Employee Benefit Plans

3 Months Ended

Oct. 26, 2019


(a)	Employee Stock Incentive Plans

Stock Incentive Plan Program Description As of October 26, 2019, we had one stock incentive plan: the 2005 Stock Incentive Plan (the “2005 Plan”). In addition, we have, in connection with our acquisitions of various companies, assumed the share-based awards granted under stock incentive plans of the acquired companies or issued share-based awards in replacement thereof. Share-based awards are designed to reward employees for their long-term contributions to us and provide incentives for them to remain with Cisco. The number and frequency of share-based awards are based on competitive practices, operating results of Cisco, government regulations, and other factors. Our primary stock incentive plan is summarized as follows:

2005 Plan The 2005 Plan provides for the granting of stock options, stock grants, stock units and stock appreciation rights (SARs), the vesting of which may be time-based or upon satisfaction of performance goals, or both, and/or other conditions. Employees (including employee directors and executive officers) and consultants of Cisco and its subsidiaries and affiliates and non-employee directors of Cisco are eligible to participate in the 2005 Plan. As of October 26, 2019, the maximum number of shares issuable under the 2005 Plan over its term was 694 million shares. The 2005 Plan may be terminated by the Board of Directors at any time and for any reason, and is currently set to terminate at the 2021 Annual Meeting unless re-adopted or extended by the shareholders prior to or on such date.

Under the 2005 Plan’s share reserve feature, a distinction is made between the number of shares in the reserve attributable to (i) stock options and SARs and (ii) “full value” awards (i.e., stock grants and stock units). Shares issued as stock grants, pursuant to stock units or pursuant to the settlement of dividend equivalents are counted against shares available for issuance under the 2005 Plan on a 1.5-to-1 ratio. If awards issued under the 2005 Plan are forfeited or terminated for any reason before being exercised or settled, then the shares underlying such awards, plus the number of additional shares, if any, that counted against shares available for issuance under the 2005 Plan at the time of grant as a result of the application of the share ratio described above, will become available again for issuance under the 2005 Plan.


(b)	Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan under which 721.4 million shares of our common stock have been reserved for issuance as of October 26, 2019. Eligible employees are offered shares through a 24-month offering period, which consists of four consecutive 6-month purchase periods. Employees may purchase a limited amount of shares of our stock at a discount of up to 15% of the lesser of the fair market value at the beginning of the offering period or the end of each 6-month purchase period. The Employee Stock Purchase Plan is scheduled to terminate on the earlier of (i) January 3, 2030 and (ii) the date on which all shares available for issuance under the Employee Stock Purchase Plan are sold pursuant to exercised purchase rights. No shares were issued under the Employee Stock Purchase Plan during each of the first quarters of fiscal 2020 and 2019. As of October 26, 2019, 159 million shares were available for issuance under the Employee Stock Purchase Plan.


(c)	Summary of Share-Based Compensation Expense

Share-based compensation expense consists primarily of expenses for stock options, stock purchase rights, restricted stock, and RSUs granted to employees. The following table summarizes share-based compensation expense (in millions):



	Three Months Ended
	October 26, 2019		October 27, 2018
Cost of sales—product	$	23	$	23
Cost of sales—service	34		33
Share-based compensation expense in cost of sales	57		56
Research and development	146		130
Sales and marketing	127		137
General and administrative	60		62
Restructuring and other charges	8		23
Share-based compensation expense in operating expenses	341		352
Total share-based compensation expense	$	398	$	408
Income tax benefit for share-based compensation	$	131	$	165

As of October 26, 2019, the total compensation cost related to unvested share-based awards not yet recognized was $3.1 billion which is expected to be recognized over approximately 2.8 years on a weighted-average basis.


(d)	Share-Based Awards Available for Grant

A summary of share-based awards available for grant is as follows (in millions):



	Share-Based Awards Available for Grant
BALANCE AT JULY 28, 2018	245
Restricted stock, stock units, and other share-based awards granted	(67	)
Share-based awards canceled/forfeited/expired	18
Shares withheld for taxes and not issued	23
Other	1
BALANCE AT JULY 27, 2019	220
Restricted stock, stock units, and other share-based awards granted	(13	)
Share-based awards canceled/forfeited/expired	4
Shares withheld for taxes and not issued	5
BALANCE AT OCTOBER 26, 2019	216

For each share awarded as restricted stock or a restricted stock unit award under the 2005 Plan, 1.5 shares was deducted from the available share-based award balance. For restricted stock units that were awarded with vesting contingent upon the achievement of future financial performance or market-based metrics, the maximum awards that can be achieved upon full vesting of such awards were reflected in the preceding table.


(e)	Restricted Stock and Stock Unit Awards

A summary of the restricted stock and stock unit activity, which includes time-based and performance-based or market-based RSUs, is as follows (in millions, except per-share amounts):



	Restricted Stock/ Stock Units		Weighted-Average Grant Date Fair Value per Share		Aggregate Fair Value
UNVESTED BALANCE AT JULY 28, 2018	119		$	30.56
Granted	45		47.71
Vested	(50	)	29.25		$	2,446
Canceled/forfeited/other	(14	)	32.01
UNVESTED BALANCE AT JULY 27, 2019	100		38.66
Granted	8		44.56
Vested	(12	)	29.71		$	551
Canceled/forfeited/other	(3	)	38.57
UNVESTED BALANCE AT OCTOBER 26, 2019	93		$	40.28


(f)	Valuation of Employee Share-Based Awards

Time-based restricted stock units and performance-based restricted stock units (“PRSUs”) that are based on our financial performance metrics or non-financial operating goals are valued using the market value of our common stock on the date of grant, discounted for the present value of expected dividends. On the date of grant, we estimated the fair value of the total shareholder return (“TSR”) component of the PRSUs using a Monte Carlo simulation model. The assumptions for the valuation of time-based RSUs and PRSUs are summarized as follows:



	RESTRICTED STOCK UNITS						PERFORMANCE BASED RESTRICTED STOCK UNITS
Three Months Ended	October 26, 2019			October 27, 2018			October 26, 2019			October 27, 2018
Number of shares granted (in millions)	6			6			2			2
Grant date fair value per share	$	45.97		$	44.32		$	41.91		$	47.00
Weighted-average assumptions/inputs:
Expected dividend yield	2.8		%	2.8		%	2.8		%	2.8		%
Range of risk-free interest rates	1.7% - 2.0%			2.1% - 2.9%			1.7% - 2.0%			2.1% - 3.0%
Range of expected volatilities for index	N/A			N/A			13.7% - 69.0%			13.0%-65.2%

The PRSUs granted during the periods presented are contingent on the achievement of our financial performance metrics or our comparative market-based returns. For the awards based on financial performance metrics or comparative market-based returns, generally 50% of the PRSUs are earned based on the average of annual operating cash flow and earnings per share goals established at the beginning of each fiscal year over a three-year performance period. Generally, the remaining 50% of the PRSUs are earned based on our TSR measured against the benchmark TSR of a peer group over the same period. Each PRSU recipient could vest in 0% to 150% of the target shares granted contingent on the achievement of our financial performance metrics or our comparative market-based returns.