10-Q 1 a10qq2fy18.htm 10-Q Q2 FY2018 Document

 
 
 
 
 
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 January 27, 2018

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 
_____________________________________
image-logoa13.jpg
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 February 15, 2018: 4,817,517,410
____________________________________ 


1


Cisco Systems, Inc.
Form 10-Q for the Quarter Ended January 27, 2018
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)
 
January 27, 2018
 
July 29, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,624

 
$
11,708

Investments
56,059

 
58,784

Accounts receivable, net of allowance for doubtful accounts of $181 at January 27, 2018 and $211 at July 29, 2017
3,963

 
5,146

Inventories
1,896

 
1,616

Financing receivables, net
4,925

 
4,856

Other current assets
1,583

 
1,593

Total current assets
86,050

 
83,703

Property and equipment, net
3,113

 
3,322

Financing receivables, net
4,913

 
4,738

Goodwill
30,391

 
29,766

Purchased intangible assets, net
2,474

 
2,539

Deferred tax assets
3,097

 
4,239

Other assets
1,472

 
1,511

TOTAL ASSETS
$
131,510

 
$
129,818

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
13,741

 
$
7,992

Accounts payable
1,060

 
1,385

Income taxes payable
2,204

 
98

Accrued compensation
2,736

 
2,895

Deferred revenue
11,102

 
10,821

Other current liabilities
4,521

 
4,392

Total current liabilities
35,364

 
27,583

Long-term debt
25,625

 
25,725

Income taxes payable
9,185

 
1,250

Deferred revenue
7,686

 
7,673

Other long-term liabilities
1,668

 
1,450

Total liabilities
79,528

 
63,681

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; 4,868 and 4,983 shares issued and outstanding at January 27, 2018 and July 29, 2017, respectively
44,535

 
45,253

Retained earnings
7,364

 
20,838

Accumulated other comprehensive income (loss)
83

 
46

Total equity
51,982

 
66,137

TOTAL LIABILITIES AND EQUITY
$
131,510

 
$
129,818

See Notes to Consolidated Financial Statements.

3


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited) 
 
Three Months Ended
 
Six Months Ended
 
January 27, 2018
 
January 28, 2017
 
January 27, 2018
 
January 28, 2017
REVENUE:
 
 
 
 
 
 
 
Product
$
8,709

 
$
8,491

 
$
17,763

 
$
17,793

Service
3,178

 
3,089

 
6,260

 
6,139

Total revenue
11,887


11,580

 
24,023

 
23,932

COST OF SALES:



 
 
 
 
Product
3,354

 
3,305

 
6,969

 
6,708

Service
1,035

 
999

 
2,129

 
2,064

Total cost of sales
4,389


4,304

 
9,098

 
8,772

GROSS MARGIN
7,498

 
7,276

 
14,925

 
15,160

OPERATING EXPENSES:



 
 
 
 
Research and development
1,549

 
1,508

 
3,116

 
3,053

Sales and marketing
2,235

 
2,222

 
4,569

 
4,640

General and administrative
483

 
456

 
1,040

 
1,011

Amortization of purchased intangible assets
60

 
64

 
121

 
142

Restructuring and other charges
98

 
133

 
250

 
544

Total operating expenses
4,425


4,383

 
9,096

 
9,390

OPERATING INCOME
3,073


2,893

 
5,829

 
5,770

Interest income
396

 
329

 
775

 
624

Interest expense
(247
)
 
(222
)
 
(482
)
 
(420
)
Other income (loss), net
10

 
(37
)
 
72

 
(58
)
Interest and other income (loss), net
159


70

 
365

 
146

INCOME BEFORE PROVISION FOR INCOME TAXES
3,232


2,963

 
6,194

 
5,916

Provision for income taxes
12,010

 
615

 
12,578

 
1,246

NET INCOME (LOSS)
$
(8,778
)

$
2,348

 
$
(6,384
)
 
$
4,670




 


 
 
 
 
Net income (loss) per share:


 


 
 
 
 
Basic
$
(1.78
)

$
0.47

 
$
(1.29
)
 
$
0.93

Diluted
$
(1.78
)

$
0.47

 
$
(1.29
)
 
$
0.92

Shares used in per-share calculation:





 
 
 
 
Basic
4,924

 
5,015

 
4,942

 
5,021

Diluted
4,924

 
5,040

 
4,942

 
5,054







 
 
 
 
Cash dividends declared per common share
$
0.29

 
$
0.26

 
$
0.58

 
$
0.52

See Notes to Consolidated Financial Statements.

4


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
January 27, 2018
 
January 28, 2017
 
January 27, 2018
 
January 28, 2017
Net income (loss)
$
(8,778
)
 
$
2,348

 
$
(6,384
)
 
$
4,670

Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains and losses, net of tax benefit (expense) of $1 and $(22) for the three and six months ended January 27, 2018, respectively, and $73 and $154 for the corresponding periods of fiscal 2017, respectively
(191
)
 
(276
)
 
(196
)
 
(397
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $15 and $25 for the three and six months ended January 27, 2018, respectively, and $(11) and $(6) for the corresponding periods of fiscal 2017, respectively
(43
)
 
19

 
(66
)
 
9


(234
)
 
(257
)
 
(262
)
 
(388
)
Cash flow hedging instruments:
 
 
 
 
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $(2) and $(3) for the three and six months ended January 27, 2018, respectively, and $1 and $4 for the corresponding periods of fiscal 2017, respectively
28

 
(1
)
 
35

 
(44
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $2 and $4 for the three and six months ended January 27, 2018, respectively, and $(2) and $(3) for the corresponding periods of fiscal 2017, respectively
(16
)
 
25

 
(27
)
 
36


12

 
24

 
8

 
(8
)
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $(4) and $(6) for the three and six months ended January 27, 2018, respectively, and $0 and $(1) for the corresponding periods of fiscal 2017, respectively
274

 
(44
)
 
291

 
(71
)
Other comprehensive income (loss)
52

 
(277
)
 
37

 
(467
)
Comprehensive income (loss)
(8,726
)
 
2,071

 
(6,347
)
 
4,203

Comprehensive (income) loss attributable to noncontrolling interests

 

 

 
(8
)
Comprehensive income (loss) attributable to Cisco Systems, Inc.
$
(8,726
)
 
$
2,071

 
$
(6,347
)
 
$
4,195

See Notes to Consolidated Financial Statements.


5


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

January 27, 2018
 
January 28, 2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(6,384
)
 
$
4,670

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
1,112

 
1,148

Share-based compensation expense
785

 
724

Provision for receivables
(43
)
 
4

Deferred income taxes
1,021

 
(26
)
Excess tax benefits from share-based compensation

 
(101
)
(Gains) losses on divestitures, investments and other, net
(174
)
 
79

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

 

Accounts receivable
1,236

 
1,396

Inventories
(276
)
 
(51
)
Financing receivables
(156
)
 
(764
)
Other assets
(15
)
 
155

Accounts payable
(338
)
 
(98
)
Income taxes, net
10,246

 
(257
)
Accrued compensation
(189
)
 
(417
)
Deferred revenue
237

 
611

Other liabilities
88

 
(571
)
Net cash provided by operating activities
7,150

 
6,502

Cash flows from investing activities:
 
 
 
Purchases of investments
(13,954
)
 
(27,847
)
Proceeds from sales of investments
9,111

 
18,420

Proceeds from maturities of investments
7,365

 
5,245

Acquisition of businesses, net of cash and cash equivalents acquired
(754
)
 
(251
)
Proceeds from business divestitures
27

 

Purchases of investments in privately held companies
(89
)
 
(142
)
Return of investments in privately held companies
124

 
108

Acquisition of property and equipment
(379
)
 
(526
)
Proceeds from sales of property and equipment
51

 
5

Other
(7
)
 
10

Net cash provided by (used in) investing activities
1,495

 
(4,978
)
Cash flows from financing activities:
 
 
 
Issuances of common stock
302

 
386

Repurchases of common stockrepurchase program
(5,457
)
 
(1,991
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(433
)
 
(432
)
Short-term borrowings, original maturities of 90 days or less, net
5,095

 
300

Issuances of debt
6,877

 
6,232

Repayments of debt
(6,230
)
 
(1
)
Excess tax benefits from share-based compensation

 
101

Dividends paid
(2,861
)
 
(2,612
)
Other
(22
)
 
(240
)
Net cash provided by (used in) financing activities
(2,729
)
 
1,743

Net increase (decrease) in cash and cash equivalents
5,916

 
3,267

Cash and cash equivalents, beginning of period
11,708

 
7,631

Cash and cash equivalents, end of period
$
17,624

 
$
10,898

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
454

 
$
419

Cash paid for income taxes, net
$
1,311

 
$
1,529

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 29, 2017
4,983

 
$
45,253

 
$
20,838

 
$
46

 
$
66,137

 
$

 
$
66,137

Net income (loss)
 
 
 
 
(6,384
)
 
 
 
(6,384
)
 
 
 
(6,384
)
Other comprehensive income (loss)
 
 
 
 
 
 
37

 
37

 
 
 
37

Issuance of common stock
52

 
302

 
 
 
 
 
302

 
 
 
302

Repurchase of common stock
(154
)
 
(1,393
)
 
(4,238
)
 
 
 
(5,631
)
 
 
 
(5,631
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(13
)
 
(433
)
 
 
 
 
 
(433
)
 
 
 
(433
)
Cash dividends declared ($0.58 per common share)
 
 
 
 
(2,861
)
 
 
 
(2,861
)
 
 
 
(2,861
)
Cumulative effect of adoption of accounting standard
 
 
 
 
9

 
 
 
9

 
 
 
9

Share-based compensation
 
 
785

 
 
 
 
 
785

 
 
 
785

Purchase acquisitions and other
 
 
21

 
 
 
 
 
21

 
 
 
21

BALANCE AT JANUARY 27, 2018
4,868

 
$
44,535

 
$
7,364

 
$
83

 
$
51,982

 
$

 
$
51,982


 
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 30, 2016
5,029

 
$
44,516

 
$
19,396

 
$
(326
)
 
$
63,586

 
$
(1
)
 
$
63,585

Net income
 
 
 
 
4,670

 
 
 
4,670

 
 
 
4,670

Other comprehensive income (loss)
 
 
 
 
 
 
(475
)
 
(475
)
 
8

 
(467
)
Issuance of common stock
57

 
386

 
 
 
 
 
386

 
 
 
386

Repurchase of common stock
(65
)
 
(575
)
 
(1,427
)
 
 
 
(2,002
)
 
 
 
(2,002
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(14
)
 
(432
)
 
 
 
 
 
(432
)
 
 
 
(432
)
Cash dividends declared ($0.52 per common share)
 
 
 
 
(2,612
)
 
 
 
(2,612
)
 
 
 
(2,612
)
Tax effects from employee stock incentive plans
 
 
(54
)
 
 
 
 
 
(54
)
 
 
 
(54
)
Share-based compensation
 
 
738

 
 
 
 
 
738

 
 
 
738

Purchase acquisitions and other
 
 
6

 
 
 
 
 
6

 
 
 
6

BALANCE AT JANUARY 28, 2017
5,007

 
$
44,585

 
$
20,027

 
$
(801
)
 
$
63,811

 
$
7

 
$
63,818



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 2018 and fiscal 2017 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 January 27, 2018 and for the three and six months ended January 27, 2018 and January 28, 2017 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 29, 2017 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 29, 2017.
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 January 27, 2018; the results of operations and the statements of comprehensive income (loss) for the three and six months ended January 27, 2018 and January 28, 2017; the statements of cash flows and equity for the six months ended January 27, 2018 and January 28, 2017, as applicable, have been made. The results of operations for the three and six months ended January 27, 2018 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
Share-Based Compensation In March 2016, the FASB issued an accounting standard update that impacts the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the Consolidated Statements of Cash Flows. Cisco adopted this accounting standard update beginning the first quarter of fiscal 2018 on a prospective basis. This resulted in an overall decrease in the effective tax rate for the six months ended January 27, 2018 due to recognition of excess tax benefits from share-based compensation. The application of this accounting standard update did not have a material impact on the Company's Consolidated Financial Statements.
(b) Recent Accounting Standards or Updates Not Yet Effective as of Period End
Revenue Recognition In May 2014, the FASB issued a new accounting standard related to revenue recognition. The new standard will supersede nearly all U.S. GAAP on revenue recognition and eliminate industry-specific guidance. The underlying principle of the new standard is to recognize revenue when a customer obtains control of promised goods or services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. It also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers.
The standard allows two methods of adoption: i) retrospectively to each prior period presented (“full retrospective method”), or ii) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective method"). Cisco will adopt the new standard using the modified retrospective method at the beginning of its first quarter of fiscal 2019.
Cisco is on schedule in establishing new accounting policies, implementing systems and processes (including more extensive use of estimates), and internal controls necessary to support the requirements of the new standard. Cisco has completed its preliminary

8

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


assessment of the financial statement impact of the new standard, as discussed below, and will continue to update that assessment as more information becomes available.
The new standard will primarily impact Cisco’s revenue recognition for software arrangements and sales to two-tier distributors. In both areas, the new standard will accelerate the recognition of revenue. The table below details both the current and expected revenue recognition timing in these areas:
 
 
Current Revenue Standard
 
New Revenue Standard
Software arrangements:
 
 
 
 
Perpetual software licenses
 
Upfront
 
Upfront
Term software licenses
 
Ratable
 
Upfront
Security software licenses
 
Ratable
 
Ratable
Enterprise license agreements
 
Ratable
 
Upfront
Software support services
 
Ratable
 
Ratable
Software-as-a-service
 
Ratable
 
Ratable
Two-tier distribution
 
Sell-Through
 
Sell-In
Cisco expects that the new standard will not have a material impact on total revenue in the year of adoption based on two factors: i) revenue will be accelerated consistent with the changes in timing as indicated in the preceding table, largely offset by ii) the reduction of revenue from software arrangements where revenue was previously deferred in prior periods and recognized ratably over time as required under the current standard. This preliminary assessment is based on the types and number of revenue arrangements currently in place. The exact impact of the new standard will be dependent on facts and circumstances at adoption and could vary from quarter to quarter.
In addition to the above revenue recognition timing impacts, the new standard will require incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized over the contract period. Currently, these costs are expensed as incurred.
Cisco will be required to record cumulative effect adjustments to retained earnings (net of tax) upon adopting the new standard at the beginning of fiscal 2019. The most significant of these adjustments will be to reduce product deferred revenue and increase retained earnings at the date of adoption to reflect revenue that would have been already recognized under the new standard related to existing arrangements. There will also be an adjustment to increase accounts receivable and reduce inventories related to the changes in revenue recognition on sales to two-tier distributors. Lastly, an adjustment will be recorded to establish an asset and increase retained earnings related to the requirement to capitalize incremental contract acquisition costs for customer contracts.
Financial Instruments In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019, and early adoption is permitted. The most significant impact of this accounting standard update for Cisco is that it will require the remeasurement of investments that are not accounted for under the equity method at fair value at the end of each reporting period with the changes recorded to the income statement. While Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements, Cisco expects that this accounting standard update will increase the variability of other income (loss), net.
Leases In February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2020 on a modified retrospective basis, and early adoption is permitted. Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Credit Losses of Financial Instruments In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2021 on a modified retrospective basis, and early adoption in fiscal 2020 is permitted. Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

9

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


Classification of Cash Flow Elements In August 2016, the FASB issued an accounting standard update related to the classification of certain cash receipts and cash payments on the statement of cash flows. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Statements of Cash Flows.
Income Taxes on Intra-Entity Transfers of Assets In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax consequences of intra-entity transfers of assets (other than inventory) at the transaction date. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. Cisco is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Restricted Cash in Statement of Cash Flow In November 2016, the FASB issued an accounting standard update that provides guidance on the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019 using a retrospective transition method to each period presented, and early adoption is permitted. Cisco does not expect that this accounting standard update will have a material impact on its Consolidated Statements of Cash Flows.
Definition of a Business In January 2017, the FASB issued an accounting standard update that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2019 on a prospective basis. The impact of this accounting standard update will be fact dependent, but Cisco expects that some transactions that were previously accounted for as business combinations or disposal transactions will be accounted for as asset purchases or asset sales under the accounting standard update.
Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued an accounting standard update that removes Step 2 of the goodwill impairment test, which requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value. The accounting standard update will be effective for Cisco beginning in the first quarter of fiscal 2021 on a prospective basis, and early adoption is permitted. Cisco does not expect that this accounting standard update will impact its Consolidated Financial Statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued a new accounting standard update that allows companies to reclassify from Accumulated Other Comprehensive Income to Retained Earnings stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "Tax Act"). Cisco will adopt this accounting standard update in the third quarter of fiscal 2018 on a retrospective basis. The application of this accounting standard update will not have a material impact on the Company's Consolidated Financial Statements.






10

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



3.
Acquisitions and Divestitures
The Company completed five acquisitions during the six months ended January 27, 2018. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
 
Purchase Consideration
 
Net Tangible Assets Acquired (Liabilities Assumed)
 
Purchased Intangible Assets
 
Goodwill
Viptela
$
497

 
$
(18
)
 
$
180

 
$
335

Springpath
248

 
(11
)
 
160

 
99

Others (three in total)
43

 
(2
)
 
21

 
24

Total
$
788

 
$
(31
)
 
$
361

 
$
458

On July 31, 2017, the Company completed its acquisition of privately held Viptela Inc. ("Viptela"), a provider of software-defined wide area networking products. Revenue from the Viptela acquisition has been included in the Company's Infrastructure Platforms product category.
On September 22, 2017, the Company completed its acquisition of privately held Springpath, Inc. ("Springpath"), a hyperconvergence software company. Revenue from the Springpath acquisition has been included in the Company's Infrastructure Platforms product category.
The total purchase consideration related to acquisitions completed during the six months ended January 27, 2018 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these acquisitions was approximately $12 million. Total transaction costs related to acquisition activities were $14 million and $3 million for the six months ended January 27, 2018 and January 28, 2017, respectively. These transaction costs were expensed as incurred in general and administrative expenses ("G&A") in the Consolidated Statements of Operations. The Company recognized a gain of $46 million in the first quarter of fiscal 2018 in connection with a step acquisition. This gain was recognized in other income (loss), net in the Consolidated Statement of Operations.
The 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 acquisitions completed during the six months ended January 27, 2018 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 six months ended January 27, 2018 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.
The Company completed two divestitures during the second quarter of fiscal 2018. The financial statement impact of these divestitures was not material for the three and six months ended January 27, 2018.
Acquisition of BroadSoft On February 1, 2018, the Company completed its acquisition of BroadSoft, Inc. ("BroadSoft"), a cloud calling and contact center solutions company for total consideration of approximately $1.9 billion, net of cash and short-term investments. Revenue from the BroadSoft acquisition will be included in the Company's Applications product category. The Company expects that most of the purchase price will be allocated to goodwill and purchased intangible assets.


11

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 six months ended January 27, 2018 (in millions):
 
Balance at
 
 
 
 
 
Balance at
 
July 29, 2017
 
Acquisitions
 
Other
 
January 27, 2018
Americas
$
18,691

 
$
337

 
$
101

 
$
19,129

EMEA
7,057

 
93

 
42

 
7,192

APJC
4,018

 
28

 
24

 
4,070

Total
$
29,766

 
$
458

 
$
167

 
$
30,391

“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 six months ended January 27, 2018 (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
Viptela
5.0
 
$
144

 
6.0
 
$
35

 
1.0
 
$
1

 
$

 
$
180

Springpath
4.0
 
157

 
0.0
 

 
0.0
 

 
3

 
160

Others (three in total)
2.5
 
18

 
4.0
 
3

 
0.0
 

 

 
21

Total
 
 
$
319

 
 
 
$
38

 
 
 
$
1

 
$
3

 
$
361

The following tables present details of the Company’s purchased intangible assets (in millions): 
January 27, 2018
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,465

 
$
(1,659
)
 
$
1,806

Customer relationships
 
1,387

 
(867
)
 
520

Other
 
82

 
(51
)
 
31

Total purchased intangible assets with finite lives
 
4,934

 
(2,577
)
 
2,357

In-process research and development, with indefinite lives
 
117

 

 
117

       Total
 
$
5,051

 
$
(2,577
)
 
$
2,474

 
July 29, 2017
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,182

 
$
(1,386
)
 
$
1,796

Customer relationships
 
1,353

 
(765
)
 
588

Other
 
82

 
(38
)
 
44

Total purchased intangible assets with finite lives
 
4,617

 
(2,189
)
 
2,428

In-process research and development, with indefinite lives
 
111

 

 
111

       Total
 
$
4,728

 
$
(2,189
)
 
$
2,539

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

12

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


There were no impairment charges related to purchased intangible assets for the three and six months ended January 27, 2018. Impairment charges related to purchased intangible assets for the three and six months ended January 28, 2017 were zero and $42 million, respectively. Of these impairment charges, $38 million was recorded to restructuring and other charges in connection with the Company's decision to exit certain product lines, and the corresponding elimination of future associated cash flows. Impairment charges were primarily as a result of declines in estimated fair values of certain purchased intangible assets resulting from the reduction or elimination of expected future cash flows associated with certain of the Company’s technology and IPR&D intangible assets.
The following table presents the amortization of purchased intangible assets, including impairment charges (in millions):
 
Three Months Ended
 
Six Months Ended
 
January 27, 2018
 
January 28, 2017
 
January 27, 2018
 
January 28, 2017
Amortization of purchased intangible assets:
 
 
 
 
 
 
 
Cost of sales
$
160

 
$
124

 
$
314

 
$
253

Operating expenses
 
 


 
 
 
 
Amortization of purchased intangible assets
60

 
64

 
121

 
142

Restructuring and other charges

 

 

 
38

Total
$
220

 
$
188

 
$
435

 
$
433

The estimated future amortization expense of purchased intangible assets with finite lives as of January 27, 2018 is as follows (in millions):
Fiscal Year
Amount
2018 (remaining six months)
$
431

2019
781

2020
564

2021
364

2022
145

Thereafter
72

   Total
$
2,357



13

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


5.
Restructuring and Other Charges
The Company began taking action under a restructuring plan in August 2016 (the "Fiscal 2017 Plan"), in order to reinvest in its key priority areas. In the first quarter of fiscal 2018, the Company extended the Fiscal 2017 Plan to include an additional $150 million of estimated additional pretax charges for employee severance and other one-time termination benefits. The Company has substantially completed the Fiscal 2017 Plan and has incurred cumulative charges of $1.0 billion. These aggregate pretax charges are primarily cash based and consist of employee severance and other one-time termination benefits, and other associated costs. In connection with this Plan, the Company incurred charges of $98 million and $133 million for the three months ended January 27, 2018 and January 28, 2017, respectively, and $250 million and $544 million for the six months ended January 27, 2018 and January 28, 2017, respectively.
The following tables summarize the activities related to the restructuring and other charges (in millions):
 
 
FISCAL 2017 PLAN
 
 
 
 
Employee
Severance
 
Other
 
Total
Liability as of July 29, 2017
 
$
74

 
$
43

 
$
117

Charges
 
223

 
27

 
250

Cash payments
 
(213
)
 
(27
)
 
(240
)
Non-cash items
 
3

 
(18
)
 
(15
)
Liability as of January 27, 2018
 
$
87

 
$
25

 
$
112

 
 
FISCAL 2017 AND PRIOR PLANS
 
 
 
 
Employee
Severance
 
Other
 
Total
Liability as of July 30, 2016
 
$
21

 
$
24

 
$
45

Charges
 
452

 
92

 
544

Cash payments
 
(381
)
 
(7
)
 
(388
)
Non-cash items
 
(6
)
 
(67
)
 
(73
)
Liability as of January 28, 2017
 
$
86

 
$
42

 
$
128



14

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):
 
 
January 27,
2018
 
July 29,
2017
Inventories:
 
 
 
 
Raw materials
 
$
385

 
$
289

Work in Process
 

 
1

Finished goods:
 
 
 

Distributor inventory and deferred cost of sales
 
465

 
451

Manufactured finished goods
 
727

 
552

Total finished goods
 
1,192

 
1,003

Service-related spares
 
292

 
300

Demonstration systems
 
27

 
23

Total
 
$
1,896

 
$
1,616

Property and equipment, net:
 
 
 
 
Gross property and equipment:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,790

 
$
4,926

Computer equipment and related software
 
1,207

 
1,258

Production, engineering, and other equipment
 
5,702

 
5,707

Operating lease assets
 
364

 
356

Furniture and fixtures
 
375

 
572

Total gross property and equipment
 
12,438

 
12,819

Less: accumulated depreciation and amortization
 
(9,325
)
 
(9,497
)
Total
 
$
3,113

 
$
3,322

Deferred revenue:
 
 
 
 
Service
 
$
10,963

 
$
11,302

Product:
 

 
 
Deferred revenue related to recurring software and subscription offers
 
5,451

 
4,971

Other product deferred revenue
 
2,374

 
2,221

Total product deferred revenue
 
7,825

 
7,192

Total
 
$
18,788

 
$
18,494

Reported as:
 

 
 
Current
 
$
11,102

 
$
10,821

Noncurrent
 
7,686

 
7,673

Total
 
$
18,788

 
$
18,494




15

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. 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. Lease receivables consist of arrangements with terms of four years on average. Loan receivables represent financing arrangements related to the sale of the Company’s hardware, software, and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. Loan receivables generally have terms of up to three years. Financed service contracts include financing receivables related to technical support and advanced services. 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):
January 27, 2018
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Gross
$
2,762

 
$
4,846

 
$
2,479

 
$
10,087

Residual value
168

 

 

 
168

Unearned income
(145
)
 

 

 
(145
)
Allowance for credit loss
(165
)
 
(94
)
 
(13
)
 
(272
)
Total, net
$
2,620

 
$
4,752

 
$
2,466

 
$
9,838

Reported as:
 
 
 
 
 
 
 
Current
$
1,222

 
$
2,258

 
$
1,445

 
$
4,925

Noncurrent
1,398

 
2,494

 
1,021

 
4,913

Total, net
$
2,620

 
$
4,752

 
$
2,466

 
$
9,838

July 29, 2017
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Gross
$
2,784

 
$
4,560

 
$
2,517

 
$
9,861

Residual value
173

 

 

 
173

Unearned income
(145
)
 

 

 
(145
)
Allowance for credit loss
(162
)
 
(103
)
 
(30
)
 
(295
)
Total, net
$
2,650

 
$
4,457

 
$
2,487

 
$
9,594

Reported as:
 
 
 
 
 
 
 
Current
$
1,301

 
$
2,104

 
$
1,451

 
$
4,856

Noncurrent
1,349

 
2,353

 
1,036

 
4,738

Total, net
$
2,650

 
$
4,457

 
$
2,487

 
$
9,594

Future minimum lease payments to the Company on lease receivables as of January 27, 2018 are summarized as follows (in millions):
Fiscal Year
Amount
2018 (remaining six months)
$
707

2019
1,054

2020
602

2021
292

2022
98

Thereafter
9

Total
$
2,762

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

16

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


(b)
Credit Quality of Financing Receivables
Gross receivables, excluding residual value, less unearned income categorized by the Company’s internal credit risk rating as of January 27, 2018 and July 29, 2017 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
January 27, 2018
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,322

 
$
1,244

 
$
51

 
$
2,617

Loan receivables
3,054

 
1,716

 
76

 
4,846

Financed service contracts
1,572

 
895

 
12

 
2,479

Total
$
5,948

 
$
3,855

 
$
139

 
$
9,942

 
INTERNAL CREDIT RISK RATING
July 29, 2017
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,408

 
$
1,181

 
$
50

 
$
2,639

Loan receivables
2,865

 
1,516

 
179

 
4,560

Financed service contracts
1,593

 
902

 
22

 
2,517

Total
$
5,866

 
$
3,599

 
$
251

 
$
9,716

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.
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.
The following tables present the aging analysis of gross receivables, excluding residual value and less unearned income as of January 27, 2018 and July 29, 2017 (in millions):
 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
January 27, 2018
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
98

 
$
96

 
$
278

 
$
472

 
$
2,145

 
$
2,617

 
$
19

 
$
19

Loan receivables
66

 
124

 
151

 
341

 
4,505

 
4,846

 
45

 
45

Financed service contracts
54

 
85

 
414

 
553

 
1,926

 
2,479

 
2

 
2

Total
$
218

 
$
305

 
$
843

 
$
1,366

 
$
8,576

 
$
9,942

 
$
66

 
$
66

 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 29, 2017
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
160

 
$
60

 
$
216

 
$
436

 
$
2,203

 
$
2,639

 
$
14

 
$
14

Loan receivables
230

 
48

 
259

 
537

 
4,023

 
4,560

 
43

 
43

Financed service contracts
160

 
77

 
523

 
760

 
1,757

 
2,517

 
18

 
2

Total
$
550

 
$
185

 
$
998

 
$
1,733

 
$
7,983

 
$
9,716

 
$
75

 
$
59

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables is presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The balances of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $462 million and $666 million as of January 27, 2018 and July 29, 2017, respectively.

17

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


As of January 27, 2018, the Company had financing receivables of $358 million, net of unbilled or current receivables, 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 $315 million as of July 29, 2017.
(c)
Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
Three months ended January 27, 2018
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of October 28, 2017
$
160

 
$
106

 
$
23

 
$
289

Provisions
3

 
(13
)
 
(10
)
 
(20
)
Foreign exchange and other
2

 
1

 

 
3

Allowance for credit loss as of January 27, 2018
$
165

 
$
94

 
$
13

 
$
272

Six months ended January 27, 2018
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of July 29, 2017
$
162

 
$
103

 
$
30

 
$
295

Provisions
1

 
(11
)
 
(16
)
 
(26
)
Foreign exchange and other
2

 
2

 
(1
)
 
3

Allowance for credit loss as of January 27, 2018
$
165

 
$
94

 
$
13

 
$
272

Three months ended January 28, 2017
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of October 29, 2016
$
227

 
$
111

 
$
48

 
$
386

Provisions
2

 

 
(1
)
 
1

Recoveries (write-offs), net
(2
)
 
(4
)
 

 
(6
)
Foreign exchange and other
(2
)
 
(1
)
 

 
(3
)
Allowance for credit loss as of January 28, 2017
$
225

 
$
106

 
$
47

 
$
378

Six months ended January 28, 2017
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of July 30, 2016
$
230

 
$
97

 
$
48

 
$
375

Provisions
(2
)
 
12

 
(1
)
 
9

Recoveries (write-offs), net
(2
)
 
(4
)
 

 
(6
)
Foreign exchange and other
(1
)
 
1

 

 

Allowance for credit loss as of January 28, 2017
$
225

 
$
106

 
$
47

 
$
378

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.

18

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


Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. These balances, as of January 27, 2018 and July 29, 2017, 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):
 
January 27, 2018
 
July 29, 2017
Operating lease assets
$
364

 
$
356

Accumulated depreciation
(232
)
 
(212
)
Operating lease assets, net
$
132

 
$
144

Minimum future rentals on noncancelable operating leases as of January 27, 2018 are summarized as follows (in millions):
Fiscal Year
Amount
2018 (remaining six months)
$
103

2019
137

2020
68

2021
15

Thereafter
2

Total
$
325



8.
Investments
(a)
Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
January 27, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
17,506

 
$

 
$
(140
)
 
$
17,366

U.S. government agency securities
1,722

 

 
(10
)
 
1,712

Non-U.S. government and agency securities
340

 

 
(1
)
 
339

Corporate debt securities
31,508

 
80

 
(233
)
 
31,355

U.S. agency mortgage-backed securities
2,106

 

 
(49
)
 
2,057

Commercial paper
1,414

 

 

 
1,414

Certificates of deposit
196

 

 

 
196

Total fixed income securities
54,792

 
80

 
(433
)
 
54,439

Publicly traded equity securities
924

 
697

 
(1
)
 
1,620

Total (1)
$
55,716

 
$
777

 
$
(434
)
 
$
56,059


19

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


July 29, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
19,880

 
$
3

 
$
(60
)
 
$
19,823

U.S. government agency securities
2,057

 

 
(5
)
 
2,052

Non-U.S. government and agency securities
389

 

 
(1
)
 
388

Corporate debt securities
31,626

 
202

 
(93
)
 
31,735

U.S. agency mortgage-backed securities
2,037

 
3

 
(17
)
 
2,023

Commercial paper
996

 

 

 
996

Certificates of deposit
60

 

 

 
60

Total fixed income securities
57,045

 
208

 
(176
)