10-Q 1 a10q-q116.htm 10-Q 10-Q
 
 
 
 
 
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 24, 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 November 13, 2015: 5,076,079,317
____________________________________ 


1


Cisco Systems, Inc.
Form 10-Q for the Quarter Ended October 24, 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)
 
October 24, 2015
 
July 25, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,758

 
$
6,877

Investments
53,349

 
53,539

Accounts receivable, net of allowance for doubtful accounts of $300 at October 24, 2015 and $302 at July 25, 2015
4,712

 
5,344

Inventories
1,482

 
1,627

Financing receivables, net
4,506

 
4,491

Deferred tax assets
2,706

 
2,915

Other current assets
1,433

 
1,490

Total current assets
73,946

 
76,283

Property and equipment, net
3,346

 
3,332

Financing receivables, net
4,037

 
3,858

Goodwill
24,882

 
24,469

Purchased intangible assets, net
2,292

 
2,376

Other assets
3,270

 
3,163

TOTAL ASSETS
$
111,773

 
$
113,481

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
3,027

 
$
3,897

Accounts payable
1,119

 
1,104

Income taxes payable
122

 
62

Accrued compensation
2,611

 
3,049

Deferred revenue
9,821

 
9,824

Other current liabilities
5,400

 
5,687

Total current liabilities
22,100

 
23,623

Long-term debt
21,594

 
21,457

Income taxes payable
1,490

 
1,876

Deferred revenue
5,341

 
5,359

Other long-term liabilities
1,263

 
1,459

Total liabilities
51,788

 
53,774

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; 5,082 and 5,085 shares issued and outstanding at October 24, 2015 and July 25, 2015, respectively
43,643

 
43,592

Retained earnings
16,586

 
16,045

Accumulated other comprehensive income (loss)
(252
)
 
61

Total Cisco shareholders’ equity
59,977

 
59,698

Noncontrolling interests
8

 
9

Total equity
59,985

 
59,707

TOTAL LIABILITIES AND EQUITY
$
111,773

 
$
113,481

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 24, 2015
 
October 25, 2014
REVENUE:
 
 
 
Product
$
9,844

 
$
9,435

Service
2,838

 
2,810

Total revenue
12,682


12,245

COST OF SALES:



Product
3,853

 
3,919

Service
997

 
993

Total cost of sales
4,850


4,912

GROSS MARGIN
7,832

 
7,333

OPERATING EXPENSES:



Research and development
1,560

 
1,583

Sales and marketing
2,443

 
2,515

General and administrative
539

 
504

Amortization of purchased intangible assets
69

 
71

Restructuring and other charges
142

 
318

Total operating expenses
4,753


4,991

OPERATING INCOME
3,079


2,342

Interest income
225

 
179

Interest expense
(159
)
 
(139
)
Other income (loss), net
(8
)
 
(22
)
Interest and other income (loss), net
58


18

INCOME BEFORE PROVISION FOR INCOME TAXES
3,137


2,360

Provision for income taxes
707

 
532

NET INCOME
$
2,430


$
1,828




 


Net income per share:


 


Basic
$
0.48


$
0.36

Diluted
$
0.48


$
0.35

Shares used in per-share calculation:





Basic
5,080

 
5,112

Diluted
5,113

 
5,156







Cash dividends declared per common share
$
0.21

 
$
0.19

See Notes to Consolidated Financial Statements.

4


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
October 24, 2015
 
October 25, 2014
Net income
$
2,430

 
$
1,828

Available-for-sale investments:
 
 
 
Change in net unrealized gains, net of tax benefit (expense) of $56 and $14 for the three months ended October 24, 2015 and October 25, 2014, respectively
(100
)
 
(22
)
Net gains reclassified into earnings, net of tax expense of $0 and $2 for the three months ended October 24, 2015 and October 25, 2014, respectively
1

 
(5
)

(99
)
 
(27
)
Cash flow hedging instruments:
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $2 and $3 for the three months ended October 24, 2015 and October 25, 2014, respectively
(2
)
 
(53
)
Net (gains) losses reclassified into earnings
3

 
4


1

 
(49
)
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $(39) and $11 for the three months ended October 24, 2015 and October 25, 2014, respectively
(216
)
 
(150
)
Other comprehensive income (loss)
(314
)
 
(226
)
Comprehensive income
2,116

 
1,602

Comprehensive (income) loss attributable to noncontrolling interests
1

 

Comprehensive income attributable to Cisco Systems, Inc.
$
2,117

 
$
1,602

See Notes to Consolidated Financial Statements.


5


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

October 24, 2015
 
October 25, 2014
Cash flows from operating activities:
 
 
 
Net income
$
2,430

 
$
1,828

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

 

Depreciation, amortization, and other
507

 
599

Share-based compensation expense
376

 
369

Provision for receivables
7

 
43

Deferred income taxes
193

 
236

Excess tax benefits from share-based compensation
(73
)
 
(71
)
(Gains) losses on investments and other, net
(4
)
 
29

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

 

Accounts receivable
631

 
723

Inventories
130

 
(107
)
Financing receivables
(206
)
 
(2
)
Other assets
129

 
2

Accounts payable
4

 
(5
)
Income taxes, net
(315
)
 
(398
)
Accrued compensation
(434
)
 
(495
)
Deferred revenue
(19
)
 
(328
)
Other liabilities
(590
)
 
68

Net cash provided by operating activities
2,766

 
2,491

Cash flows from investing activities:
 
 
 
Purchases of investments
(10,823
)
 
(9,761
)
Proceeds from sales of investments
6,675

 
3,450

Proceeds from maturities of investments
4,133

 
3,906

Acquisition of businesses, net of cash and cash equivalents acquired
(614
)
 
(184
)
Purchases of investments in privately held companies
(78
)
 
(50
)
Return of investments in privately held companies
24

 
42

Acquisition of property and equipment
(262
)
 
(285
)
Proceeds from sales of property and equipment
6

 
3

Other
(11
)
 
2

Net cash used in investing activities
(950
)
 
(2,877
)
Cash flows from financing activities:
 
 
 
Issuances of common stock
385

 
353

Repurchases of common stockrepurchase program
(1,210
)
 
(1,088
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(382
)
 
(342
)
Short-term borrowings, original maturities less than 90 days, net
(4
)
 
(4
)
Repayments of debt
(852
)
 
(3
)
Excess tax benefits from share-based compensation
73

 
71

Dividends paid
(1,068
)
 
(973
)
Other
123

 
33

Net cash used in financing activities
(2,935
)
 
(1,953
)
Net decrease in cash and cash equivalents
(1,119
)
 
(2,339
)
Cash and cash equivalents, beginning of period
6,877

 
6,726

Cash and cash equivalents, end of period
$
5,758

 
$
4,387

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
264


$
263

Cash paid for income taxes, net
$
828


$
694

See Notes to Consolidated Financial Statements.

6


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per-share amounts)
(Unaudited)
 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total  Equity
BALANCE AT JULY 25, 2015
5,085

 
$
43,592

 
$
16,045

 
$
61

 
$
59,698

 
$
9

 
$
59,707

Net income
 
 
 
 
2,430

 
 
 
2,430

 
 
 
2,430

Other comprehensive income (loss)
 
 
 
 
 
 
(313
)
 
(313
)
 
(1
)
 
(314
)
Issuance of common stock
57

 
385

 
 
 
 
 
385

 
 
 
385

Repurchase of common stock
(45
)
 
(386
)
 
(821
)
 
 
 
(1,207
)
 
 
 
(1,207
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(15
)
 
(382
)
 
 
 
 
 
(382
)
 
 
 
(382
)
Cash dividends declared ($0.21 per common share)
 
 
 
 
(1,068
)
 
 
 
(1,068
)
 
 
 
(1,068
)
Tax effects from employee stock incentive plans
 
 
39

 
 
 
 
 
39

 
 
 
39

Share-based compensation expense
 
 
376

 
 
 
 
 
376

 
 
 
376

Purchase acquisitions and other
 
 
19

 
 
 
 
 
19

 
 
 
19

BALANCE AT OCTOBER 24, 2015
5,082

 
$
43,643

 
$
16,586

 
$
(252
)
 
$
59,977

 
$
8

 
$
59,985


 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
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
 
 
 
 
1,828

 
 
 
1,828

 
 
 
1,828

Other comprehensive income (loss)
 
 
 
 
 
 
(226
)
 
(226
)
 

 
(226
)
Issuance of common stock
57

 
353

 
 
 
 
 
353

 
 
 
353

Repurchase of common stock
(41
)
 
(338
)
 
(675
)
 
 
 
(1,013
)
 
 
 
(1,013
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(14
)
 
(342
)
 
 
 
 
 
(342
)
 
 
 
(342
)
Cash dividends declared ($0.19 per common share)
 
 
 
 
(973
)
 
 
 
(973
)
 
 
 
(973
)
Tax effects from employee stock incentive plans
 
 
55

 
 
 
 
 
55

 
 
 
55

Share-based compensation expense
 
 
369

 
 
 
 
 
369

 
 
 
369

Purchase acquisitions and other
 
 
3

 
 
 
 
 
3

 
 
 
3

BALANCE AT OCTOBER 25, 2014
5,109

 
$
41,984

 
$
14,273

 
$
451

 
$
56,708

 
$
7

 
$
56,715


Supplemental Information
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of October 24, 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
4,488

 
$
23,001

 
$
70,885

 
$
93,886

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 2016 is a 53-week fiscal year and fiscal 2015 was a 52-week fiscal year. 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 October 24, 2015 and for the three months ended October 24, 2015 and October 25, 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 25, 2015 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 25, 2015.
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 normal recurring adjustments necessary to present fairly the consolidated balance sheet as of October 24, 2015; the results of operations, statements of comprehensive income, cash flows and equity for the three months ended October 24, 2015 and October 25, 2014, as applicable, have been made. The results of operations for the three months ended October 24, 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
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, as amended, will be effective for the Company beginning in the first quarter of fiscal 2019. 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 permitted, but no earlier than fiscal 2018. 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.




8

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

3.
Acquisitions and Divestitures
The Company completed three acquisitions during the three months ended October 24, 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
MaintenanceNet
$
105

 
$
(21
)
 
$
65

 
$
61

OpenDNS
545

 
(9
)
 
61

 
493

Other
6

 
(1
)
 
4

 
3

Total
$
656

 
$
(31
)
 
$
130

 
$
557

On August 6, 2015, the Company completed its acquisition of privately held MaintenanceNet, Inc. ("MaintenanceNet"), a provider of a cloud-based software platform that uses data analytics and automation to manage renewals of recurring customer contracts. This acquisition is a component of the Company's strategy for its Services organization to simplify and digitize its business processes.
On August 26, 2015, the Company completed its acquisition of privately held OpenDNS, Inc. ("OpenDNS"), a provider of advanced threat protection for endpoint devices. With the OpenDNS acquisition, the Company aims to strengthen its security offerings by adding broad visibility and threat intelligence delivered through a software-as-a-service platform. Revenue from the OpenDNS acquisition has been included in the Company's Security product category.
The total purchase consideration related to the Company’s acquisitions completed during the three months ended October 24, 2015 consisted of cash consideration and the assumption of vested share-based awards. The total cash and cash equivalents acquired from these business combinations was approximately $9 million. Total transaction costs related to the Company’s acquisition activities were $5 million and $2 million for the three months ended October 24, 2015 and October 25, 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 acquisitions 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 acquisitions completed during the three months ended October 24, 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 acquisition from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three months ended October 24, 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.
Pending Divestiture On July 22, 2015, the Company entered into an exclusive agreement to sell the client premises equipment portion of its Service Provider Video connected devices business to French-based Technicolor for approximately $600 million in cash and stock subject to certain adjustments provided for in the agreement.  In connection with this transaction, the Company had tangible assets of approximately $100 million which were held for sale (of which the most significant component is inventories of approximately $80 million), and current liabilities of approximately $120 million (primarily comprised of supply chain-related liabilities, warranties, rebates and other accrued liabilities), which were held for sale as of October 24, 2015. The Company estimates that approximately $150 million of goodwill is attributable to this business, based on its relative fair value. The Company is working to close the transaction during the second quarter of fiscal 2016, subject to customary closing conditions including the receipt of certain regulatory approvals.

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 three months ended October 24, 2015 (in millions):
 
Balance at
 
 
 
 
 
Balance at
 
July 25, 2015
 
Acquisitions
 
Other
 
October 24, 2015
Americas
$
15,212

 
$
361

 
$
(90
)
 
$
15,483

EMEA
5,791

 
141

 
(34
)
 
5,898

APJC
3,466

 
55

 
(20
)
 
3,501

Total
$
24,469

 
$
557

 
$
(144
)
 
$
24,882

“Other” in the table above primarily consists of foreign currency translation, as well as immaterial purchase accounting adjustments.
(b)
Purchased Intangible Assets
The following table presents details of the Company’s intangible assets acquired through acquisitions completed during the three months ended October 24, 2015 (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
MaintenanceNet
5.0
 
$
50

 
5.0
 
$
2

 
2.0
 
$
2

 
$
11

 
$
65

OpenDNS
5.0
 
43

 
7.0
 
15

 
1.0
 
2

 
1

 
$
61

Other
5.0
 
4

 
0.0
 

 
0.0
 

 

 
$
4

Total
 
 
$
97

 
 
 
$
17

 
 
 
$
4

 
$
12

 
$
130

The following tables present details of the Company’s purchased intangible assets (in millions): 
October 24, 2015
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,454

 
$
(1,902
)
 
$
1,552

Customer relationships
 
1,716

 
(1,036
)
 
680

Other
 
58

 
(27
)
 
31

Total purchased intangible assets with finite lives
 
5,228

 
(2,965
)
 
2,263

In-process research and development, with indefinite lives
 
29

 

 
29

Total
 
$
5,257

 
$
(2,965
)
 
$
2,292

 
July 25, 2015
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,418

 
$
(1,818
)
 
$
1,600

Customer relationships
 
1,699

 
(971
)
 
728

Other
 
55

 
(24
)
 
31

Total purchased intangible assets with finite lives
 
5,172

 
(2,813
)
 
2,359

In-process research and development, with indefinite lives
 
17

 

 
17

Total
 
$
5,189

 
$
(2,813
)
 
$
2,376


10

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

Purchased intangible assets include intangible assets acquired through acquisitions as well as through direct purchases or licenses. In fiscal 2015, the Company, along with a number of other companies, entered into an agreement to obtain a license to the patents owned by the Rockstar Consortium, and the Company paid approximately $300 million, of which $188 million was expensed to product cost of sales in the first quarter of fiscal 2015 related to the settlement of patent infringement claims, and the remainder was capitalized as an intangible asset to be amortized over its estimated useful life.
The following table presents the amortization of purchased intangible assets (in millions):
 
Three Months Ended
 
October 24,
2015
 
October 25,
2014
Amortization of purchased intangible assets:
 
 
 
Cost of sales
$
146

 
$
189

Operating expenses
69

 
71

Total
$
215

 
$
260

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 24, 2015 is as follows (in millions):
Fiscal Year
Amount
2016 (remaining nine months)
$
574

2017
619

2018
476

2019
379

2020
162

Thereafter
53

Total
$
2,263


5.
Restructuring and Other Charges
Fiscal 2015 Plan The Company announced a restructuring action in August 2014 (the "Fiscal 2015 Plan"), in order to realign its workforce towards key growth areas of its business such as data center, software, security, and cloud. The Company's aggregate pre-tax estimated charges pursuant to the restructuring are expected to be approximately $700 million, consisting of severance and other one-time termination benefits and other associated costs, and the Company has incurred cumulative charges of approximately $630 million in connection with this plan through October 24, 2015. The Company incurred charges of $141 million, net of a $1 million credit to cost of sales, and $318 million for the three months ended October 24, 2015 and October 25, 2014, respectively. These charges are primarily cash-based, and the Company expects the Fiscal 2015 Plan to be substantially completed during the first half of fiscal 2016.
Fiscal 2014 Plan In connection with a restructuring action announced in August 2013 (the "Fiscal 2014 Plan"), the Company incurred cumulative charges of approximately $418 million. 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 PLAN
 
FISCAL 2015 PLAN
 
 
 
 
Employee
Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 25, 2015
 
$
11

 
$
14

 
$
49

 
$
15

 
$
89

Charges
 

 

 
125

 
17

 
142

Cash payments
 
(4
)
 
(1
)
 
(119
)
 
(5
)
 
(129
)
Non-cash items
 

 

 

 
(16
)
 
(16
)
Liability as of October 24, 2015
 
$
7

 
$
13

 
$
55

 
$
11

 
$
86



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):
 
 
October 24,
2015
 
July 25,
2015
Inventories:
 
 
 
 
Raw materials
 
$
107

 
$
114

Work in process
 
1

 
2

Finished goods:
 
 
 

Distributor inventory and deferred cost of sales
 
631

 
610

Manufactured finished goods
 
464

 
593

Total finished goods
 
1,095

 
1,203

Service-related spares
 
240

 
258

Demonstration systems
 
39

 
50

Total
 
$
1,482

 
$
1,627

Property and equipment, net:
 
 
 
 
Gross property and equipment:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,561

 
$
4,495

Computer equipment and related software
 
1,276

 
1,310

Production, engineering, and other equipment
 
5,742

 
5,753

Operating lease assets
 
372

 
372

Furniture and fixtures
 
502

 
497

Total gross property and equipment
 
12,453

 
12,427

Less: accumulated depreciation and amortization
 
(9,107
)
 
(9,095
)
Total
 
$
3,346

 
$
3,332

 Other assets:
 
 
 
 
Deferred tax assets
 
$
1,583

 
$
1,648

Investments in privately held companies
 
928

 
897

Other
 
759

 
618

Total
 
$
3,270

 
$
3,163

Deferred revenue:
 
 
 
 
Service
 
$
9,689

 
$
9,757

Product:
 

 
 
Unrecognized revenue on product shipments and other deferred revenue
 
4,888

 
4,766

Cash receipts related to unrecognized revenue from two-tier distributors
 
585

 
660

Total product deferred revenue
 
5,473

 
5,426

Total
 
$
15,162

 
$
15,183

Reported as:
 

 
 
Current
 
$
9,821

 
$
9,824

Noncurrent
 
5,341

 
5,359

Total
 
$
15,162

 
$
15,183




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):
October 24, 2015
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Gross
$
3,317

 
$
1,963

 
$
3,598

 
$
8,878

Residual value
225

 

 

 
225

Unearned income
(182
)
 

 

 
(182
)
Allowance for credit loss
(255
)
 
(90
)
 
(33
)
 
(378
)
Total, net
$
3,105

 
$
1,873

 
$
3,565

 
$
8,543

Reported as:
 
 
 
 
 
 
 
Current
$
1,447

 
$
931

 
$
2,128

 
$
4,506

Noncurrent
1,658

 
942

 
1,437

 
4,037

Total, net
$
3,105

 
$
1,873

 
$
3,565

 
$
8,543

July 25, 2015
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Gross
$
3,361

 
$
1,763

 
$
3,573

 
$
8,697

Residual value
224

 

 

 
224

Unearned income
(190
)
 

 

 
(190
)
Allowance for credit loss
(259
)
 
(87
)
 
(36
)
 
(382
)
Total, net
$
3,136

 
$
1,676

 
$
3,537

 
$
8,349

Reported as:
 
 
 
 
 
 
 
Current
$
1,468

 
$
856

 
$
2,167

 
$
4,491

Noncurrent
1,668

 
820

 
1,370

 
3,858

Total, net
$
3,136

 
$
1,676

 
$
3,537

 
$
8,349

As of October 24, 2015 and July 25, 2015, the deferred service revenue related to "Financed Service Contracts and Other" was $1,911 million and $1,853 million, respectively.
Future minimum lease payments at October 24, 2015 are summarized as follows (in millions):
Fiscal Year
Amount
2016 (remaining nine months)
$
1,307

2017
1,079

2018
606

2019
254

2020
70

Thereafter
1

Total
$
3,317

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 October 24, 2015 and July 25, 2015 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
October 24, 2015
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,670

 
$
1,336

 
$
129

 
$
3,135

Loan receivables
1,039

 
783

 
141

 
1,963

Financed service contracts and other
2,111

 
1,437

 
50

 
3,598

Total
$
4,820

 
$
3,556

 
$
320

 
$
8,696

 
INTERNAL CREDIT RISK RATING
July 25, 2015
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,688

 
$
1,342

 
$
141

 
$
3,171

Loan receivables
788

 
823

 
152

 
1,763

Financed service contracts and other
2,133

 
1,389

 
51

 
3,573

Total
$
4,609

 
$
3,554

 
$
344

 
$
8,507

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 24, 2015 and July 25, 2015 were $2,308 million and $2,253 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $8,921 million and $8,731 million as of their respective period ends.
The following tables present the aging analysis of gross receivables less unearned income as of October 24, 2015 and July 25, 2015 (in millions):
 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
October 24, 2015
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
100

 
$
51

 
$
176

 
$
327

 
$
2,808

 
$
3,135

 
$
83

 
$
72

Loan receivables
22

 
85

 
69

 
176

 
1,787

 
1,963

 
17

 
17

Financed service contracts and other
152

 
50

 
249

 
451

 
3,147

 
3,598

 
26

 
6

Total
$
274

 
$
186

 
$
494

 
$
954

 
$
7,742

 
$
8,696

 
$
126

 
$
95

 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 25, 2015
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
90

 
$
27

 
$
185

 
$
302

 
$
2,869

 
$
3,171

 
$
73

 
$
73

Loan receivables
21

 
3

 
25

 
49

 
1,714

 
1,763

 
32

 
32

Financed service contracts and other
396

 
152

 
414

 
962

 
2,611

 
3,573

 
29

 
9

Total
$
507

 
$
182

 
$
624

 
$
1,313

 
$
7,194

 
$
8,507

 
$
134

 
$
114

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 $333 million and $496 million as of October 24, 2015 and July 25, 2015, respectively.
As of October 24, 2015, the Company had financing receivables of $119 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 as they are well-secured and in the process of collection. Such balance was $70 million as of July 25, 2015.
(c)
Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
 
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 25, 2015
$
259

 
$
87

 
$
36

 
$
382

Provisions

 
4

 

 
4

Recoveries (write-offs), net
(4
)
 

 
(3
)
 
(7
)
Foreign exchange and other

 
(1
)
 

 
(1
)
Allowance for credit loss as of October 24, 2015
$
255

 
$
90

 
$
33

 
$
378

Financing receivables as of October 24, 2015 (1)
$
3,360

 
$
1,963

 
$
3,598

 
$
8,921

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

 
$
98

 
$
18

 
$
349

Provisions
22

 
(13
)
 
19

 
28

Recoveries (write-offs), net
(4
)
 
1

 

 
(3
)
Foreign exchange and other
(3
)
 
(2
)
 
(1
)
 
(6
)
Allowance for credit loss as of October 25, 2014
$
248

 
$
84

 
$
36

 
$
368

Financing receivables as of October 25, 2014 (1)
$
3,509

 
$
1,744

 
$
3,071

 
$
8,324

(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 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 October 24, 2015 and July 25, 2015, 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):

15

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

 
October 24, 2015
 
July 25, 2015
Operating lease assets
$
372

 
$
372

Accumulated depreciation
(207
)
 
(205
)
Operating lease assets, net
$
165

 
$
167

Minimum future rentals on noncancelable operating leases at October 24, 2015 were approximately $0.1 billion for the remaining nine months of fiscal 2016, $0.1 billion for fiscal 2017, and less than $0.1 billion per year for each of fiscal 2018 through fiscal 2020.

8.
Investments
(a)
Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
October 24, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
27,409

 
$
63

 
$
(1
)
 
$
27,471

U.S. government agency securities
3,606

 
11

 

 
3,617

Non-U.S. government and agency securities
1,133

 
3

 

 
1,136

Corporate debt securities
18,314

 
70

 
(78
)
 
18,306

U.S. agency mortgage-backed securities
1,454

 
15

 

 
1,469

Total fixed income securities
51,916

 
162

 
(79
)
 
51,999

Publicly traded equity securities
1,094

 
268

 
(12
)
 
1,350

Total
$
53,010

 
$
430

 
$
(91
)
 
$
53,349

July 25, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
29,904

 
$
41

 
$
(6
)
 
$
29,939

U.S. government agency securities
3,662

 
2

 
(1
)
 
3,663

Non-U.S. government and agency securities
1,128

 
1

 
(1
)
 
1,128

Corporate debt securities
15,802

 
34

 
(53
)
 
15,783

U.S. agency mortgage-backed securities
1,456

 
8

 
(3
)
 
1,461

Total fixed income securities
51,952

 
86

 
(64
)
 
51,974

Publicly traded equity securities
1,092

 
480

 
(7
)
 
1,565

Total
$
53,044

 
$
566

 
$
(71
)
 
$
53,539

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 24, 2015
 
October 25, 2014
Gross realized gains
$
35

 
$
21

Gross realized losses
(36
)
 
(14
)
Total
$
(1
)
 
$
7


16

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

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 24, 2015
 
October 25, 2014
Net losses on investments in publicly traded equity securities
$
(9
)
 
$
(4
)
Net gains on investments in fixed income securities
8

 
11

Total
$
(1
)
 
$
7

There were no impairment charges on available-for-sale investments for the periods presented.
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 24, 2015 and July 25, 2015 (in millions):
 
UNREALIZED LOSSES
LESS THAN 12 MONTHS
 
UNREALIZED LOSSES
12 MONTHS OR GREATER
 
TOTAL
October 24, 2015
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross 
Unrealized 
Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities 
$
2,566

 
$
(1
)
 
$

 
$

 
$
2,566

 
$
(1
)
U.S. government agency securities
80

 

 

 

 
80

 

Non-U.S. government and agency securities
57

 

 
10

 

 
67

 

Corporate debt securities
7,421

 
(66
)
 
1,048

 
(12
)
 
8,469

 
(78
)
U.S. agency mortgage-backed securities
77

 

 

 

 
77

 

Total fixed income securities
10,201

 
(67
)

1,058


(12
)

11,259


(79
)
Publicly traded equity securities
103

 
(11
)
 
2

 
(1
)
 
105

 
(12
)
Total
$
10,304

 
$
(78
)
 
$
1,060

 
$
(13
)
 
$
11,364

 
$
(91
)
 
UNREALIZED LOSSES
LESS THAN 12 MONTHS
 
UNREALIZED LOSSES
12 MONTHS OR GREATER
 
TOTAL
July 25, 2015
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross 
Unrealized 
Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities 
$
6,412

 
$
(6
)
 
$

 
$

 
$
6,412

 
$
(6
)
U.S. government agency securities
1,433

 
(1
)
 

 

 
1,433

 
(1
)
Non-U.S. government and agency securities
515

 
(1
)
 
4

 

 
519

 
(1
)
Corporate debt securities
9,552

 
(49
)
 
312

 
(4
)
 
9,864

 
(53
)
U.S. agency mortgage-backed securities
579

 
(3
)
 

 

 
579

 
(3
)
Total fixed income securities
18,491

 
(60
)
 
316

 
(4
)
 
18,807

 
(64
)
Publicly traded equity securities
108

 
(7
)
 
2

 

 
110

 
(7
)
Total
$
18,599

 
$
(67
)
 
$
318

 
$
(4
)
 
$
18,917

 
$
(71
)

17

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

As of October 24, 2015, 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 24, 2015, 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 24, 2015.
The Company has evaluated its publicly traded equity securities as of October 24, 2015 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
(c)
Maturities of Fixed Income Securities
The following table summarizes the maturities of the Company’s fixed income securities at October 24, 2015 (in millions): 
 
Amortized Cost
 
Fair Value
Less than 1 year
$
17,274

 
$
17,276

Due in 1 to 2 years
15,914

 
15,950

Due in 2 to 5 years
17,105

 
17,138

Due after 5 years
1,623

 
1,635

Total
$
51,916

 
$
51,999


Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments.
(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 24, 2015 and October 25, 2014 was $0.5 billion and $1.0 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 24, 2015 and July 25, 2015, the Company had no outstanding securities lending transactions.
(e)
Investments in Privately Held Companies
The carrying value of the Company’s investments in privately held companies was included in other assets. For such investments that were accounted for under the equity and cost method as of October 24, 2015 and July 25, 2015, the amounts are summarized in the following table (in millions):
 
October 24, 2015
 
July 25, 2015
Equity method investments
$
619

 
$
578

Cost method investments
309

 
319

Total
$
928

 
$
897

For additional information on impairment charges related to investments in privately held companies, see Note 9.
Variable Interest Entities In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain customers. These privately held companies and customers may be considered to be variable interest entities. The Company evaluates on an ongoing basis its investments in these privately held companies and its customer financings and has determined that as of October 24, 2015 there were no variable interest entities required to be consolidated in the Company’s Consolidated Financial Statements.


18

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

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