10-Q 1 a10q-q315.htm 10-Q 10Q- Q3'15
 
 
 
 
 
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 April 25, 2015

OR
o
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  o  
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  o  
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
(Do not check if a smaller reporting company)
  
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 May 15, 2015: 5,085,888,730
____________________________________ 


1


Cisco Systems, Inc.
Form 10-Q for the Quarter Ended April 25, 2015
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 I. FINANCIAL INFORMATION 
Item 1.
Financial Statements (Unaudited)
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
 
April 25,
2015
 
July 26,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,870

 
$
6,726

Investments
50,549

 
45,348

Accounts receivable, net of allowance for doubtful accounts of $290 at April 25, 2015 and $265 at July 26, 2014
4,889

 
5,157

Inventories
1,760

 
1,591

Financing receivables, net
4,248

 
4,153

Deferred tax assets
2,539

 
2,808

Other current assets
1,476

 
1,331

Total current assets
69,331

 
67,114

Property and equipment, net
3,276

 
3,252

Financing receivables, net
3,506

 
3,918

Goodwill
24,398

 
24,239

Purchased intangible assets, net
2,626

 
3,280

Other assets
3,075

 
3,331

TOTAL ASSETS
$
106,212

 
$
105,134

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
4,418

 
$
508

Accounts payable
1,118

 
1,032

Income taxes payable
80

 
159

Accrued compensation
2,726

 
3,181

Deferred revenue
9,371

 
9,478

Other current liabilities
5,532

 
5,451

Total current liabilities
23,245

 
19,809

Long-term debt
16,586

 
20,401

Income taxes payable
1,294

 
1,851

Deferred revenue
4,810

 
4,664

Other long-term liabilities
1,444

 
1,748

Total liabilities
47,379

 
48,473

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; 5,093 and 5,107 shares issued and outstanding at April 25, 2015 and July 26, 2014, respectively
43,133

 
41,884

Retained earnings
15,503

 
14,093

Accumulated other comprehensive income
187

 
677

Total Cisco shareholders’ equity
58,823

 
56,654

Noncontrolling interests
10

 
7

Total equity
58,833

 
56,661

TOTAL LIABILITIES AND EQUITY
$
106,212

 
$
105,134

See Notes to Consolidated Financial Statements.

3


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
April 25,
2015
 
April 26,
2014
 
April 25,
2015
 
April 26,
2014
REVENUE:
 
 
 
 
 
 
 
Product
$
9,326

 
$
8,820

 
$
27,839

 
$
26,640

Service
2,811

 
2,725

 
8,479

 
8,145

Total revenue
12,137


11,545


36,318


34,785

COST OF SALES:



 
 
 
 
Product
3,584

 
3,595

 
11,309

 
11,665

Service
1,028

 
944

 
3,061

 
2,756

Total cost of sales
4,612


4,539


14,370


14,421

GROSS MARGIN
7,525

 
7,006

 
21,948

 
20,364

OPERATING EXPENSES:



 
 
 
 
Research and development
1,547

 
1,565

 
4,659

 
4,701

Sales and marketing
2,449

 
2,342

 
7,272

 
7,030

General and administrative
510

 
460

 
1,504

 
1,426

Amortization of purchased intangible assets
70

 
71

 
213

 
207

Restructuring and other charges
24

 
26

 
411

 
336

Total operating expenses
4,600


4,464


14,059


13,700

OPERATING INCOME
2,925


2,542


7,889


6,664

Interest income
190

 
170

 
558

 
508

Interest expense
(139
)
 
(146
)
 
(417
)
 
(422
)
Other income (loss), net
59

 
76

 
238

 
187

Interest and other income (loss), net
110


100


379


273

INCOME BEFORE PROVISION FOR INCOME TAXES
3,035


2,642


8,268


6,937

Provision for income taxes
598

 
461

 
1,606

 
1,331

NET INCOME
$
2,437


$
2,181


$
6,662


$
5,606




 


 
 
 
 
Net income per share:


 


 
 
 
 
Basic
$
0.48


$
0.42


$
1.30


$
1.06

Diluted
$
0.47


$
0.42


$
1.29


$
1.06

Shares used in per-share calculation:





 
 
 
 
Basic
5,102

 
5,143

 
5,110

 
5,271

Diluted
5,148

 
5,180

 
5,154

 
5,311







 
 
 
 
Cash dividends declared per common share
$
0.21

 
$
0.19

 
$
0.59

 
$
0.53

See Notes to Consolidated Financial Statements.

4


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
April 25,
2015
 
April 26,
2014
 
April 25,
2015
 
April 26,
2014
Net income
$
2,437

 
$
2,181

 
$
6,662

 
$
5,606

Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains, net of tax benefit (expense) of $(57) and $(34) for the three and nine months ended April 25, 2015, respectively, and $(8) and $(131) for the corresponding periods of fiscal 2014, respectively
72

 
(8
)
 
80

 
209

Net gains reclassified into earnings, net of tax expense of $16 and $42 for the three and nine months ended April 25, 2015, respectively, and $26 and $88 for the corresponding periods of fiscal 2014, respectively
(28
)
 
(43
)
 
(78
)
 
(146
)

44

 
(51
)

2


63

Cash flow hedging instruments:
 
 
 
 
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $0 and $3 for the three and nine months ended April 25, 2015, respectively, and $(1) and $(2) for the corresponding periods of fiscal 2014, respectively
(32
)
 
13

 
(160
)
 
44

Net (gains) losses reclassified into earnings
64

 
(16
)
 
94

 
(44
)

32

 
(3
)

(66
)


Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $14 and $50 for the three and nine months ended April 25, 2015, respectively, and $(5) for each of the corresponding periods of fiscal 2014
(80
)
 
42

 
(423
)
 
27

Other comprehensive income (loss)
(4
)
 
(12
)

(487
)

90

Comprehensive income
2,433

 
2,169


6,175


5,696

Comprehensive (income) loss attributable to noncontrolling interests
5

 
6

 
(3
)
 
(1
)
Comprehensive income attributable to Cisco Systems, Inc.
$
2,438

 
$
2,175


$
6,172


$
5,695

See Notes to Consolidated Financial Statements.


5


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Nine Months Ended

April 25,
2015
 
April 26,
2014
Cash flows from operating activities:
 
 
 
Net income
$
6,662

 
$
5,606

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation, amortization, and other
1,791

 
1,811

Share-based compensation expense
1,044

 
1,009

Provision for receivables
82

 
48

Deferred income taxes
438

 
(181
)
Excess tax benefits from share-based compensation
(102
)
 
(84
)
(Gains) losses on investments and other, net
(231
)
 
(228
)
Change in operating assets and liabilities, net of effects of acquisitions:

 

Accounts receivable
97

 
1,064

Inventories
(235
)
 
(50
)
Financing receivables
36

 
332

Other assets
(341
)
 
180

Accounts payable
101

 
(2
)
Income taxes, net
(511
)
 
(356
)
Accrued compensation
(324
)
 
(411
)
Deferred revenue
217

 
(309
)
Other liabilities
(310
)
 
291

Net cash provided by operating activities
8,414

 
8,720

Cash flows from investing activities:
 
 
 
Purchases of investments
(30,617
)
 
(27,884
)
Proceeds from sales of investments
13,890

 
14,490

Proceeds from maturities of investments
11,632

 
12,048

Acquisition of businesses, net of cash and cash equivalents acquired
(238
)
 
(2,784
)
Purchases of investments in privately held companies
(155
)
 
(315
)
Return of investments in privately held companies
274

 
119

Acquisition of property and equipment
(907
)
 
(950
)
Proceeds from sales of property and equipment
8

 
168

Other
(115
)
 
(30
)
Net cash used in investing activities
(6,228
)
 
(5,138
)
Cash flows from financing activities:
 
 
 
Issuances of common stock
1,584

 
1,053

Repurchases of common stockrepurchase program
(3,325
)
 
(7,965
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(415
)
 
(345
)
Short-term borrowings, original maturities less than 90 days, net
496

 
(2
)
Issuances of debt

 
8,001

Repayments of debt
(507
)
 
(3,274
)
Excess tax benefits from share-based compensation
102

 
84

Dividends paid
(3,017
)
 
(2,784
)
Other
40

 
(34
)
Net cash used in financing activities
(5,042
)
 
(5,266
)
Net decrease in cash and cash equivalents
(2,856
)
 
(1,684
)
Cash and cash equivalents, beginning of period
6,726

 
7,925

Cash and cash equivalents, end of period
$
3,870

 
$
6,241

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
646


$
561

Cash paid for income taxes, net
$
1,680


$
1,868

See Notes to Consolidated Financial Statements.

6


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per-share amounts)
(Unaudited)
Nine Months Ended April 25, 2015
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 26, 2014
5,107

 
$
41,884

 
$
14,093

 
$
677

 
$
56,654

 
$
7

 
$
56,661

Net income
 
 
 
 
6,662

 
 
 
6,662

 
 
 
6,662

Other comprehensive income (loss)
 
 
 
 
 
 
(490
)
 
(490
)
 
3

 
(487
)
Issuance of common stock
123

 
1,584

 
 
 
 
 
1,584

 
 
 
1,584

Repurchase of common stock
(120
)
 
(994
)
 
(2,235
)
 
 
 
(3,229
)
 
 
 
(3,229
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(17
)
 
(415
)
 
 
 
 
 
(415
)
 
 
 
(415
)
Cash dividends declared ($0.59 per common share)
 
 
 
 
(3,017
)
 
 
 
(3,017
)
 
 
 
(3,017
)
Tax effects from employee stock incentive plans
 
 
27

 
 
 
 
 
27

 
 
 
27

Share-based compensation expense
 
 
1,044

 
 
 
 
 
1,044

 
 
 
1,044

Purchase acquisitions and other
 
 
3

 
 
 
 
 
3

 
 
 
3

BALANCE AT APRIL 25, 2015
5,093

 
$
43,133

 
$
15,503

 
$
187

 
$
58,823

 
$
10

 
$
58,833


Nine Months Ended April 26, 2014
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
 
 
 
 
5,606

 
 
 
5,606

 
 
 
5,606

Other comprehensive income (loss)
 
 
 
 
 
 
89

 
89

 
1

 
90

Issuance of common stock
100

 
1,053

 
 
 
 
 
1,053

 
 
 
1,053

Repurchase of common stock
(359
)
 
(2,837
)
 
(5,188
)
 
 
 
(8,025
)
 
 
 
(8,025
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(14
)
 
(345
)
 
 
 
 
 
(345
)
 
 
 
(345
)
Cash dividends declared ($0.53 per common share)
 
 
 
 
(2,784
)
 
 
 
(2,784
)
 
 
 
(2,784
)
Tax effects from employee stock incentive plans
 
 
16

 
 
 
 
 
16

 
 
 
16

Share-based compensation expense
 
 
1,009

 
 
 
 
 
1,009

 
 
 
1,009

Purchase acquisitions and other
 
 
48

 
 
 
 
 
48

 
 
 
48

BALANCE AT APRIL 26, 2014
5,116

 
$
41,241

 
$
13,849

 
$
697

 
$
55,787

 
$
9

 
$
55,796


Supplemental Information
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of April 25, 2015, the Company’s Board of Directors had authorized an aggregate repurchase of up to $97 billion 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
4,408

 
$
22,318

 
$
69,356

 
$
91,674

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 2015 and fiscal 2014 are each 52-week fiscal years. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All 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 April 25, 2015 and for the three and nine months ended April 25, 2015 and April 26, 2014 has been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. 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 26, 2014 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 26, 2014.
The Company consolidates its investments in a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as this is a variable interest entity 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 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 consolidated balance sheet as of April 25, 2015; the results of operations and statements of comprehensive income for the three and nine months ended April 25, 2015 and April 26, 2014; and the statements of cash flows and equity for the nine months ended April 25, 2015 and April 26, 2014, as applicable, have been made. The results of operations for the three and nine months ended April 25, 2015 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Certain reclassifications have been made to the amounts in prior periods 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 March 2013, the Financial Accounting Standards Board (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 sells either 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 became effective for the Company beginning in the first quarter of fiscal 2015. The application of this accounting standard update did not have any impact to the Company's 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, an 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 became effective for the Company beginning in the first quarter of fiscal 2015 and applied prospectively. The application of this accounting standard update did not have a material impact to the Company's Consolidated Financial Statements.
In April 2014, the FASB issued an accounting standard update that changes the criteria for reporting discontinued operations. This accounting standard update raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. The Company adopted this accounting standard update in the second quarter of fiscal 2015, and it did not have any impact upon adoption.

8

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

(b)
Recent Accounting Standards or Updates Not Yet Effective
In May 2014, the FASB issued an accounting standard update related to revenue from contracts with customers, which will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.  Early adoption is not permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
In February 2015, the FASB issued an accounting standard update that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

In April 2015, the FASB issued an accounting standard update requiring debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt, consistent with debt discounts. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2017 on a retrospective basis, with early adoption permitted. The accounting standard update is a change in balance sheet presentation only and is not expected to have a material impact on the Company's Consolidated Financial Statements.


3.
Business Combinations
The Company completed four business combinations during the nine months ended April 25, 2015. 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
Metacloud, Inc.
$
149

 
$
(7
)
 
$
29

 
$
127

All others (three in total)
93

 
(10
)
 
46

 
57

Total
$
242

 
$
(17
)
 
$
75

 
$
184

On September 29, 2014, the Company completed its acquisition of Metacloud, Inc. ("Metacloud"), a provider of private clouds for global organizations. With its acquisition of Metacloud, the Company aims to advance its Intercloud strategy to deliver a globally distributed, highly secure cloud platform capable of meeting customer demands. Revenue from the Metacloud acquisition has been included in the Company's Service category.
The total purchase consideration related to the Company’s business combinations completed during the nine months ended April 25, 2015 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these business combinations was approximately $5 million. Total transaction costs related to the Company’s business combination activities were $5 million and $7 million for the nine months ended April 25, 2015 and April 26, 2014, respectively. These transaction costs were expensed as incurred in general and administrative expenses ("G&A") 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, that 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.
The goodwill generated from the Company’s business combinations completed during the nine months ended April 25, 2015 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 nine months ended April 25, 2015 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.

9

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

4.
Goodwill and Purchased Intangible Assets
(a)
Goodwill
The following table presents the goodwill allocated to the Company’s reportable segments as of and during the nine months ended April 25, 2015 (in millions):
 
Balance at July 26, 2014
 
Acquisitions
 
Other
 
Balance at April 25, 2015
Americas
$
15,080

 
$
99

 
$
(13
)
 
$
15,166

EMEA
5,715

 
67

 
(7
)
 
5,775

APJC
3,444

 
18

 
(5
)
 
3,457

Total
$
24,239

 
$
184

 
$
(25
)
 
$
24,398

The column entitled “Other” primarily includes purchase accounting adjustments.

(b)
Purchased Intangible Assets
The following table presents details of the Company’s intangible assets acquired through business combinations completed during the nine months ended April 25, 2015 (in millions, except years):
 
FINITE LIVES
 
INDEFINITE
LIVES
 
TOTAL
 
TECHNOLOGY
 
CUSTOMER
RELATIONSHIPS
 
IPR&D
 
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Amount
 
Amount
Metacloud, Inc.
3.0
 
$
24

 
5.0
 
$
3

 
$
2

 
$
29

All others (three in total)
4.7
 
31

 
8.1
 
11

 
4

 
46

Total
 
 
$
55

 
 
 
$
14

 
$
6

 
$
75

The following tables present details of the Company’s purchased intangible assets (in millions): 
April 25, 2015
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,456

 
$
(1,742
)
 
$
1,714

Customer relationships
 
1,709

 
(915
)
 
794

Other
 
51

 
(22
)
 
29

Total purchased intangible assets with finite lives
 
5,216

 
(2,679
)
 
2,537

In-process research and development, with indefinite lives
 
89

 

 
89

Total
 
$
5,305

 
$
(2,679
)
 
$
2,626

 
July 26, 2014
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
4,100

 
$
(1,976
)
 
$
2,124

Customer relationships
 
1,706

 
(720
)
 
986

Other
 
51

 
(13
)
 
38

Total purchased intangible assets with finite lives
 
5,857

 
(2,709
)
 
3,148

In-process research and development, with indefinite lives
 
132

 

 
132

Total
 
$
5,989

 
$
(2,709
)
 
$
3,280

Purchased intangible assets include intangible assets acquired through business combinations as well as through direct purchases or licenses.

10

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

The following table presents the amortization of purchased intangible assets (in millions):
 
Three Months Ended
 
Nine Months Ended
 
April 25,
2015
 
April 26,
2014
 
April 25,
2015
 
April 26,
2014
Amortization of purchased intangible assets:
 
 
 
 
 
 
 
Cost of sales
$
187

 
$
190

 
$
618

 
$
553

Operating expenses
70

 
71

 
213

 
207

Total
$
257

 
$
261

 
$
831

 
$
760

Amortization of purchased intangible assets for the three and nine months ended April 25, 2015 included impairment charges of approximately $1 million and $57 million, respectively. The impairment was primarily due to reductions in expected future cash flows related to certain of the Company's technology intangible assets and was recorded as amortization of purchased intangible assets. There were no impairment charges related to purchased intangible assets during the three and nine months ended April 26, 2014.
The estimated future amortization expense of purchased intangible assets with finite lives as of April 25, 2015 is as follows (in millions):
Fiscal Year
Amount
2015 (remaining three months)
$
223

2016
763

2017
590

2018
448

2019
345

Thereafter
168

Total
$
2,537


5.
Restructuring and Other Charges
Fiscal 2015 Plan
In connection with a restructuring action announced in August 2014 ("Fiscal 2015 Plan"), the Company incurred charges of $24 million and $411 million for the three and nine months ended April 25, 2015, respectively. The Company estimates that it will recognize aggregate pre-tax charges pursuant to the restructuring action in an amount not expected to exceed $600 million, consisting of severance and other one-time termination benefits and other associated costs. These charges are primarily cash-based and the Company expects the remaining amount to be recognized during the remainder of fiscal 2015.
Fiscal 2014 Plan
In connection with a restructuring action announced in August 2013 ("Fiscal 2014 Plan"), the Company incurred cumulative charges of approximately $418 million, of which $26 million and $336 million were incurred during the three and nine months ended April 26, 2014, respectively. The Company completed the Fiscal 2014 Plan at the end of fiscal 2014.
The following table summarizes the activities related to the restructuring and other charges as discussed above (in millions):
 
 
Fiscal 2014 and Prior Plans
 
Fiscal 2015 Plan
 
 
 
 
Employee
Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 26, 2014
 
$
40

 
$
29

 
$

 
$

 
$
69

Gross charges in fiscal 2015
 

 

 
405

 
6

 
411

Cash payments
 
(26
)
 
(10
)
 
(381
)
 
(3
)
 
(420
)
Non-cash items
 

 

 
(2
)
 
4

 
2

Liability as of April 25, 2015
 
$
14

 
$
19

 
$
22

 
$
7

 
$
62



11

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):
 
 
April 25,
2015
 
July 26,
2014
Inventories:
 
 
 
 
Raw materials
 
$
264

 
$
77

Work in process
 
2

 
5

Finished goods:
 
 
 

Distributor inventory and deferred cost of sales
 
635

 
595

Manufactured finished goods
 
547

 
606

Total finished goods
 
1,182

 
1,201

Service-related spares
 
268

 
273

Demonstration systems
 
44

 
35

Total
 
$
1,760

 
$
1,591

Property and equipment, net:
 
 
 
 
Gross property and equipment:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,465

 
$
4,468

Computer equipment and related software
 
1,344

 
1,425

Production, engineering, and other equipment
 
5,795

 
5,756

Operating lease assets
 
359

 
362

Furniture and fixtures
 
498

 
509

Total gross property and equipment
 
12,461

 
12,520

Less: accumulated depreciation and amortization
 
(9,185
)
 
(9,268
)
Total
 
$
3,276

 
$
3,252

 Other assets:
 
 
 
 
Deferred tax assets
 
$
1,437

 
$
1,700

Investments in privately held companies
 
873

 
899

Other
 
765

 
732

Total
 
$
3,075

 
$
3,331

Deferred revenue:
 
 
 
 
Service
 
$
9,236

 
$
9,640

Product:
 

 
 
Unrecognized revenue on product shipments and other deferred revenue
 
4,258

 
3,924

Cash receipts related to unrecognized revenue from two-tier distributors
 
687

 
578

Total product deferred revenue
 
4,945

 
4,502

Total
 
$
14,181

 
$
14,142

Reported as:
 

 
 
Current
 
$
9,371

 
$
9,478

Noncurrent
 
4,810

 
4,664

Total
 
$
14,181

 
$
14,142




12

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

7.
Financing Receivables and Operating Leases
(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):
April 25, 2015
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Gross
$
3,276

 
$
1,720

 
$
3,081

 
$
8,077

Residual value
226

 

 

 
226

Unearned income
(190
)
 

 

 
(190
)
Allowance for credit loss
(242
)
 
(80
)
 
(37
)
 
(359
)
Total, net
$
3,070

 
$
1,640

 
$
3,044

 
$
7,754

Reported as:
 
 
 
 
 
 
 
Current
$
1,424

 
$
820

 
$
2,004

 
$
4,248

Noncurrent
1,646

 
820

 
1,040

 
3,506

Total, net
$
3,070

 
$
1,640

 
$
3,044

 
$
7,754

July 26, 2014
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Gross
$
3,532

 
$
1,683

 
$
3,210

 
$
8,425

Residual value
233

 

 

 
233

Unearned income
(238
)
 

 

 
(238
)
Allowance for credit loss
(233
)
 
(98
)
 
(18
)
 
(349
)
Total, net
$
3,294

 
$
1,585

 
$
3,192

 
$
8,071

Reported as:
 
 
 
 
 
 
 
Current
$
1,476

 
$
728

 
$
1,949

 
$
4,153

Noncurrent
1,818

 
857

 
1,243

 
3,918

Total, net
$
3,294

 
$
1,585

 
$
3,192

 
$
8,071

As of April 25, 2015 and July 26, 2014, the deferred service revenue related to "Financed Service Contracts and Other" was $1,520 million and $1,843 million, respectively.
Future minimum lease payments at April 25, 2015 are summarized as follows (in millions):
Fiscal Year
Amount
2015 (remaining three months)
$
498

2016
1,349

2017
857

2018
406

2019
146

Thereafter
20

Total
$
3,276

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

13

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

(b)
Credit Quality of Financing Receivables
Gross receivables less unearned income categorized by the Company’s internal credit risk rating as of April 25, 2015 and July 26, 2014 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
April 25, 2015
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,590

 
$
1,371

 
$
125

 
$
3,086

Loan receivables
755

 
816

 
149

 
1,720

Financed service contracts and other
1,650

 
1,371

 
60

 
3,081

Total
$
3,995

 
$
3,558

 
$
334

 
$
7,887

 
INTERNAL CREDIT RISK RATING
July 26, 2014
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,615

 
$
1,538

 
$
141

 
$
3,294

Loan receivables
953

 
593

 
137

 
1,683

Financed service contracts and other
1,744

 
1,367

 
99

 
3,210

Total
$
4,312

 
$
3,498

 
$
377

 
$
8,187

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 April 25, 2015 and July 26, 2014 were $1,900 million and $2,220 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,113 million and $8,420 million as of their respective period ends.
The following tables present the aging analysis of gross receivables less unearned income as of April 25, 2015 and July 26, 2014 (in millions):
 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
April 25, 2015
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
102

 
$
48

 
$
138

 
$
288

 
$
2,798

 
$
3,086

 
$
38

 
$
38

Loan receivables
12

 
15

 
56

 
83

 
1,637

 
1,720

 
29

 
29

Financed service contracts and other
99

 
88

 
309

 
496

 
2,585

 
3,081

 
32

 
12

Total
$
213

 
$
151

 
$
503

 
$
867

 
$
7,020

 
$
7,887

 
$
99

 
$
79

 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 26, 2014
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
63

 
$
46

 
$
202

 
$
311

 
$
2,983

 
$
3,294

 
$
48

 
$
41

Loan receivables
3

 
21

 
27

 
51

 
1,632

 
1,683

 
19

 
19

Financed service contracts and other
268

 
230

 
220

 
718

 
2,492

 
3,210

 
12

 
9

Total
$
334

 
$
297

 
$
449

 
$
1,080

 
$
7,107

 
$
8,187

 
$
79

 
$
69

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

14

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

of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $361 million and $334 million as of April 25, 2015 and July 26, 2014, respectively.
As of April 25, 2015, the Company had financing receivables of $75 million, net of unbilled or current receivables from the same contract, that were in the category of 91 days plus past due but remained on accrual status. Such balance was $78 million as of July 26, 2014. 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 April 25, 2015
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of January 24, 2015
$
250

 
$
85

 
$
40

 
$
375

Provisions
(4
)
 
(5
)
 
(2
)
 
(11
)
Recoveries (write-offs), net
(1
)
 

 

 
(1
)
Foreign exchange and other
(3
)
 

 
(1
)
 
(4
)
Allowance for credit loss as of April 25, 2015
$
242

 
$
80

 
$
37

 
$
359

Financing receivables as of April 25, 2015 (1)
$
3,312

 
$
1,720

 
$
3,081

 
$
8,113

 
CREDIT LOSS ALLOWANCES
Nine Months Ended April 25, 2015
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 26, 2014
$
233

 
$
98

 
$
18

 
$
349

Provisions
25

 
(15
)
 
21

 
31

Recoveries (write-offs), net
(6
)
 
1

 

 
(5
)
Foreign exchange and other
(10
)
 
(4
)
 
(2
)
 
(16
)
Allowance for credit loss as of April 25, 2015
$
242

 
$
80

 
$
37

 
$
359

 
CREDIT LOSS ALLOWANCES
Three Months Ended April 26, 2014
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of January 25, 2014
$
254

 
$
98

 
$
22

 
$
374

Provisions
(6
)
 
(10
)
 
(2
)
 
(18
)
Recoveries (write-offs), net
(1
)
 
4

 
(1
)
 
2

Foreign exchange and other
2

 

 

 
2

Allowance for credit loss as of April 26, 2014
$
249

 
$
92

 
$
19

 
$
360

Financing receivables as of April 26, 2014 (1)
$
3,537

 
$
1,621

 
$
2,810

 
$
7,968

 
CREDIT LOSS ALLOWANCES
Nine Months Ended April 26, 2014
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 27, 2013
$
238

 
$
86

 
$
20

 
$
344

Provisions
9

 
5

 

 
14

Recoveries (write-offs), net

 
4

 
(1
)
 
3

Foreign exchange and other
2

 
(3
)
 

 
(1
)
Allowance for credit loss as of April 26, 2014
$
249

 
$
92

 
$
19

 
$
360

(1) Total financing receivables before allowance for credit loss.
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

15

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

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.
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 April 25, 2015 and July 26, 2014, 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)
Operating Leases
The Company provides financing of certain equipment through operating leases, and the amounts are included in property and equipment in the Consolidated Balance Sheets. Amounts relating to equipment on operating lease assets and the associated accumulated depreciation are summarized as follows (in millions):
 
April 25,
2015
 
July 26,
2014
Operating lease assets
$
359

 
$
362

Accumulated depreciation
(195
)
 
(202
)
Operating lease assets, net
$
164

 
$
160

Minimum future rentals on noncancelable operating leases at April 25, 2015 were approximately $0.1 billion for the remaining three months of fiscal 2015, $0.2 billion for fiscal 2016, and less than $0.1 billion per year for each of fiscal 2017 through fiscal 2019.

8.
Investments
(a)
Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
April 25, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
29,364

 
$
59

 
$
(1
)
 
$
29,422

U.S. government agency securities
3,257

 
6

 
(1
)
 
3,262

Non-U.S. government and agency securities
1,184

 
2

 

 
1,186

Corporate debt securities
13,321

 
86

 
(13
)
 
13,394

U.S. agency mortgage-backed securities
1,346

 
16

 

 
1,362

Total fixed income securities
48,472

 
169

 
(15
)
 
48,626

Publicly traded equity securities
1,328

 
598

 
(3
)
 
1,923

Total
$
49,800

 
$
767

 
$
(18
)
 
$
50,549


16

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

July 26, 2014
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
31,717

 
$
29

 
$
(12
)
 
$
31,734

U.S. government agency securities
1,062

 
1

 

 
1,063

Non-U.S. government and agency securities
860

 
2

 
(1
)
 
861

Corporate debt securities
9,092

 
74

 
(7
)
 
9,159

U.S. agency mortgage-backed securities
574

 
5

 

 
579

Total fixed income securities
43,305

 
111

 
(20
)
 
43,396

Publicly traded equity securities
1,314

 
648

 
(10
)
 
1,952

Total
$
44,619

 
$
759

 
$
(30
)
 
$
45,348

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
 
Nine Months Ended
 
April 25,
2015
 
April 26,
2014
 
April 25,
2015
 
April 26,
2014
Gross realized gains
$
55

 
$
75

 
$
168

 
$
267

Gross realized losses
(11
)
 
(6
)
 
(48
)
 
(33
)
Total
$
44

 
$
69

 
$
120

 
$
234

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
 
Nine Months Ended
 
April 25,
2015
 
April 26,
2014
 
April 25,
2015
 
April 26,
2014
Net gains on investments in publicly traded equity securities
$
38

 
$
55

 
$
94

 
$
199

Net gains on investments in fixed income securities
6

 
14

 
26

 
35

Total
$
44

 
$
69

 
$
120

 
$
234

There were no impairment charges on available-for-sale investments for the nine months ended April 25, 2015. For the three months ended April 26, 2014, there were no impairment charges on available-for-sale investments. For the nine months ended April 26, 2014, the Company had impairment charges of $11 million for publicly traded equity securities, which were due to a decline in the fair value of those securities below their cost basis that were determined to be other than temporary.
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 April 25, 2015 and July 26, 2014 (in millions):