in connection with these plans. For the three months ended October 27, 2012, such charges were $59 million. The remaining liability balance as of October 26, 2013 was $22 million inclusive of severance and non-severance activities.

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 26,
2013
 
July 27,
2013
Inventories:
 
 
 
 
Raw materials
 
$
80

 
$
105

Work in process
 
7

 
24

Finished goods:
 
 
 
 
Distributor inventory and deferred cost of sales
 
619

 
572

Manufactured finished goods
 
464

 
480

Total finished goods
 
1,083

 
1,052

Service-related spares
 
257

 
256

Demonstration systems
 
39

 
39

Total
 
$
1,466

 
$
1,476

Property and equipment, net:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,340

 
$
4,426

Computer equipment and related software
 
1,428

 
1,416

Production, engineering, and other equipment
 
5,767

 
5,721

Operating lease assets (1)
 
326

 
326

Furniture and fixtures
 
498

 
497

 
 
12,359

 
12,386

Less accumulated depreciation and amortization (1)
 
(9,086
)
 
(9,064
)
Total
 
$
3,273

 
$
3,322

 
 
 
 
 
(1)      Accumulated depreciation related to operating lease assets was $207 and $203 as of October 26, 2013 and July 27, 2013, respectively.
 Other assets:
 
 
 
 
Deferred tax assets
 
$
1,496

 
$
1,539

Investments in privately held companies
 
884

 
833

Other
 
760

 
743

Total
 
$
3,140

 
$
3,115

Deferred revenue:
 
 
 
 
Service
 
$
8,896

 
$
9,403

Product:
 
 
 
 
Unrecognized revenue on product shipments and other deferred revenue
 
3,628

 
3,340

Cash receipts related to unrecognized revenue from two-tier distributors
 
683

 
680

Total product deferred revenue
 
4,311

 
4,020

Total
 
$
13,207

 
$
13,423

Reported as:
 
 
 
 
Current
 
$
9,212

 
$
9,262

Noncurrent
 
3,995

 
4,161

Total
 
$
13,207

 
$
13,423




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 26, 2013
Lease Receivables
 
Loan Receivables
 
Financed Service Contracts and Other
 
Total Financing Receivables
Gross
$
3,813

 
$
1,808

 
$
3,018

 
$
8,639

Unearned income
(264
)
 

 

 
(264
)
Allowance for credit loss
(237
)
 
(93
)
 
(20
)
 
(350
)
Total, net
$
3,312

 
$
1,715

 
$
2,998

 
$
8,025

Reported as:
 
 
 
 
 
 
 
Current
$
1,463

 
$
951

 
$
1,718

 
$
4,132

Noncurrent
1,849

 
764

 
1,280

 
3,893

Total, net
$
3,312

 
$
1,715

 
$
2,998

 
$
8,025

July 27, 2013
Lease Receivables
 
Loan Receivables
 
Financed Service Contracts and Other
 
Total Financing Receivables
Gross
$
3,780

 
$
1,649

 
$
3,136

 
$
8,565

Unearned income
(273
)
 

 

 
(273
)
Allowance for credit loss
(238
)
 
(86
)
 
(20
)
 
(344
)
Total, net
$
3,269

 
$
1,563

 
$
3,116

 
$
7,948

Reported as:
 
 
 
 
 
 
 
Current
$
1,418

 
$
898

 
$
1,721

 
$
4,037

Noncurrent
1,851

 
665

 
1,395

 
3,911

Total, net
$
3,269

 
$
1,563

 
$
3,116

 
$
7,948

As of October 26, 2013 and July 27, 2013, the deferred service revenue related to the financed service contracts and other was $1,881 million and $2,036 million, respectively.
Contractual maturities of the gross lease receivables at October 26, 2013 are summarized as follows (in millions):
Fiscal Year
 
Amount
2014 (remaining nine months)
 
$
1,338

2015
 
1,251

2016
 
746

2017
 
364

2018
 
109

Thereafter
 
5

Total
 
$
3,813


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 26, 2013 and July 27, 2013 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
 
 
 
 
 
 
October 26, 2013
1 to 4
 
5 to 6
 
7 and Higher
 
Total
 
Residual Value
 
Gross Receivables,
Net of Unearned Income
Lease receivables
$
1,695

 
$
1,498

 
$
104

 
$
3,297

 
$
252

 
$
3,549

Loan receivables
981

 
777

 
50

 
1,808

 

 
1,808

Financed service contracts and other
1,792

 
1,110

 
116

 
3,018

 

 
3,018

Total
$
4,468

 
$
3,385

 
$
270

 
$
8,123

 
$
252

 
$
8,375

 
INTERNAL CREDIT RISK RATING
 
 
 
 
 
 
July 27, 2013
1 to 4
 
5 to 6
 
7 and Higher
 
Total
 
Residual Value
 
Gross Receivables,
Net of Unearned Income
Lease receivables
$
1,681

 
$
1,482

 
$
93

 
$
3,256

 
$
251

 
$
3,507

Loan receivables
842

 
777

 
30

 
1,649

 

 
1,649

Financed service contracts and other
1,876

 
1,141

 
119

 
3,136

 

 
3,136

Total
$
4,399

 
$
3,400

 
$
242

 
$
8,041

 
$
251

 
$
8,292

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, which consist of the following: 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.
In circumstances when collectibility 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 26, 2013 and July 27, 2013 were $2,289 million and $2,453 million, respectively, and they were associated with financing receivables (net of unearned income) of $8,375 million and $8,292 million as of their respective period ends. 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 26, 2013 and July 27, 2013 (in millions):
 
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
October 26, 2013
31-60
 
61-90 
 
91+
 
Total Past Due
 
Current
 
Gross Receivables,
Net of Unearned Income
 
Nonaccrual Financing Receivables
 
Impaired Financing Receivables
Lease receivables
$
135

 
$
60

 
$
148

 
$
343

 
$
3,206

 
$
3,549

 
$
28

 
$
24

Loan receivables
28

 
2

 
16

 
46

 
1,762

 
1,808

 
7

 
17

Financed service contracts and other
85

 
41

 
277

 
403

 
2,615

 
3,018

 
12

 
11

Total
$
248

 
$
103

 
$
441

 
$
792

 
$
7,583

 
$
8,375

 
$
47

 
$
52


15

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

 
DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 27, 2013
31-60
 
61-90 
 
91+
 
Total Past Due
 
Current
 
Gross Receivables,
Net of Unearned Income
 
Nonaccrual Financing Receivables
 
Impaired Financing Receivables
Lease receivables
$
85

 
$
48

 
$
124

 
$
257

 
$
3,250

 
$
3,507

 
$
27

 
$
22

Loan receivables
6

 
3

 
11

 
20

 
1,629

 
1,649

 
11

 
9

Financed service contracts and other
75

 
48

 
392

 
515

 
2,621

 
3,136

 
18

 
11

Total
$
166

 
$
99

 
$
527

 
$
792

 
$
7,500

 
$
8,292

 
$
56

 
$
42

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 are presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The preceding aging tables exclude pending adjustments on billed tax assessment in certain international markets. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $320 million and $406 million as of October 26, 2013 and July 27, 2013, respectively.
As of October 26, 2013, the Company had financing receivables of $92 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 $87 million as of July 27, 2013. 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
Three Months Ended October 26, 2013
Lease Receivables
 
Loan Receivables
 
Financed Service Contracts and Other
 
Total
Allowance for credit loss as of July 27, 2013
$
238

 
$
86

 
$
20

 
$
344

Provisions
(3
)
 
6

 

 
3

Foreign exchange and other
2

 
1

 

 
3

Allowance for credit loss as of October 26, 2013
$
237

 
$
93

 
$
20

 
$
350

Gross receivables as of October 26, 2013, net of unearned income
$
3,549

 
$
1,808

 
$
3,018

 
$
8,375

 
CREDIT LOSS ALLOWANCES
Three Months Ended October 27, 2012
Lease Receivables
 
Loan Receivables
 
Financed Service Contracts and Other
 
Total
Allowance for credit loss as of July 28, 2012
$
247

 
$
122

 
$
11

 
$
380

Provisions
(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

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. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.

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. These balances, as of October 26, 2013 and July 27, 2013, are presented under “(b) Credit Quality of Financing Receivables” above.
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 $6.3 billion and $5.6 billion for the three months ended October 26, 2013 and October 27, 2012, respectively. The balance of the channel partner financing subject to guarantees was $1.4 billion as of each October 26, 2013 and July 27, 2013.
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 $25 million and $44 million for the three months ended October 26, 2013 and October 27, 2012, respectively.
Financing Guarantee Summary  The aggregate amounts of financing guarantees outstanding at October 26, 2013 and July 27, 2013, 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 26,
2013
 
July 27,
2013
Maximum potential future payments relating to financing guarantees:
 
 
 
Channel partner
$
483

 
$
438

End user
223

 
237

Total
$
706

 
$
675

Deferred revenue associated with financing guarantees:
 
 
 
Channel partner
$
(232
)
 
$
(225
)
End user
(189
)
 
(191
)
Total
$
(421
)
 
$
(416
)
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue
$
285

 
$
259



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 26, 2013
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
28,603

 
$
37

 
$
(2
)
 
$
28,638

U.S. government agency securities
2,394

 
5

 

 
2,399

Non-U.S. government and agency securities
907

 
3

 
(1
)
 
909

Corporate debt securities
7,974

 
73

 
(21
)
 
8,026

U.S. agency mortgage-backed securities
456

 
5

 

 
461

Total fixed income securities
40,334

 
123

 
(24
)
 
40,433

Publicly traded equity securities
1,820

 
696

 
(2
)
 
2,514

Total
$
42,154

 
$
819

 
$
(26
)
 
$
42,947

July 27, 2013
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
27,814

 
$
22

 
$
(13
)
 
$
27,823

U.S. government agency securities
3,083

 
7

 
(1
)
 
3,089

Non-U.S. government and agency securities
1,094

 
3

 
(2
)
 
1,095

Corporate debt securities
7,876

 
55

 
(50
)
 
7,881

Total fixed income securities
39,867

 
87

 
(66
)
 
39,888

Publicly traded equity securities
2,063

 
738

 
(4
)
 
2,797

Total
$
41,930

 
$
825

 
$
(70
)
 
$
42,685

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 26,
2013
 
October 27,
2012
Gross realized gains
 
$
95

 
$
63

Gross realized losses
 
(12
)
 
(36
)
Total
 
$
83

 
$
27

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 26,
2013
 
October 27,
2012
Net gains (losses) on investments in publicly traded equity securities
 
$
75

 
$
10

Net gains on investments in fixed income securities
 
8

 
17

Total
 
$
83

 
$
27

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 26, 2013 and July 27, 2013 (in millions):
 
UNREALIZED LOSSES LESS THAN 12 MONTHS
 
UNREALIZED LOSSES 12 MONTHS OR GREATER
 
TOTAL
October 26, 2013
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities 
$
3,303

 
$
(2
)
 
$
8

 
$

 
$
3,311

 
$
(2
)
U.S. government agency securities
201

 

 

 

 
201

 

Non-U.S. government and agency securities
208

 
(1
)
 
2

 

 
210

 
(1
)
Corporate debt securities
2,357

 
(21
)
 
13

 

 
2,370

 
(21
)
U.S. agency mortgage-backed securities
32

 

 

 

 
32

 

Total fixed income securities
6,101

 
(24
)
 
23

 

 
6,124

 
(24
)
Publicly traded equity securities
45

 
(2
)
 

 

 
45

 
(2
)
Total
$
6,146

 
$
(26
)
 
$
23

 
$

 
$
6,169

 
$
(26
)

 
UNREALIZED LOSSES LESS THAN 12 MONTHS
 
UNREALIZED LOSSES 12 MONTHS OR GREATER
 
TOTAL
July 27, 2013
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities 
$
7,865

 
$
(13
)
 
$

 
$

 
$
7,865

 
$
(13
)
U.S. government agency securities
294

 
(1
)
 

 

 
294

 
(1
)
Non-U.S. government and agency securities
432

 
(2
)
 

 

 
432

 
(2
)
Corporate debt securities
3,704

 
(50
)
 
4

 

 
3,708

 
(50
)
Total fixed income securities
12,295

 
(66
)
 
4

 

 
12,299

 
(66
)
Publicly traded equity securities
278

 
(4
)
 

 

 
278

 
(4
)
Total
$
12,573

 
$
(70
)
 
$
4

 
$

 
$
12,577

 
$
(70
)
As of October 26, 2013, 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 26, 2013, 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 26, 2013.
The Company has evaluated its publicly traded equity securities as of October 26, 2013 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.

19

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

(c)
Maturities of Fixed Income Securities
The following table summarizes the maturities of the Company’s fixed income securities at October 26, 2013 (in millions): 
 
Amortized Cost
 
Fair Value
Less than 1 year
$
15,286

 
$
15,297

Due in 1 to 2 years
12,310

 
12,346

Due in 2 to 5 years
12,160

 
12,204

Due after 5 years
578

 
586

Total
$
40,334

 
$
40,433


Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
(d)
Securities Lending
The Company periodically engages in securities lending activities with certain of its available-for-sale investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for the three months ended October 26, 2013 and October 27, 2012 was $0.6 billion and $0.8 billion, respectively. The Company requires collateral equal to at least 102% of the fair market value of the loaned security and that the collateral be 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 26, 2013 and July 27, 2013, 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 26, 2013 and July 27, 2013 were as follows (in millions):
 
OCTOBER 26, 2013
FAIR VALUE MEASUREMENTS
 
JULY 27, 2013
FAIR VALUE MEASUREMENTS
 
Level 1
 
Level 2
 
Total Balance
 
Level 1
 
Level 2
 
Total Balance
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
3,145

 
$

 
$
3,145

 
$
6,045

 
$

 
$
6,045

Available-for-sale investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities

 
28,638