10-Q 1 a10qq3fy18.htm 10-Q Q3 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 April 28, 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 May 17, 2018: 4,702,882,494
____________________________________ 


1

Cisco Systems, Inc.
Form 10-Q for the Quarter Ended April 28, 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)
 
April 28, 2018
 
July 29, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,719

 
$
11,708

Investments
47,712

 
58,784

Accounts receivable, net of allowance for doubtful accounts of $115 at April 28, 2018 and $211 at July 29, 2017
4,274

 
5,146

Inventories
1,900

 
1,616

Financing receivables, net
4,868

 
4,856

Other current assets
1,668

 
1,593

Total current assets
67,141

 
83,703

Property and equipment, net
3,082

 
3,322

Financing receivables, net
4,915

 
4,738

Goodwill
31,654

 
29,766

Purchased intangible assets, net
2,681

 
2,539

Deferred tax assets
3,044

 
4,239

Other assets
1,491

 
1,511

TOTAL ASSETS
$
114,008

 
$
129,818

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
7,736

 
$
7,992

Accounts payable
1,552

 
1,385

Income taxes payable
962

 
98

Accrued compensation
2,966

 
2,895

Deferred revenue
11,301

 
10,821

Other current liabilities
4,125

 
4,392

Total current liabilities
28,642

 
27,583

Long-term debt
20,336

 
25,725

Income taxes payable
9,076

 
1,250

Deferred revenue
7,652

 
7,673

Other long-term liabilities
1,641

 
1,450

Total liabilities
67,347

 
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; 4,734 and 4,983 shares issued and outstanding at April 28, 2018 and July 29, 2017, respectively
43,556

 
45,253

Retained earnings
3,709

 
20,838

Accumulated other comprehensive income (loss)
(604
)
 
46

Total equity
46,661

 
66,137

TOTAL LIABILITIES AND EQUITY
$
114,008

 
$
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
 
Nine Months Ended
 
April 28, 2018
 
April 29, 2017
 
April 28, 2018
 
April 29, 2017
REVENUE:
 
 
 
 
 
 
 
Product
$
9,304

 
$
8,885

 
$
27,067

 
$
26,678

Service
3,159

 
3,055

 
9,419

 
9,194

Total revenue
12,463


11,940

 
36,486

 
35,872

COST OF SALES:



 
 
 
 
Product
3,625

 
3,405

 
10,594

 
10,113

Service
1,079

 
1,017

 
3,208

 
3,081

Total cost of sales
4,704


4,422

 
13,802

 
13,194

GROSS MARGIN
7,759

 
7,518

 
22,684

 
22,678

OPERATING EXPENSES:



 
 
 
 
Research and development
1,590

 
1,507

 
4,706

 
4,560

Sales and marketing
2,325

 
2,226

 
6,894

 
6,866

General and administrative
561

 
487

 
1,601

 
1,498

Amortization of purchased intangible assets
67

 
59

 
188

 
201

Restructuring and other charges
82

 
70

 
332

 
614

Total operating expenses
4,625


4,349

 
13,721

 
13,739

OPERATING INCOME
3,134


3,169

 
8,963

 
8,939

Interest income
380

 
354

 
1,155

 
978

Interest expense
(237
)
 
(219
)
 
(719
)
 
(639
)
Other income (loss), net
(24
)
 
(113
)
 
48

 
(171
)
Interest and other income (loss), net
119


22

 
484

 
168

INCOME BEFORE PROVISION FOR INCOME TAXES
3,253


3,191

 
9,447

 
9,107

Provision for income taxes
562

 
676

 
13,140

 
1,922

NET INCOME (LOSS)
$
2,691


$
2,515

 
$
(3,693
)
 
$
7,185




 


 
 
 
 
Net income (loss) per share:


 


 
 
 
 
Basic
$
0.56


$
0.50

 
$
(0.76
)
 
$
1.43

Diluted
$
0.56


$
0.50

 
$
(0.76
)
 
$
1.42

Shares used in per-share calculation:





 
 
 
 
Basic
4,791

 
5,005

 
4,892

 
5,015

Diluted
4,844

 
5,045

 
4,892

 
5,056







 
 
 
 
Cash dividends declared per common share
$
0.33

 
$
0.29

 
$
0.91

 
$
0.81

See Notes to Consolidated Financial Statements.

4

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
April 28, 2018
 
April 29, 2017
 
April 28, 2018
 
April 29, 2017
Net income (loss)
$
2,691

 
$
2,515

 
$
(3,693
)
 
$
7,185

Available-for-sale investments:
 
 
 
 
 
 
 
Change in net unrealized gains and losses, net of tax benefit (expense) of $18 and $(4) for the three and nine months ended April 28, 2018, respectively, and $(25) and $129 for the corresponding periods of fiscal 2017, respectively
(428
)
 
229

 
(624
)
 
(168
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $3 and $28 for the three and nine months ended April 28, 2018, respectively, and $(32) and $(38) for the corresponding periods of fiscal 2017, respectively
(14
)
 
44

 
(80
)
 
53


(442
)
 
273

 
(704
)
 
(115
)
Cash flow hedging instruments:
 
 
 
 
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $0 and $(3) for the three and nine months ended April 28, 2018, respectively, and $(5) and $(1) for the corresponding periods of fiscal 2017, respectively
(10
)
 
20

 
25

 
(24
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $3 and $7 for the three and nine months ended April 28, 2018, respectively, and $(2) and $(5) for the corresponding periods of fiscal 2017, respectively
(25
)
 
25

 
(52
)
 
61


(35
)
 
45

 
(27
)
 
37

Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $3 and $(3) for the three and nine months ended April 28, 2018, respectively, and $(6) and $(7) for the corresponding periods of fiscal 2017, respectively
(255
)
 
134

 
36

 
63

Other comprehensive income (loss)
(732
)
 
452

 
(695
)
 
(15
)
Comprehensive income (loss)
1,959

 
2,967

 
(4,388
)
 
7,170

Comprehensive (income) loss attributable to noncontrolling interests
—

 
7

 
—

 
(1
)
Comprehensive income (loss) attributable to Cisco Systems, Inc.
$
1,959

 
$
2,974

 
$
(4,388
)
 
$
7,169

See Notes to Consolidated Financial Statements.



5

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

April 28, 2018
 
April 29, 2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(3,693
)
 
$
7,185

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
1,676

 
1,708

Share-based compensation expense
1,184

 
1,124

Provision for receivables
(104
)
 
20

Deferred income taxes
1,013

 
(125
)
Excess tax benefits from share-based compensation
—

 
(125
)
(Gains) losses on divestitures, investments and other, net
(159
)
 
156

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

 

Accounts receivable
1,064

 
1,253

Inventories
(289
)
 
(149
)
Financing receivables
(165
)
 
(773
)
Other assets
(135
)
 
140

Accounts payable
148

 
149

Income taxes, net
8,795

 
(112
)
Accrued compensation
53

 
(154
)
Deferred revenue
415

 
592

Other liabilities
(237
)
 
(1,014
)
Net cash provided by operating activities
9,566

 
9,875

Cash flows from investing activities:
 
 
 
Purchases of investments
(14,132
)
 
(35,562
)
Proceeds from sales of investments
12,422

 
24,414

Proceeds from maturities of investments
12,259

 
8,390

Acquisition of businesses, net of cash and cash equivalents acquired
(2,789
)
 
(3,211
)
Proceeds from business divestitures
27

 
—

Purchases of investments in privately held companies
(126
)
 
(172
)
Return of investments in privately held companies
163

 
168

Acquisition of property and equipment
(620
)
 
(756
)
Proceeds from sales of property and equipment
54

 
6

Other
(3
)
 
35

Net cash provided by (used in) investing activities
7,255

 
(6,688
)
Cash flows from financing activities:
 
 
 
Issuances of common stock
318

 
418

Repurchases of common stock—repurchase program
(11,562
)
 
(2,516
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(541
)
 
(497
)
Short-term borrowings, original maturities of 90 days or less, net
(2,502
)
 
2,000

Issuances of debt
6,877

 
6,232

Repayments of debt
(9,875
)
 
(4,151
)
Excess tax benefits from share-based compensation
—

 
125

Dividends paid
(4,433
)
 
(4,063
)
Other
(92
)
 
(250
)
Net cash used in financing activities
(21,810
)
 
(2,702
)
Net increase (decrease) in cash and cash equivalents
(4,989
)
 
485

Cash and cash equivalents, beginning of period
11,708

 
7,631

Cash and cash equivalents, end of period
$
6,719

 
$
8,116

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
739

 
$
727

Cash paid for income taxes, net
$
3,332

 
$
2,159

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)
 
 
 
 
(3,693
)
 
 
 
(3,693
)
 
 
 
(3,693
)
Other comprehensive income (loss)
 
 
 
 
 
 
(695
)
 
(695
)
 
 
 
(695
)
Issuance of common stock
61

 
318

 
 
 
 
 
318

 
 
 
318

Repurchase of common stock
(294
)
 
(2,679
)
 
(8,967
)
 
 
 
(11,646
)
 
 
 
(11,646
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(16
)
 
(541
)
 
 
 
 
 
(541
)
 
 
 
(541
)
Cash dividends declared ($0.91 per common share)
 
 
 
 
(4,433
)
 
 
 
(4,433
)
 
 
 
(4,433
)
Effect of adoption of accounting standards
 
 
 
 
(36
)
 
45

 
9

 
 
 
9

Share-based compensation
 
 
1,184

 
 
 
 
 
1,184

 
 
 
1,184

Purchase acquisitions and other
 
 
21

 
 
 
 
 
21

 
 
 
21

BALANCE AT APRIL 28, 2018
4,734

 
$
43,556

 
$
3,709

 
$
(604
)
 
$
46,661

 
$
—

 
$
46,661


 
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
 
 
 
 
7,185

 
 
 
7,185

 
 
 
7,185

Other comprehensive income (loss)
 
 
 
 
 
 
(16
)
 
(16
)
 
1

 
(15
)
Issuance of common stock
65

 
418

 
 
 
 
 
418

 
 
 
418

Repurchase of common stock
(80
)
 
(708
)
 
(1,797
)
 
 
 
(2,505
)
 
 
 
(2,505
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(16
)
 
(497
)
 
 
 
 
 
(497
)
 
 
 
(497
)
Cash dividends declared ($0.81 per common share)
 
 
 
 
(4,063
)
 
 
 
(4,063
)
 
 
 
(4,063
)
Tax effects from employee stock incentive plans
 
 
(34
)
 
 
 
 
 
(34
)
 
 
 
(34
)
Share-based compensation
 
 
1,138

 
 
 
 
 
1,138

 
 
 
1,138

Purchase acquisitions and other
 
 
170

 
 
 
 
 
170

 
 
 
170

BALANCE AT APRIL 29, 2017
4,998

 
$
45,003

 
$
20,721

 
$
(342
)
 
$
65,382

 
$
—

 
$
65,382



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 April 28, 2018 and for the three and nine months ended April 28, 2018 and April 29, 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 April 28, 2018; the results of operations and the statements of comprehensive income (loss) for the three and nine months ended April 28, 2018 and April 29, 2017; the statements of cash flows and equity for the nine months ended April 28, 2018 and April 29, 2017, as applicable, have been made. The results of operations for the three and nine months ended April 28, 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 nine months ended April 28, 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.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued an accounting standard update that allows companies to reclassify from accumulated other comprehensive income ("AOCI") to retained earnings stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "Tax Act"). The guidance is effective January 1, 2019 with early adoption permitted. Cisco early adopted this accounting standard update in the third quarter of fiscal 2018 and elected not to reclassify prior periods. Adoption of this standard resulted in a decrease of $45 million to retained earnings due to the reclassification from AOCI to retained earnings.

8
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



(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 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 the timing of when revenue is typically recognized under the current revenue standard compared to the timing of when revenue will typically be recognized under the New Revenue Standard for these major 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.

9
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


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 and subsequent amendments 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.
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 currently estimates a net increase of approximately $1.3 billion to net deferred tax assets and retained earnings upon adoption of the standard related to the unrecognized income tax effects of asset transfers that occurred prior to the adoption date. The ongoing impact of this standard will be facts and circumstances dependent on any transactions within its scope.
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.


10
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)



3.
Acquisitions and Divestitures
The Company completed seven acquisitions during the nine months ended April 28, 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

BroadSoft
2,179

 
353

 
430

 
1,396

Others (four in total)
72

 
4

 
42

 
26

Total
$
2,996

 
$
328

 
$
812

 
$
1,856

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.
On February 1, 2018, the Company completed its acquisition of publicly held BroadSoft, Inc. ("BroadSoft"), a cloud calling and contact center solutions company. Revenue from the BroadSoft acquisition has been included in the Company's Applications product category.
The total purchase consideration related to acquisitions completed during the nine months ended April 28, 2018 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these acquisitions was approximately $174 million. Total transaction costs related to acquisition and divestiture activities were $25 million and $7 million for the nine months ended April 28, 2018 and April 29, 2017, respectively. These transaction costs were expensed as incurred in general and administrative expenses ("G&A") in the Consolidated Statements of Operations. For the nine months ended April 28, 2018, the Company recognized a gain of $46 million 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 nine months ended April 28, 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 nine months ended April 28, 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 nine months ended April 28, 2018.
Pending Divestiture On May 1, 2018, the Company announced a definitive agreement to sell its Service Provider Video Software Solutions ("SPVSS") business. As of April 28, 2018, this business had tangible assets of approximately $200 million (primarily comprised of accounts receivables, inventories and various other current and long-term assets) and net intangible assets and goodwill (based on relative fair value) of $300 million. In addition, the business had total liabilities of approximately $370 million (primarily comprised of deferred revenue and various other current and long-term liabilities). These assets and liabilities were held for sale and were not presented separately as the amounts were not material to the Consolidated Balance Sheet. The transaction is expected to close in the first quarter of fiscal 2019, subject to regulatory approvals and customary closing conditions.

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 nine months ended April 28, 2018 (in millions):
 
Balance at
 
 
 
 
 
Balance at
 
July 29, 2017
 
Acquisitions
 
Other
 
April 28, 2018
Americas
$
18,691

 
$
1,194

 
$
17

 
$
19,902

EMEA
7,057

 
491

 
9

 
7,557

APJC
4,018

 
171

 
6

 
4,195

Total
$
29,766

 
$
1,856

 
$
32

 
$
31,654

“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 nine months ended April 28, 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

BroadSoft
4.0
 
255

 
6.0
 
169

 
2.0
 
6

 
—

 
430

Others (four in total)
3.9
 
39

 
4.0
 
3

 
0.0
 
—

 
—

 
42

Total
 
 
$
595

 
 
 
$
207

 
 
 
$
7

 
$
3

 
$
812

The following tables present details of the Company’s purchased intangible assets (in millions): 
April 28, 2018
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,657

 
$
(1,738
)
 
$
1,919

Customer relationships
 
1,538

 
(909
)
 
629

Other
 
63

 
(34
)
 
29

Total purchased intangible assets with finite lives
 
5,258

 
(2,681
)
 
2,577

In-process research and development, with indefinite lives
 
104

 
—

 
104

       Total
 
$
5,362

 
$
(2,681
)
 
$
2,681

 
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)


Impairment charges related to purchased intangible assets for the three and nine months ended April 28, 2018 were $1 million. Impairment charges related to purchased intangible assets for the three and nine months ended April 29, 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
 
Nine Months Ended
 
April 28, 2018
 
April 29, 2017
 
April 28, 2018
 
April 29, 2017
Amortization of purchased intangible assets:
 
 
 
 
 
 
 
Cost of sales
$
177

 
$
141

 
$
491

 
$
394

Operating expenses
 
 


 
 
 
 
Amortization of purchased intangible assets
67

 
59

 
188

 
201

Restructuring and other charges
—

 
—

 
—

 
38

Total
$
244

 
$
200

 
$
679

 
$
633

The estimated future amortization expense of purchased intangible assets with finite lives as of April 28, 2018 is as follows (in millions):
Fiscal Year
Amount
2018 (remaining three months)
$
235

2019
883

2020
665

2021
463

2022
212

Thereafter
119

   Total
$
2,577



13
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


5.
Restructuring and Other Charges
Fiscal 2018 Plan The Company initiated a restructuring plan in the third quarter of fiscal 2018 (the "Fiscal 2018 Plan") in order to realign the organization and enable further investment in key priority areas. The total pretax charges are estimated to be approximately $300 million. In connection with the Fiscal 2018 Plan, the Company incurred charges of $82 million for the three and nine months ended April 28, 2018. These aggregate pretax charges are primarily cash based and consist of employee severance and other one-time termination benefits, and other associated costs. The Company expects the Fiscal 2018 Plan to be substantially completed in fiscal 2019.
Fiscal 2017 Plan 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 incurred cumulative charges of approximately $1.0 billion, which were primarily cash based and consisted of employee severance and other one-time termination benefits, and other associated costs. The Company completed the Fiscal 2017 Plan in the third quarter of fiscal 2018.
The following tables summarize the activities related to the restructuring and other charges (in millions):
 
 
FISCAL 2017 PLAN
 
FISCAL 2018 PLAN
 
 
 
 
Employee
Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 29, 2017
 
$
74

 
$
43

 
$
—

 
$
—

 
$
117

Charges
 
223

 
27

 
75

 
7

 
332

Cash payments
 
(245
)
 
(30
)
 
(49
)
 
(1
)
 
(325
)
Non-cash items
 
4

 
(18
)
 
—

 
(6
)
 
(20
)
Liability as of April 28, 2018
 
$
56

 
$
22

 
$
26

 
$
—

 
$
104

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

 
$
24

 
$
45

Charges
 
510

 
104

 
614

Cash payments
 
(463
)
 
(26
)
 
(489
)
Non-cash items
 
(7
)
 
(57
)
 
(64
)
Liability as of April 29, 2017
 
$
61

 
$
45

 
$
106



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):
 
 
April 28,
2018
 
July 29,
2017
Inventories:
 
 
 
 
Raw materials
 
$
459

 
$
289

Work in Process
 
—

 
1

Finished goods:
 
 
 
 
Distributor inventory and deferred cost of sales
 
476

 
451

Manufactured finished goods
 
659

 
552

Total finished goods
 
1,135

 
1,003

Service-related spares
 
273

 
300

Demonstration systems
 
33

 
23

Total
 
$
1,900

 
$
1,616

Property and equipment, net:
 
 
 
 
Gross property and equipment:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,768

 
$
4,926

Computer equipment and related software
 
1,111

 
1,258

Production, engineering, and other equipment
 
5,709

 
5,707

Operating lease assets
 
370

 
356

Furniture and fixtures
 
368

 
572

Total gross property and equipment
 
12,326

 
12,819

Less: accumulated depreciation and amortization
 
(9,244
)
 
(9,497
)
Total
 
$
3,082

 
$
3,322

Deferred revenue:
 
 
 
 
Service
 
$
10,960

 
$
11,302

Product:
 

 
 
Deferred revenue related to recurring software and subscription offers
 
5,635

 
4,971

Other product deferred revenue
 
2,358

 
2,221

Total product deferred revenue
 
7,993

 
7,192

Total
 
$
18,953

 
$
18,494

Reported as:
 

 
 
Current
 
$
11,301

 
$
10,821

Noncurrent
 
7,652

 
7,673

Total
 
$
18,953

 
$
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):
April 28, 2018
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Gross
$
2,660

 
$
4,963

 
$
2,398

 
$
10,021

Residual value
166

 
—

 
—

 
166

Unearned income
(142
)
 
—

 
—

 
(142
)
Allowance for credit loss
(165
)
 
(85
)
 
(12
)
 
(262
)
Total, net
$
2,519

 
$
4,878

 
$
2,386

 
$
9,783

Reported as:
 
 
 
 
 
 
 
Current
$
1,223

 
$
2,288

 
$
1,357

 
$
4,868

Noncurrent
1,296

 
2,590

 
1,029

 
4,915

Total, net
$
2,519

 
$
4,878

 
$
2,386

 
$
9,783

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 April 28, 2018 are summarized as follows (in millions):
Fiscal Year
Amount
2018 (remaining three months)
$
324

2019
1,158

2020
673

2021
348

2022
134

Thereafter
23

Total
$
2,660

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 April 28, 2018 and July 29, 2017 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
April 28, 2018
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,207

 
$
1,248

 
$
63

 
$
2,518

Loan receivables
3,234

 
1,654

 
75

 
4,963

Financed service contracts
1,519

 
863

 
16

 
2,398

Total
$
5,960

 
$
3,765

 
$
154

 
$
9,879

 
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 April 28, 2018 and July 29, 2017 (in millions):
 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
April 28, 2018
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
32

 
$
42

 
$
282

 
$
356

 
$
2,162

 
$
2,518

 
$
15

 
$
15

Loan receivables
92

 
74

 
353

 
519

 
4,444

 
4,963

 
37

 
37

Financed service contracts
94

 
121

 
321

 
536

 
1,862

 
2,398

 
3

 
3

Total
$
218

 
$
237

 
$
956

 
$
1,411

 
$
8,468

 
$
9,879

 
$
55

 
$
55

 
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

17
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 $618 million and $666 million as of April 28, 2018 and July 29, 2017, respectively.
As of April 28, 2018, the Company had financing receivables of $311 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 April 28, 2018
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of January 27, 2018
$
165

 
$
94

 
$
13

 
$
272

Provisions
1

 
(8
)
 
(1
)
 
(8
)
Foreign exchange and other
(1
)
 
(1
)
 
—

 
(2
)
Allowance for credit loss as of April 28, 2018
$
165

 
$
85

 
$
12

 
$
262

Nine months ended April 28, 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
2

 
(19
)
 
(17
)
 
(34
)
Foreign exchange and other
1

 
1

 
(1
)
 
1

Allowance for credit loss as of April 28, 2018
$
165

 
$
85

 
$
12

 
$
262

Three months ended April 29, 2017
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of January 28, 2017
$
225

 
$
106

 
$
47

 
$
378

Provisions
3

 
10

 
(14
)
 
(1
)
Recoveries (write-offs), net
(8
)
 
—

 
(1
)
 
(9
)
Foreign exchange and other
—

 
1

 
—

 
1

Allowance for credit loss as of April 29, 2017
$
220

 
$
117

 
$
32

 
$
369

Nine months ended April 29, 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
1

 
22

 
(15
)
 
8

Recoveries (write-offs), net
(10
)
 
(4
)
 
(1
)
 
(15
)
Foreign exchange and other
(1
)
 
2

 
—

 
1

Allowance for credit loss as of April 29, 2017
$
220

 
$
117

 
$
32

 
$
369

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 April 28, 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):
 
April 28, 2018
 
July 29, 2017
Operating lease assets
$
370

 
$
356

Accumulated depreciation
(242
)
 
(212
)
Operating lease assets, net
$
128

 
$
144

Minimum future rentals on noncancelable operating leases as of April 28, 2018 are summarized as follows (in millions):
Fiscal Year
Amount
2018 (remaining three months)
$
54

2019
168

2020
85

2021
21

Thereafter
2

Total
$
330



8.
Investments
(a)
Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
April 28, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
13,672

 
$
—

 
$
(141
)
 
$
13,531

U.S. government agency securities
1,166

 
—

 
(10
)
 
1,156

Non-U.S. government and agency securities
282

 
—

 
(1
)
 
281

Corporate debt securities
29,639

 
53

 
(454
)
 
29,238

U.S. agency mortgage-backed securities
2,009

 
—

 
(73
)
 
1,936

Commercial paper
195

 
—

 
—

 
195

Certificates of deposit
50

 
—

 
—

 
50

Total fixed income securities
47,013

 
53

 
(679
)
 
46,387

Publicly traded equity securities
843

 
486

 
(4
)
 
1,325

Total (1)
$
47,856

 
$
539

 
$
(683
)
 
$
47,712


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