10-Q 1 a10qq1fy19.htm 10-Q Q1 FY2019 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 October 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-logoa14.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 every Interactive Data File required to be submitted 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 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
 
  
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 November 15, 2018: 4,495,961,730
____________________________________ 


1


Cisco Systems, Inc.
Form 10-Q for the Quarter Ended October 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)
 
October 27, 2018
 
July 28, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,410

 
$
8,934

Investments
34,183

 
37,614

Accounts receivable, net of allowance for doubtful accounts of $130 at October 27, 2018 and $129 at July 28, 2018
4,536

 
5,554

Inventories
1,572

 
1,846

Financing receivables, net
4,851

 
4,949

Other current assets
2,134

 
2,940

Total current assets
55,686

 
61,837

Property and equipment, net
2,956

 
3,006

Financing receivables, net
4,644

 
4,882

Goodwill
33,386

 
31,706

Purchased intangible assets, net
2,716

 
2,552

Deferred tax assets
3,960

 
3,219

Other assets
2,081

 
1,582

TOTAL ASSETS
$
105,429

 
$
108,784

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
7,241

 
$
5,238

Accounts payable
1,805

 
1,904

Income taxes payable
1,084

 
1,004

Accrued compensation
2,622

 
2,986

Deferred revenue
9,637

 
11,490

Other current liabilities
4,025

 
4,413

Total current liabilities
26,414

 
27,035

Long-term debt
18,323

 
20,331

Income taxes payable
8,216

 
8,585

Deferred revenue
7,177

 
8,195

Other long-term liabilities
1,451

 
1,434

Total liabilities
61,581

 
65,580

Commitments and contingencies (Note 13)

 

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; 4,517 and 4,614 shares issued and outstanding at October 27, 2018 and July 28, 2018, respectively
41,897

 
42,820

Retained earnings
3,169

 
1,233

Accumulated other comprehensive income (loss)
(1,218
)
 
(849
)
Total equity
43,848

 
43,204

TOTAL LIABILITIES AND EQUITY
$
105,429

 
$
108,784

See Notes to Consolidated Financial Statements.

3


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited) 
 
Three Months Ended
 
October 27, 2018
 
October 28, 2017
REVENUE:
 
 
 
Product
$
9,890

 
$
9,054

Service
3,182

 
3,082

Total revenue
13,072


12,136

COST OF SALES:



Product
3,799

 
3,615

Service
1,127

 
1,094

Total cost of sales
4,926


4,709

GROSS MARGIN
8,146

 
7,427

OPERATING EXPENSES:



Research and development
1,608

 
1,567

Sales and marketing
2,410

 
2,334

General and administrative
211

 
557

Amortization of purchased intangible assets
34

 
61

Restructuring and other charges
78

 
152

Total operating expenses
4,341


4,671

OPERATING INCOME
3,805


2,756

Interest income
344

 
379

Interest expense
(221
)
 
(235
)
Other income (loss), net
(19
)
 
62

Interest and other income (loss), net
104


206

INCOME BEFORE PROVISION FOR INCOME TAXES
3,909


2,962

Provision for income taxes
360

 
568

NET INCOME
$
3,549


$
2,394




 


Net income per share:


 


Basic
$
0.78


$
0.48

Diluted
$
0.77


$
0.48

Shares used in per-share calculation:





Basic
4,565

 
4,959

Diluted
4,614

 
4,994

See Notes to Consolidated Financial Statements.

4


CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
 
Three Months Ended
 
October 27, 2018
 
October 28, 2017
Net income
$
3,549

 
$
2,394

Available-for-sale investments:
 
 
 
Change in net unrealized gains and losses, net of tax benefit (expense) of $13 and $(23) for the three months ended October 27, 2018 and October 28, 2017, respectively
5

 
(5
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $0 and $10 for the three months ended October 27, 2018 and October 28, 2017, respectively
6

 
(23
)

11

 
(28
)
Cash flow hedging instruments:
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $1 and $(1) for the three months ended October 27, 2018 and October 28, 2017, respectively
(3
)
 
7

Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $0 and $2 for the three months ended October 27, 2018 and October 28, 2017, respectively

 
(11
)

(3
)
 
(4
)
Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $(1) and $(2) for the three months ended October 27, 2018 and October 28, 2017, respectively
(209
)
 
17

Other comprehensive income (loss)
(201
)
 
(15
)
Comprehensive income (loss)
3,348

 
2,379

Comprehensive (income) loss attributable to noncontrolling interests

 

Comprehensive income (loss) attributable to Cisco Systems, Inc.
$
3,348

 
$
2,379

See Notes to Consolidated Financial Statements.



5


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

October 27, 2018
 
October 28, 2017
Cash flows from operating activities:
 
 
 
Net income
$
3,549

 
$
2,394

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
465

 
566

Share-based compensation expense
403

 
392

Provision (benefit) for receivables
8

 
(17
)
Deferred income taxes
(72
)
 
178

(Gains) losses on divestitures, investments and other, net
7

 
(56
)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

 

Accounts receivable
892

 
957

Inventories
(34
)
 
(80
)
Financing receivables
273

 
(333
)
Other assets
(295
)
 
8

Accounts payable
(153
)
 
(235
)
Income taxes, net
(437
)
 
(419
)
Accrued compensation
(348
)
 
(215
)
Deferred revenue
(309
)
 
77

Other liabilities
(186
)
 
(137
)
Net cash provided by operating activities
3,763

 
3,080

Cash flows from investing activities:
 
 
 
Purchases of investments
(484
)
 
(8,275
)
Proceeds from sales of investments
2,805

 
2,682

Proceeds from maturities of investments
2,541

 
3,929

Acquisition of businesses, net of cash and cash equivalents acquired
(1,964
)
 
(725
)
Purchases of investments in privately held companies
(29
)
 
(20
)
Return of investments in privately held companies
16

 
81

Acquisition of property and equipment
(212
)
 
(168
)
Proceeds from sales of property and equipment
2

 
1

Other

 
(10
)
Net cash provided by (used in) investing activities
2,675

 
(2,505
)
Cash flows from financing activities:
 
 
 
Issuances of common stock
8

 
9

Repurchases of common stockrepurchase program
(5,076
)
 
(1,686
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(318
)
 
(342
)
Short-term borrowings, original maturities of 90 days or less, net

 
(2,498
)
Issuances of debt

 
5,482

Repayments of debt

 
(748
)
Dividends paid
(1,500
)
 
(1,436
)
Other
(59
)
 
(31
)
Net cash used in financing activities
(6,945
)
 
(1,250
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(507
)
 
(675
)
Cash, cash equivalents, and restricted cash, beginning of period
8,993

 
11,773

Cash, cash equivalents, and restricted cash, end of period
$
8,486

 
$
11,098

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
269

 
$
283

Cash paid for income taxes, net
$
869

 
$
810



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 28, 2018
4,614

 
$
42,820

 
$
1,233

 
$
(849
)
 
$
43,204

 
$

 
$
43,204

Net income
 
 
 
 
3,549

 
 
 
3,549

 
 
 
3,549

Other comprehensive income (loss)
 
 
 
 
 
 
(201
)
 
(201
)
 
 
 
(201
)
Issuance of common stock
19

 
8

 
 
 
 
 
8

 
 
 
8

Repurchase of common stock
(109
)
 
(1,016
)
 
(4,010
)
 
 
 
(5,026
)
 
 
 
(5,026
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(7
)
 
(318
)
 
 
 
 
 
(318
)
 
 
 
(318
)
Cash dividends declared ($0.33 per common share)
 
 
 
 
(1,500
)
 
 
 
(1,500
)
 
 
 
(1,500
)
Effect of adoption of accounting standards
 
 
 
 
3,897

 
(168
)
 
3,729

 
 
 
3,729

Share-based compensation
 
 
403

 
 
 
 
 
403

 
 
 
403

BALANCE AT OCTOBER 27, 2018
4,517

 
$
41,897

 
$
3,169

 
$
(1,218
)
 
$
43,848

 
$

 
$
43,848


 
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
 
 
 
 
2,394

 
 
 
2,394

 
 
 
2,394

Other comprehensive income (loss)
 
 
 
 
 
 
(15
)
 
(15
)
 

 
(15
)
Issuance of common stock
30

 
9

 
 
 
 
 
9

 
 
 
9

Repurchase of common stock
(51
)
 
(462
)
 
(1,158
)
 
 
 
(1,620
)
 
 
 
(1,620
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(11
)
 
(342
)
 
 
 
 
 
(342
)
 
 
 
(342
)
Cash dividends declared ($0.29 per common share)
 
 
 
 
(1,436
)
 
 
 
(1,436
)
 
 
 
(1,436
)
Effect of adoption of accounting standards
 
 


 
9

 
 
 
9

 
 
 
9

Share-based compensation
 
 
392

 
 
 
 
 
392

 
 
 
392

Purchase acquisitions and other
 
 
22

 
 
 
 
 
22

 
 
 
22

BALANCE AT OCTOBER 28, 2017
4,951

 
$
44,872

 
$
20,647

 
$
31

 
$
65,550

 
$

 
$
65,550



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,” “Cisco,” “we,” “us,” or “our”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2019 and fiscal 2018 are each 52-week fiscal years. The Consolidated Financial Statements include our accounts and those of our subsidiaries. All intercompany accounts and transactions have been eliminated. We conduct business globally and are 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).
We have prepared the accompanying financial data as of October 27, 2018 and for the three months ended October 27, 2018 and October 28, 2017, 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 28, 2018 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, we believe 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 our Annual Report on Form 10-K for the fiscal year ended July 28, 2018.
We consolidate our investments in certain variable interest entities (VIEs) where we are the primary beneficiary. The noncontrolling interests attributed to these investments, if any, are presented as a separate component from our equity in the equity section of the Consolidated Balance Sheets. The share of earnings attributable to the noncontrolling interests are not presented separately in the Consolidated Statements of Operations as these amounts are not material for any of the fiscal periods presented.
In the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet as of October 27, 2018; the results of operations and the statements of comprehensive income (loss) for the three months ended October 27, 2018 and October 28, 2017; the statements of cash flows and equity for the three months ended October 27, 2018 and October 28, 2017, as applicable, have been made. The results of operations for the three months ended October 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. We have evaluated subsequent events through the date that the financial statements were issued.

2.
Recent Accounting Pronouncements
(a)
New Accounting Updates Recently Adopted
Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, a new accounting standard related to revenue recognition. ASC 606 supersedes nearly all U.S. GAAP on revenue recognition and eliminated industry-specific guidance. The underlying principle of ASC 606 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.
ASC 606 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"). At the beginning of the first quarter of fiscal 2019, we adopted ASC 606 using the modified retrospective method to those contracts that were not completed as of July 28, 2018. Refer to Opening Balance Adjustments below for the impact of adoption on our Consolidated Financial Statements.
We have implemented new accounting policies, systems, processes, and internal controls necessary to support the requirements of ASC 606.
ASC 606 primarily impacts our revenue recognition for software arrangements and sales to two-tier distributors. In both areas, the new standard accelerates the recognition of revenue.

8

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


The table below details the timing of when revenue was typically recognized under the prior revenue standard compared to the timing of when revenue is typically recognized under ASC 606 for these major areas:
 
 
Prior Revenue Standard
 
ASC 606
Software arrangements:
 
 
 
 
Perpetual software licenses
 
Upfront
 
Upfront
Term software licenses
 
Ratable
 
Upfront
Security software licenses
 
Ratable
 
Ratable
Enterprise license agreements (software licenses)
 
Ratable
 
Upfront
Software support (maintenance)
 
Ratable
 
Ratable
Software-as-a-service
 
Ratable
 
Ratable
Two-tier distribution
 
Sell-Through
 
Sell-In
In addition to the above revenue recognition timing impacts, ASC 606 requires incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relates.
We enter into contracts with customers that can include various combinations of products and services which are generally distinct and accounted for as separate performance obligations. As a result, our contracts may contain multiple performance obligations. We determine whether arrangements are distinct based on whether the customer can benefit from the product or service on its own or together with other resources that are readily available and whether our commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. We classify our hardware, perpetual software licenses, and software-as-a-service (SaaS) as distinct performance obligations. Term software licenses represent multiple obligations, which include software licenses and software maintenance. In transactions where we deliver hardware or software, we are typically the principal and we record revenue and costs of goods sold on a gross basis. We refer to our term software licenses, security software licenses, SaaS, and associated service arrangements as subscription offers.
We recognize revenue upon transfer of control of promised goods or services in a contract with a customer in an amount that reflects the consideration we expect to receive in exchange for those products or services. Transfer of control occurs once the customer has the contractual right to use the product, generally upon shipment or once delivery and risk of loss has transferred to the customer. Transfer of control can also occur over time for software maintenance and services as the customer receives the benefit over the contract term. Our hardware and perpetual software licenses are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses include multiple performance obligations where the term licenses are recognized upfront upon transfer of control, with the associated software maintenance revenue recognized ratably over the contract term as services and software updates are provided. SaaS arrangements have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term as the customer consumes the services. On our product sales, we record consideration from shipping and handling on a gross basis within net product sales. We record our revenue net of any associated sales taxes.
Significant Judgments
Revenue is allocated among these performance obligations in a manner that reflects the consideration that we expect to be entitled to for the promised goods or services based on standalone selling prices (SSP). SSP is estimated for each distinct performance obligation and judgment may be required in their determination. The best evidence of SSP is the observable price of a product or service when we sell the goods separately in similar circumstances and to similar customers. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs.
We apply judgment in determining the transaction price as we may be required to estimate variable consideration when determining the amount of revenue to recognize. Variable consideration includes various rebate, cooperative marketing, and other incentive programs that we offer to our distributors, partners and customers. When determining the amount of revenue to recognize, we estimate the expected usage of these programs, applying the expected value or most likely estimate and update the estimate at each reporting period as actual utilization becomes available. We also consider the customers' right of return in determining the transaction price, where applicable.
We assess certain software licenses, such as for security software, that contain critical updates or upgrades which customers can download throughout the contract term. Without these updates or upgrades, the functionality of the software would diminish over a relatively short time period. These updates or upgrades provide the customer the full functionality of the purchased security software licenses and are required to maintain the security license's utility as the risks and threats in the environment are rapidly

9

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


changing. In these circumstances, the revenue from these software arrangements is recognized as a distinct performance obligation satisfied over the contract term.
For the additional disclosures required as part of ASC 606 see Note 3.
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 most significant impact of this accounting standard update is that it requires the remeasurement of investments not accounted for under the equity method to be recorded at fair value through the Consolidated Statement of Operations at the end of each reporting period. The application of this accounting standard update increases the variability of other income (loss), net.
Our equity investments are accounted for as follows:
Marketable equity securities have readily determinable fair value (RDFV) that are measured and recorded at fair value.
Non-marketable equity securities do not have RDFV and are measured using a measurement alternative recorded at cost less any impairment, plus or minus changes resulting from qualifying observable price changes. For certain of these securities, we have elected to apply the net asset value (NAV) practical expedient. The NAV is the estimated fair value of these investments.
Equity method investments are securities we do not control, but are able to exert significant influence over the investee. These investments are measured at cost less any impairment, plus or minus our share of equity method investee income or loss.
We adopted this accounting standard update beginning the first quarter of fiscal 2019. The standard was adopted using the modified retrospective method for our marketable equity securities and non-marketable equity securities measured using the NAV practical expedient. For our non-marketable equity securities measured using the measurement alternative, we applied the prospective method. Refer to Opening Balance Adjustments below for the impact of adoption on our Consolidated Balance Sheet.
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. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a modified retrospective basis. The ongoing impact of this standard will be facts and circumstances dependent on any transactions within its scope. Refer to Opening Balance Adjustments below for the impact of adoption on our Consolidated Balance Sheet.
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. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a retrospective basis. The application of this accounting standard update did not have an impact on our Consolidated Statements of Cash Flows.
Restricted Cash in Statement of Cash Flows 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. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 using a retrospective transition method to each period presented. The application of this accounting standard update did not have a material impact on our Consolidated Statements of Cash Flows. Prior period information has been retrospectively adjusted due to the adoption of ASU 2016-18, Statement of Cash Flows, Restricted Cash in the beginning of the first quarter of fiscal 2019.
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. We early adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a prospective basis. The application of this accounting standard update did not have a material impact on our Consolidated Financial Statements.
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. We adopted this accounting standard update beginning in the first quarter of fiscal 2019 on a prospective basis. The impact of this accounting standard update will be fact dependent, but we expect 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.

10

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


Opening Balance Adjustments
The following table summarizes the cumulative effect of the changes made to the Consolidated Balance Sheet for the adoption of ASC 606, ASU 2016-01, Financial Instruments, and ASU 2016-16, Intra-Entity Transfers of Assets Other than Inventory (in millions):
Line Item in Consolidated Balance Sheet:
 
Balance at July 28, 2018
 
New Revenue Recognition Standard
 
New Financial Instruments Standard
 
New Intra-Entity Transfers Standard
 
Adjusted Balance at July 29, 2018
ASSETS
 
 
 
 
 
 
 
 
 
 
Accounts receivable, net
 
$
5,554

 
$
(104
)
(1) 
$

 
$

 
$
5,450

Inventories
 
$
1,846

 
$
(302
)
(2) 
$

 
$

 
$
1,544

Other current assets (includes capitalized contract acquisition costs)
 
$
2,940

 
$
371

(3), (4) 
$

 
$
(25
)
(3) 
$
3,286

Deferred tax assets
 
$
3,219

 
$
(624
)
(3) 
$
(15
)
(3) 
$
1,415

(8) 
$
3,995

Other assets (includes capitalized contract acquisition costs)
 
$
1,582

 
$
327

(4) 
$
136

(7) 
$
(91
)
(3) 
$
1,954

 
 
 
 
 
 
 
 
 
 
 
TOTAL ASSETS
 
$
108,784

 
$
(332
)
 
$
121

 
$
1,299

 
$
109,872

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Income taxes payable
 
$
1,004

 
$

 
$

 
$
11

(3) 
$
1,015

Deferred revenue — current
 
$
11,490

 
$
(1,702
)
(5) 
$

 
$

 
$
9,788

Other current liabilities
 
$
4,413

 
$
33

(6) 
$

 
$

 
$
4,446

Deferred revenue — non-current
 
$
8,195

 
$
(1,081
)
(5) 
$

 
$

 
$
7,114

Other long-term liabilities
 
$
1,434

 
$
85

(3) 
$
13

(3) 
$

 
$
1,532

Retained earnings
 
$
1,233

 
$
2,333

(10) 
$
283

(10) 
$
1,281

(10) 
$
5,130

Accumulated other comprehensive income (loss)
 
$
(849
)
 
$

 
$
(175
)
(9) 
$
7

(3) 
$
(1,017
)
 
 
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND EQUITY
 
$
108,784

 
$
(332
)
 
$
121

 
$
1,299

 
$
109,872

(1) Primarily represents the decrease to accounts receivable related to the change in recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis
(2) Primarily represents the reduction of inventory for the change from recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis
(3) Includes the impacts to deferred tax assets, liabilities and other income tax balances
(4) Primarily represents capitalized contract acquisition costs (e.g. commissions)
(5) Primarily represents deferred revenue adjusted to retained earnings primarily due to the change in revenue recognition for certain software arrangements from ratable to upfront, recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis. Of this total $2.8 billion adjustment, $2.6 billion related to product deferred revenue, of which $1.3 billion relates to our recurring software and subscription offers, $0.6 billion relates to two-tier distribution, and the remainder relates to non-recurring software and other adjustments.
(6) Primarily represents the reclassification of accounts receivable contra balances to other current liabilities, adjustments to rebate liabilities for the change from recognizing revenue on sales to two-tier distributors from a sell-through to a sell-in basis, and reclassifications from other current liabilities for amounts that are not contract liabilities under ASC 606
(7) Represents the adjustment due to the remeasurement of non-marketable equity investments at fair value
(8) Primarily represents the change in net deferred tax assets related to unrecognized income tax effects of intra-entity asset transfers
(9) Represents the reclassification of net unrealized gains from accumulated other comprehensive income (loss) to retained earnings
(10) Retained earnings impact from the adjustments noted above

11

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


Impact of ASC 606 Adoption
The application of ASC 606 increased our total revenue by $276 million in the first quarter of fiscal 2019. The application of ASC 606 did not have a material impact to either our cost of sales or our operating expenses in the first quarter of fiscal 2019. We recognized a $152 million benefit to our provision for income taxes relating to indirect effects from the adoption of ASC 606 in the first quarter of fiscal 2019. For additional information regarding ASC 606, see Note 3 to the Consolidated Financial Statements.
In connection with the adoption of ASC 606, we recorded a transition adjustment to increase retained earnings by $2.3 billion. See above for the transition impact of ASC 606 by balance sheet line item. As of October 27, 2018, the balance sheet changes attributable to ASC 606 related to accounts receivable, inventories, and deferred revenue were not materially different than the impacts upon adoption. In connection with the adoption of ASC 606, we established contract assets for unbilled receivables. As of October 27, 2018, we had total contract assets of $447 million of which, $270 million was recorded in other current assets and $177 million was recorded in other assets. As of October 27, 2018, we had total capitalized contract acquisition costs of $673 million, of which $380 million was recorded in other current assets and $293 million was recorded in other assets. The adoption of ASC 606 did not have any impact on net cash provided by operating activities.
(b)
Recent Accounting Standards or Updates Not Yet Effective
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 us beginning in the first quarter of fiscal 2020 and early adoption is permitted. We expect to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2020, and we are currently evaluating the impact of this accounting standard update on our 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 us beginning in the first quarter of fiscal 2021 and early adoption in fiscal 2020 is permitted. We expect to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2021, and we are currently evaluating the impact of this accounting standard update on our Consolidated Financial Statements.


12

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


3.
Revenue
(a)
Disaggregation of Revenue
We disaggregate our revenue into groups of similar products and services that depict the nature, amount, and timing of revenue and cash flows for our various offerings. The sales cycle, contractual obligations, customer requirements, and go-to-market strategies differ for each of our product categories, resulting in different economic risk profiles for each category. The following table presents this disaggregation of revenue (in millions):
 
Three Months Ended
 
October 27,
2018
 
October 28,
2017
Revenue:
 
 
 
Infrastructure Platforms
$
7,642

 
$
6,980

Applications
1,419

 
1,203

Security
651

 
585

Other Products
178

 
286

Total Product
9,890

 
9,054

Services
3,182

 
3,082

Total
$
13,072

 
$
12,136

Amounts may not sum due to rounding.
Infrastructure Platforms consist of our core networking technologies of switching, routing, data center products, and wireless that are designed to work together to deliver networking capabilities and transport and/or store data. These technologies consist of both hardware and software offerings, including software licenses and software-as-a-service (SaaS), that help our customers build networks, automate, orchestrate, integrate, and digitize data. We are shifting and expanding more of our business to software and subscriptions across our core networking portfolio. Our hardware and perpetual software in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses are multiple performance obligations where the term license is recognized upfront upon transfer of control with the associated software maintenance revenue recognized ratably over the contract term. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Applications consists of offerings that utilize the core networking and data center platforms to provide their functions. The products consist primarily of software offerings, including software licenses and SaaS, as well as hardware. Our perpetual software and hardware in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. Term software licenses are multiple performance obligations where the term license is recognized upfront upon transfer of control with the associated software maintenance revenue recognized ratably over the contract term. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Security primarily includes our unified threat management, advanced threat security, and web security products. These products consist of both hardware and software offerings, including software licenses and SaaS. Updates and upgrades for the term software licenses are critical for our software to perform its intended commercial purpose because of the continuous need for our software to secure our customers' network environments against frequent threats. Therefore, security software licenses are generally represented by a single distinct performance obligation with revenue recognized ratably over the contract term. Our hardware and perpetual software in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control. SaaS arrangements in this category have one distinct performance obligation which is satisfied over time with revenue recognized ratably over the contract term.
Other Products primarily include our Service Provider Video Software Solutions, cloud and system management products. On May 1, 2018, we announced a definitive agreement to sell the SPVSS business. The sale was closed on October 28, 2018. These products include both hardware and software licenses. Our offerings in this category are distinct performance obligations where revenue is recognized upfront upon transfer of control.
In addition to our product offerings, we provide a broad range of service and support options for our customers, including technical support services and advanced services. Technical support services represent the majority of these offerings which are distinct performance obligations that are satisfied over time with revenue recognized ratably over the contract term. Advanced services are distinct performance obligations that are satisfied over time with revenue recognized as services are delivered.

13

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


The sales arrangements as discussed above are typically made pursuant to customer purchase orders based on master purchase or partner agreements. Cash is received based on our standard payment terms which is typically 30 days. We provide financing arrangements to customers for all of our hardware, software and service offerings. Refer to Note 8 for additional information. For these arrangements, cash is typically received over time.
(b)
Contract Balances
Accounts receivable, net was $4.5 billion as of October 27, 2018 compared to $5.6 billion as of July 28, 2018, as reported on the Consolidated Balance Sheet.
Contract assets consist of unbilled receivables and are recorded when revenue is recognized in advance of scheduled billings to our customers. These amounts are primarily related to software and service arrangements where transfer of control has occurred but we have not yet invoiced. As of October 27, 2018 and July 29, 2018, our contract assets for these unbilled receivables were $447 million and $122 million, respectively, and were included in other current assets and other assets.
Contract liabilities consist of deferred revenue. Deferred revenue was $16.8 billion as of October 27, 2018 compared to $19.7 billion as of July 28, 2018. In connection with the adoption of ASC 606, we recorded an adjustment to retained earnings to reduce deferred revenue by $2.8 billion. We recognized approximately $3.4 billion of revenue during the first quarter of fiscal 2019 that was included in the deferred revenue balance at July 29, 2018.
(c)
Remaining Performance Obligations
Remaining Performance Obligations (RPO) are comprised of deferred revenue plus unbilled contract revenue. As of October 27, 2018, the aggregate amount of RPO was $22.3 billion, comprised of $16.8 billion of deferred revenue and $5.5 billion of unbilled contract revenue. We expect approximately 55% of this amount to be recognized as revenue over the next year. Unbilled contract revenue represents non-cancelable contracts for which we have not invoiced, have an obligation to perform, and revenue has not yet been recognized in the financial statements.
(d)
Capitalized Contract Acquisition Costs
In connection with the adoption of ASC 606, we began to capitalize direct and incremental costs incurred to acquire contracts, primarily sales commissions, for which the associated revenue is expected to be recognized in future periods. We incur these costs in connection with both initial contracts and renewals. These costs are initially deferred and typically amortized over the term of the customer contract which corresponds to the period of benefit. Deferred sales commissions were $673 million and $644 million as of October 27, 2018 and July 29, 2018, respectively, and were included in other current assets and other assets. The amortization expense associated with these costs was $112 million for the first quarter of fiscal 2019 and was included in sales and marketing expenses.

4.
Acquisitions and Divestitures
We completed two acquisitions during the first quarter of fiscal 2019. 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
Duo
$
2,025

 
$
(57
)
 
$
342

 
$
1,740

Other (one acquisition)
34

 
3

 
8

 
23

Total
$
2,059

 
$
(54
)
 
$
350

 
$
1,763

On September 28, 2018, we completed our acquisition of privately held Duo Security, Inc. ("Duo"), a leading provider of unified access security and multi-factor authentication delivered through the cloud. Revenue from the Duo acquisition has been included in our Security product category.
The total purchase consideration related to acquisitions completed during the first quarter of fiscal 2019 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these acquisitions was approximately $82 million. Total transaction costs related to acquisition and divestiture activities were $10 million and $9 million for the first quarter of fiscal 2019 and fiscal 2018, respectively. These transaction costs were expensed as incurred in general and administrative expenses ("G&A") in the Consolidated Statements of Operations. We recognized a gain of $3 million and $46 million during the first quarter of 2019 and fiscal 2018, respectively, in connection with step acquisitions. The gains were recognized in other income (loss), net in the Consolidated Statement of Operations.

14

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


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 us may become known to us 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 first quarter of fiscal 2019 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 and the revenue and net income subsequent to the acquisition date for the acquisitions completed during the first quarter of fiscal 2019 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to our financial results.
Divestiture of Service Provider Video Software Solutions On May 1, 2018, we announced a definitive agreement to sell our Service Provider Video Software Solutions ("SPVSS") business. As of October 27, 2018, this business had tangible assets of approximately $165 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 $330 million. In addition, the business had total liabilities of approximately $290 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. We closed the sale of this business on October 28, 2018 and the value is preliminary and subject to revision as information is finalized. We expect to have an immaterial financial statement impact from this transaction.

15

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


5.
Goodwill and Purchased Intangible Assets
(a)
Goodwill
The following table presents the goodwill allocated to our reportable segments as of October 27, 2018 and during the first quarter of fiscal 2019 (in millions):
 
Balance at
 
 
 
 
 
Balance at
 
July 28, 2018
 
Acquisitions
 
Other
 
October 27, 2018
Americas
$
19,998

 
$
1,073

 
$
(53
)
 
$
21,018

EMEA
7,529

 
491

 
(19
)
 
8,001

APJC
4,179

 
199

 
(11
)
 
4,367

Total
$
31,706

 
$
1,763

 
$
(83
)
 
$
33,386

“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 our intangible assets acquired through acquisitions completed during the first quarter of fiscal 2019 (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
Duo
5.0
 
$
153

 
5.0

 
$
94

 
2.5

 
$
18

 
$
77

 
$
342

Others (one in total)
5.0
 
8

 

 

 

 

 

 
8

Total
 
 
$
161

 
 
 
$
94

 
 
 
$
18

 
$
77

 
$
350

The following tables present details of our purchased intangible assets (in millions): 
October 27, 2018
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,847

 
$
(2,013
)
 
$
1,834

Customer relationships
 
1,629

 
(965
)
 
664

Other
 
80

 
(42
)
 
38

Total purchased intangible assets with finite lives
 
5,556

 
(3,020
)
 
2,536

In-process research and development, with indefinite lives
 
180

 

 
180

       Total
 
$
5,736

 
$
(3,020
)
 
$
2,716

 
July 28, 2018
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,711

 
$
(1,888
)
 
$
1,823

Customer relationships
 
1,538

 
(937
)
 
601

Other
 
63

 
(38
)
 
25

Total purchased intangible assets with finite lives
 
5,312

 
(2,863
)
 
2,449

In-process research and development, with indefinite lives
 
103

 

 
103

       Total
 
$
5,415

 
$
(2,863
)
 
$
2,552

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

16

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


There were no impairment charges related to purchased intangible assets for the first quarter of fiscal 2019 and fiscal 2018, respectively. Impairment charges are primarily 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 our technology and in-process research and development (IPR&D) intangible assets.
The following table presents the amortization of purchased intangible assets, including impairment charges (in millions):
 
Three Months Ended
 
October 27, 2018
 
October 28, 2017
Amortization of purchased intangible assets:
 
 
 
Cost of sales
$
151

 
$
154

Operating expenses
34

 
61

Total
$
185

 
$
215

The estimated future amortization expense of purchased intangible assets with finite lives as of October 27, 2018 is as follows (in millions):
Fiscal Year
Amount
2019 (remaining nine months)
$
577

2020
$
726

2021
$
530

2022
$
274

2023
$
133

Thereafter
$
45



17

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


6.
Restructuring and Other Charges
We initiated a restructuring plan during fiscal 2018 (the "Fiscal 2018 Plan") in order to realign the organization and enable further investment in key priority areas with estimated pretax charges of approximately $300 million. In the first quarter of fiscal 2019, we expanded the restructuring plan to include an additional $300 million of estimated additional pretax charges. In connection with the Fiscal 2018 Plan, we have incurred cumulative charges of $186 million. These aggregate pretax charges are primarily cash-based and consist of employee severance and other one-time termination benefits, and other associated costs. We expect the Fiscal 2018 Plan to be substantially completed in fiscal 2019.
We announced a restructuring plan in August 2016 (the "Fiscal 2017 Plan"), in order to reinvest in our key priority areas. In connection with the Fiscal 2017 Plan, we 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. We completed the Fiscal 2017 Plan in fiscal 2018.
The following tables summarize the activities related to the restructuring and other charges (in millions):
 
 
FISCAL 2017 AND PRIOR PLANS
 
FISCAL 2018 PLAN
 
 
 
 
Employee Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 28, 2018
 
$
41

 
$
13

 
$
19

 
$

 
$
73

Charges
 

 

 
54

 
24

 
78

Cash payments
 
(10
)
 
(1
)
 
(52
)
 
(1
)
 
(64
)
Non-cash items
 

 

 

 
(23
)
 
(23
)
Liability as of October 27, 2018
 
$
31

 
$
12

 
$
21

 
$

 
$
64

 
 
FISCAL 2017 AND PRIOR PLANS
 
 
 
 
Employee
Severance
 
Other
 
Total
Liability as of July 29, 2017
 
$
74

 
$
43

 
$
117

Charges
 
145

 
7

 
152

Cash payments
 
(79
)
 
(16
)
 
(95
)
Non-cash items
 

 
(6
)
 
(6
)
Liability as of October 28, 2017
 
$
140

 
$
28

 
$
168



18

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


7.
Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
 
 
October 27,
2018
 
July 28,
2018
Cash and cash equivalents
 
$
8,410

 
$
8,934

Restricted cash included in other current assets
 
32

 
32

Restricted cash included in other assets
 
44

 
27

Total cash, cash equivalents, and restricted cash
 
$
8,486

 
$
8,993

Inventories:
 
 
 
 
Raw materials
 
$
421

 
$
423

Work in Process
 

 

Finished goods:
 
 
 
 
Deferred cost of sales and distributor inventory
 
116

 
443

Manufactured finished goods
 
758

 
689

Total finished goods
 
874

 
1,132

Service-related spares
 
248

 
258

Demonstration systems
 
29

 
33

Total
 
$
1,572

 
$
1,846

Property and equipment, net:
 
 
 
 
Gross property and equipment:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,707

 
$
4,710

Computer equipment and related software
 
1,037

 
1,085

Production, engineering, and other equipment
 
5,712

 
5,734

Operating lease assets
 
475

 
356

Furniture and fixtures
 
363

 
358

Total gross property and equipment
 
12,294

 
12,243

Less: accumulated depreciation and amortization
 
(9,338
)
 
(9,237
)
Total
 
$
2,956

 
$
3,006

Deferred revenue:
 
 
 
 
Service
 
$
11,062

 
$
11,431

Product
 
5,752

 
8,254

Total
 
$
16,814

 
$
19,685

Reported as:
 

 
 
Current
 
$
9,637

 
$
11,490

Noncurrent
 
7,177

 
8,195

Total
 
$
16,814

 
$
19,685




19

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


8.
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 Cisco’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 our hardware, software, and services, which may include additional funding for other costs associated with network installation and integration of our 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 our financing receivables is presented as follows (in millions):
October 27, 2018
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Gross
$
2,511

 
$
4,924

 
$
2,240

 
$
9,675

Residual value
159

 

 

 
159

Unearned income
(140
)
 

 

 
(140
)
Allowance for credit loss
(131
)
 
(60
)
 
(8
)
 
(199
)
Total, net
$
2,399

 
$
4,864

 
$
2,232

 
$
9,495

Reported as:
 
 
 
 
 
 
 
Current
$
1,143

 
$
2,422

 
$
1,286

 
$
4,851

Noncurrent
1,256

 
2,442

 
946

 
4,644

Total, net
$
2,399

 
$
4,864

 
$
2,232

 
$
9,495

July 28, 2018
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Gross
$
2,688

 
$
4,999

 
$
2,326

 
$
10,013

Residual value
164

 

 

 
164

Unearned income
(141
)
 

 

 
(141
)
Allowance for credit loss
(135
)
 
(60
)
 
(10
)
 
(205
)
Total, net
$
2,576

 
$
4,939

 
$
2,316

 
$
9,831

Reported as:
 
 
 
 
 
 
 
Current
$
1,249

 
$
2,376

 
$
1,324

 
$
4,949

Noncurrent
1,327

 
2,563

 
992

 
4,882

Total, net
$
2,576

 
$
4,939

 
$
2,316

 
$
9,831

Future minimum lease payments to Cisco on lease receivables as of October 27, 2018 are summarized as follows (in millions):
Fiscal Year
Amount
2019 (remaining nine months)
$
1,105

2020
614

2021
478

2022
231

2023
78

Thereafter
5

Total
$
2,511

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

20

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 our internal credit risk rating as of October 27, 2018 and July 28, 2018 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
October 27, 2018
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,238

 
$
1,084

 
$
49

 
$
2,371

Loan receivables
3,122

 
1,744

 
58

 
4,924

Financed service contracts
1,454

 
768

 
18

 
2,240

Total
$
5,814

 
$
3,596

 
$
125

 
$
9,535

 
INTERNAL CREDIT RISK RATING
July 28, 2018
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,294

 
$
1,199

 
$
54

 
$
2,547

Loan receivables
3,184

 
1,752

 
63

 
4,999

Financed service contracts
1,468

 
835

 
23

 
2,326

Total
$
5,946

 
$
3,786

 
$
140

 
$
9,872

We determine the adequacy of our allowance for credit loss by assessing the risks and losses inherent in our financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by us to our customers, which consist of the following: lease receivables, loan receivables, and financed service contracts.
Our 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.
The following tables present the aging analysis of gross receivables, excluding residual value and less unearned income as of October 27, 2018 and July 28, 2018 (in millions):
 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
October 27, 2018
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
79

 
$
27

 
$
121

 
$
227

 
$
2,144

 
$
2,371

 
$
5

 
$
5

Loan receivables
123

 
85

 
348

 
556

 
4,368

 
4,924

 
29

 
29

Financed service contracts
102

 
147

 
262

 
511

 
1,729

 
2,240

 
3

 
3

Total
$
304

 
$
259

 
$
731

 
$
1,294

 
$
8,241

 
$
9,535

 
$
37

 
$
37

 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 28, 2018
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
72

 
$
27

 
$
155

 
$
254

 
$
2,293

 
$
2,547

 
$
9

 
$
9

Loan receivables
104

 
55

 
252

 
411

 
4,588

 
4,999

 
30

 
30

Financed service contracts
138

 
78

 
304

 
520

 
1,806

 
2,326

 
3

 
3

Total
$
314

 
$
160

 
$
711

 
$
1,185

 
$
8,687

 
$
9,872

 
$
42

 
$
42

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables 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 $474 million and $503 million as of October 27, 2018 and July 28, 2018, respectively.
As of October 27, 2018, we had financing receivables of $234 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 $182 million as of July 28, 2018.

21

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


(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 October 27, 2018
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts
 
Total
Allowance for credit loss as of July 28, 2018
$
135

 
$
60

 
$
10

 
$
205

Provisions (benefits)
(3
)
 

 
(2
)
 
(5
)
Foreign exchange and other
(1
)
 

 

 
(1
)
Allowance for credit loss as of October 27, 2018
$
131

 
$
60

 
$
8

 
$
199

Three months ended October 28, 2017
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
)
 
2

 
(6
)
 
(6
)
Foreign exchange and other

 
1

 
(1
)
 

Allowance for credit loss as of October 28, 2017
$
160

 
$
106

 
$
23

 
$
289

We assess the allowance for credit loss related to financing receivables on either an individual or a collective basis. We consider 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 our 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. Our internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.
Typically, we also consider receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. These balances, as of October 27, 2018 and July 28, 2018, are presented under “(b) Credit Quality of Financing Receivables” above.
We evaluate the remainder of our financing receivables portfolio for impairment on a collective basis and record an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, we use expected default frequency rates published by a major third-party credit-rating agency as well as our 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
We provide 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):
 
October 27, 2018
 
July 28, 2018
Operating lease assets
$
475

 
$
356

Accumulated depreciation
(333
)
 
(238
)
Operating lease assets, net
$
142

 
$
118


22

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


Minimum future rentals on noncancelable operating leases as of October 27, 2018 are summarized as follows (in millions):
Fiscal Year
Amount
2019 (remaining nine months)
$
125

2020
108

2021
44

2022
3

Thereafter
1

Total
$
281



9.
Available-for-Sale Debt Investments and Equity Investments
The following table summarizes our available-for-sale debt investments and equity investments (in millions):
 
October 27, 2018
 
July 28, 2018
Available-for-sale debt investments
$
34,183

 
$
37,009

Marketable equity securities

 
605

Total investments
34,183

 
37,614

Non-marketable equity securities included in other assets
1,125

 
978

Equity method investments included in other assets
115

 
118

Total
$
35,423

 
$
38,710

(a)
Summary of Available-for-Sale Debt Investments
The following tables summarize our available-for-sale debt investments (in millions):
October 27, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government securities
$
5,783

 
$

 
$
(29
)
 
$
5,754

U.S. government agency securities
434

 

 
(4
)
 
430

Non-U.S. government and agency securities
153

 

 

 
153

Corporate debt securities
26,444

 
33

 
(446
)
 
26,031

U.S. agency mortgage-backed securities
1,481

 

 
(60
)
 
1,421

Commercial paper
309

 

 

 
309

Certificates of deposit
85

 

 

 
85

Total (1)
$
34,689

 
$
33

 
$
(539
)
 
$
34,183

July 28, 2018
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
U.S. government securities
$
7,318

 
$

 
$
(43
)
 
$
7,275

U.S. government agency securities
732

 

 
(5
)
 
727

Non-U.S. government and agency securities
209

 

 
(1
)
 
208

Corporate debt securities
27,765

 
44

 
(445
)
 
27,364

U.S. agency mortgage-backed securities
1,488

 

 
(53
)
 
1,435

Total (1)
$
37,512

 
$
44

 
<