Financing Receivables and Guarantees


(a)	Financing Receivables

Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company's and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company's products and services, which may include additional funding for other costs associated with network installation and integration of the Company's products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, as well as receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.

A summary of the Company’s financing receivables is presented as follows (in millions):



October 27, 2012	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total Financing Receivables
Gross	$	3,601		$	1,816		$	2,639		$	8,056
Unearned income	(261		)	—			—			(261		)
Allowance for credit loss	(248		)	(114		)	(12		)	(374		)
Total, net	$	3,092		$	1,702		$	2,627		$	7,421
Reported as:
Current	$	1,310		$	947		$	1,469		$	3,726
Noncurrent	1,782			755			1,158			3,695
Total, net	$	3,092		$	1,702		$	2,627		$	7,421



July 28, 2012	Lease Receivables			Loan Receivables			Financed Service Contracts and Other			Total Financing Receivables
Gross	$	3,429		$	1,796		$	2,651		$	7,876
Unearned income	(250		)	—			—			(250		)
Allowance for credit loss	(247		)	(122		)	(11		)	(380		)
Total, net	$	2,932		$	1,674		$	2,640		$	7,246
Reported as:
Current	1,200			968			1,493			3,661
Noncurrent	1,732			706			1,147			3,585
Total, net	$	2,932		$	1,674		$	2,640		$	7,246

As of October 27, 2012 and July 28, 2012, the deferred service revenue related to the financed service contracts and other was $1,810 million and $1,838 million, respectively.

Contractual maturities of the gross lease receivables at October 27, 2012 are summarized as follows (in millions):



Fiscal Year	Amount
2013 (remaining nine months)	$	1,199
2014	1,205
2015	732
2016	342
2017	123
Total	$	3,601

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


(b)	Credit Quality of Financing Receivables

Financing receivables categorized by the Company's internal credit risk rating as of October 27, 2012 and July 28, 2012 are summarized as follows (in millions):



	INTERNAL CREDIT RISK RATING
October 27, 2012	1 to 4		5 to 6		7 and Higher		Total		Residual Value		Gross Receivables, Net of Unearned Income
Lease receivables	$	1,602	$	1,417	$	42	$	3,061	$	279	$	3,340
Loan receivables	945		834		37		1,816		—		1,816
Financed service contracts and other	1,531		1,010		98		2,639		—		2,639
Total	$	4,078	$	3,261	$	177	$	7,516	$	279	$	7,795



	INTERNAL CREDIT RISK RATING
July 28, 2012	1 to 4		5 to 6		7 and Higher		Total		Residual Value		Gross Receivables, Net of Unearned Income
Lease receivables	$	1,532	$	1,342	$	31	$	2,905	$	274	$	3,179
Loan receivables	831		921		44		1,796		—		1,796
Financed service contracts and other	1,552		1,030		69		2,651		—		2,651
Total	$	3,915	$	3,293	$	144	$	7,352	$	274	$	7,626

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: lease receivables, loan receivables, and financed service contracts and other.

The Company's internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings and constitute a relatively small portion of the Company's financing receivables.

In circumstances when collectability is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company's revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of October 27, 2012 and July 28, 2012 were $2,321 million, and $2,387 million, respectively, and they were associated with financing receivables (net of unearned income) of $7,795 million and $7,626 million as of their respective period ends. The losses that the Company has incurred historically, including in the periods presented with respect to its financing receivables, have been immaterial and consistent with the performance of an investment-grade portfolio. The Company did not modify any financing receivables during the periods presented.

The following tables present the aging analysis of financing receivables as of October 27, 2012 and July 28, 2012 (in millions):



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
October 27, 2012	31-60		61-90		91+		Total Past Due		Current		Gross Receivables, Net of Unearned Income		Non-Accrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	88	$	76	$	206	$	370	$	2,970	$	3,340	$	23	$	15
Loan receivables	6		—		23		29		1,787		1,816		6		6
Financed service contracts and other	64		130		477		671		1,968		2,639		16		7
Total	$	158	$	206	$	706	$	1,070	$	6,725	$	7,795	$	45	$	28



	DAYS PAST DUE (INCLUDES BILLED AND UNBILLED)
July 28, 2012	31-60		61-90		91+		Total Past Due		Current		Gross Receivables, Net of Unearned Income		Non-Accrual Financing Receivables		Impaired Financing Receivables
Lease receivables	$	151	$	69	$	173	$	393	$	2,786	$	3,179	$	23	$	14
Loan receivables	10		8		11		29		1,767		1,796		4		4
Financed service contracts and other	89		68		392		549		2,102		2,651		18		10
Total	$	250	$	145	$	576	$	971	$	6,655	$	7,626	$	45	$	28

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 lease receivables, loan receivables, and financed service contracts and other were, respectively, $157 million, $15 million, and $377 million as of October 27, 2012; and were, respectively, $139 million, $3 million, and $313 million as of July 28, 2012.

As of October 27, 2012, the Company had financing receivables of $140 million, net of unbilled or current receivables from the same contract, that were in the category for 91 days plus past due but remained on accrual status. Such balance was $109 million as of July 28, 2012. A financing receivable may be placed on nonaccrual status earlier if, in management's opinion, a timely collection of the full principal and interest becomes uncertain.


(c)	Allowance for Credit Loss Rollforward

The allowances for credit loss and the related financing receivables are summarized as follows (in millions):



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts and Other		Total
Allowance for credit loss as of July 28, 2012	$	247		$	122		$	11	$	380
Provisions, net	(2		)	(10		)	1		(11		)
Foreign exchange and other	3			2			—		5
Allowance for credit loss as of October 27, 2012	$	248		$	114		$	12	$	374
Gross receivables as of October 27, 2012, net of unearned income	$	3,340		$	1,816		$	2,639	$	7,795



	CREDIT LOSS ALLOWANCES
	Lease Receivables			Loan Receivables			Financed Service Contracts and Other		Total
Allowance for credit loss as of July 30, 2011	$	237		$	103		$	27	$	367
Provisions, net	2			5			2		9
Foreign exchange and other	(6		)	(5		)	—		(11		)
Allowance for credit loss as of October 29, 2011	$	233		$	103		$	29	$	365
Gross receivables as of October 29, 2011, net of unearned income	$	2,849		$	1,468		$	2,557	$	6,874

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.

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. Financing receivables that were individually evaluated for impairment during the periods presented were not material and therefore are not presented separately in the preceding tables.

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)	Financing Guarantees

In the ordinary course of business, the Company provides financing guarantees for various third-party financing arrangements extended to channel partners and end-user customers. Payments under these financing guarantee arrangements were not material for the periods presented.

Channel Partner Financing Guarantees The Company facilitates arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, generally with payment terms ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, the Company guarantees a portion of these arrangements. The volume of channel partner financing was $5.6 billion and $5.3 billion for the three months ended October 27, 2012 and October 29, 2011, respectively. The balance of the channel partner financing subject to guarantees was $1.4 billion and $1.5 billion as of October 27, 2012 and October 29, 2011, respectively.

End-User Financing Guarantees The Company also provides financing guarantees for third-party financing arrangements extended to end-user customers related to leases and loans, which typically have terms of up to three years. The volume of financing provided by third parties for leases and loans as to which the Company had provided guarantees was $44 million and $35 million for the three months ended October 27, 2012 and October 29, 2011, respectively.

Financing Guarantee Summary The aggregate amounts of financing guarantees outstanding at October 27, 2012 and July 28, 2012, representing the total maximum potential future payments under financing arrangements with third parties along with the related deferred revenue, are summarized in the following table (in millions):



	October 27, 2012			July 28, 2012
Maximum potential future payments relating to financing guarantees:
Channel partner	$	372		$	277
End user	243			232
Total	$	615		$	509
Deferred revenue associated with financing guarantees:
Channel partner	$	(221	)	$	(193	)
End user	(215		)	(200		)
Total	$	(436	)	$	(393	)
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue	$	179		$	116