Commitments And Contingencies | 9 Months Ended |
Apr. 26, 2014 |
Commitments and Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies | ' |
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12 | Commitments and Contingencies | | | | | | | | | | | | | | |
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(a) | Operating Leases | | | | | | | | | | | | | | |
The Company leases office space in many U.S. locations. Outside the United States, larger leased sites include sites in Belgium, China, France, Germany, India, Israel, Italy, Japan, Norway, and the United Kingdom. The Company also leases equipment and vehicles. Future minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of April 26, 2014 are as follows (in millions): |
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Fiscal Year | Amount | | | | | | | | | | | | |
2014 (remaining three months) | $ | 103 | | | | | | | | | | | | | |
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2015 | 332 | | | | | | | | | | | | | |
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2016 | 227 | | | | | | | | | | | | | |
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2017 | 157 | | | | | | | | | | | | | |
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2018 | 121 | | | | | | | | | | | | | |
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Thereafter | 243 | | | | | | | | | | | | | |
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Total | $ | 1,183 | | | | | | | | | | | | | |
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(b) | Purchase Commitments with Contract Manufacturers and Suppliers | | | | | | | | | | | | | | |
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based upon criteria as defined by the Company or establish the parameters defining the Company’s requirements. A significant portion of the Company’s reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. In certain instances, these agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs prior to firm orders being placed. As of April 26, 2014 and July 27, 2013, the Company had total purchase commitments for inventory of $4,038 million and $4,033 million, respectively. |
The Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its future demand forecasts consistent with the valuation of the Company’s excess and obsolete inventory. As of April 26, 2014 and July 27, 2013, the liability for these purchase commitments was $156 million and $172 million, respectively, and was included in other current liabilities. |
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(c) | Other Commitments | | | | | | | | | | | | | | |
In connection with the Company’s business combinations, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones, or upon the continued employment with the Company of certain employees of the acquired entities. |
The following table summarizes the compensation expense related to acquisitions (in millions): |
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| Three Months Ended | | Nine Months Ended |
| April 26, | | April 27, | | April 26, | | April 27, |
2014 | 2013 | 2014 | 2013 |
Compensation expense related to acquisitions | $ | 95 | | | $ | 44 | | | $ | 505 | | | $ | 79 | |
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As of April 26, 2014, the Company estimated that future cash compensation expense of up to $645 million may be required to be recognized pursuant to the applicable business combination agreements, which included the remaining potential compensation expense related to Insieme Networks, Inc. as more fully discussed immediately below. |
Insieme Networks, Inc. In the third quarter of fiscal 2012, the Company made an investment in Insieme Networks, Inc. ("Insieme"), an early-stage company focused on research and development in the data center market. As set forth in the agreement between the Company and Insieme, this investment included $100 million of funding and a license to certain of the Company’s technology. Immediately prior to the call option exercise and acquisition described below, the Company owned approximately 83% of Insieme as a result of these investments and consolidated the results of Insieme in its Consolidated Financial Statements. In connection with this investment, the Company and Insieme entered into a put/call option agreement that provided the Company with the right to purchase the remaining interests in Insieme. In addition, the noncontrolling interest holders could require the Company to purchase their shares upon the occurrence of certain events. |
During the first quarter of fiscal 2014, the Company exercised its call option and entered into an agreement to purchase the remaining interests in Insieme. The acquisition closed in the second quarter of fiscal 2014, at which time the former noncontrolling interest holders became eligible to receive up to two milestone payments, which will be determined using agreed-upon formulas based primarily on revenue for certain of Insieme’s products. During the three and nine months ended April 26, 2014, the Company recorded compensation expense of $52 million and $363 million related to the fair value of the vested portion of amounts that are expected to be earned by the former noncontrolling interest holders. Continued vesting and changes to the fair value of the amounts probable of being earned will result in adjustments to the recorded compensation expense in future periods. Based on the terms of the agreement, the Company has determined that the maximum amount that could be recorded as compensation expense by the Company is approximately $856 million, net of forfeitures and including the $363 million that has been expensed through April 26, 2014. The milestone payments, if earned, are expected to be paid primarily during fiscal 2016 and fiscal 2017. |
The Company also has certain funding commitments, primarily related to its investments in privately held companies and venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of which are required to be funded on demand. The funding commitments were $276 million and $263 million as of April 26, 2014 and July 27, 2013, respectively. |
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(d) | Variable Interest Entities | | | | | | | | | | | | | | |
VCE Joint Venture VCE is a joint venture that the Company formed in fiscal 2010 with EMC Corporation (“EMC”), with investments from VMware, Inc. (“VMware”) and Intel Corporation. VCE helps organizations leverage best-in-class technologies and disciplines from Cisco, EMC, and VMware to enable the transformation to cloud computing. |
As of April 26, 2014, the Company’s cumulative gross investment in VCE was approximately $679 million, inclusive of accrued interest, and its ownership percentage was approximately 35%. The Company invested $147 million during the nine months ended April 26, 2014. |
The Company accounts for its investment in VCE under the equity method, and its portion of VCE’s net loss is recognized in other income (loss), net. The Company’s share of VCE’s losses, based upon its portion of the overall funding, was approximately 36.8% for each of the three and nine months ended April 26, 2014 and April 27, 2013. As of April 26, 2014, the Company had recorded cumulative losses from VCE of $584 million since inception, of which losses of $52 million and $49 million were recorded for the three months ended April 26, 2014 and April 27, 2013, respectively, and losses of $163 million and $135 million were recorded for the nine months ended April 26, 2014 and April 27, 2013, respectively. The Company’s carrying value in VCE as of April 26, 2014 of $95 million was recorded in other assets. |
Over the next 12 months, as VCE scales its operations, the Company expects that it will make additional investments in VCE and may incur additional losses proportionate with the Company’s share ownership. |
From time to time, EMC and Cisco may enter into guarantee agreements on behalf of VCE to indemnify third parties, such as customers, for monetary damages. Such guarantees were not material as of April 26, 2014. |
Other Variable Interest Entities In the ordinary course of business, the Company has investments in other privately held companies and provides financing to certain customers. These other privately held companies and customers may be considered to be variable interest entities. The Company evaluates on an ongoing basis its investments in these other privately held companies and its customer financings, and has determined that as of April 26, 2014 there were no other variable interest entities required to be consolidated in the Company’s Consolidated Financial Statements. |
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(e) | Product Warranties and Guarantees | | | | | | | | | | | | | | |
The following table summarizes the activity related to product warranty liability during the nine months ended April 26, 2014 and April 27, 2013 (in millions): |
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| Nine Months Ended | | | | | | | | |
| April 26, | | April 27, | | | | | | | | |
2014 | 2013 | | | | | | | | |
Balance at beginning of period | $ | 402 | | | $ | 373 | | | | | | | | | |
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Provision for warranties issued | 532 | | | 480 | | | | | | | | | |
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Payments | (504 | ) | | (462 | ) | | | | | | | | |
Balance at end of period | $ | 430 | | | $ | 391 | | | | | | | | | |
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The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The Company’s products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products the Company provides a limited lifetime warranty. |
The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other end-user customers. For additional information, see Note 7. The Company’s other guarantee arrangements as of April 26, 2014 and July 27, 2013 that were subject to recognition and disclosure requirements were not material. |
(f) Supplier Component Remediation Liability |
The Company has recorded in other current liabilities a liability for the expected remediation cost for certain products sold in prior fiscal years containing memory components manufactured by a single supplier between 2005 and 2010. These components are widely used across the industry and are included in a number of the Company's products. Defects in some of these components have caused products to fail after a power cycle event. Defect rates due to this issue have been and are expected to be low. However, recently the Company has seen a small number of its customers experience a growing number of failures in their networks as a result of this component problem. Although the majority of these products are beyond the Company's warranty terms, the Company is proactively working with customers on mitigation. Prior to the second quarter of fiscal 2014, the Company had a liability of $63 million related to this issue for expected remediation costs based on the intended approach at that time. In February 2014, on the basis of the growing number of failures described above, the Company decided to expand its approach which resulted in an additional charge to product cost of sales of $655 million being recorded for the second quarter of fiscal 2014. As of April 26, 2014, the remaining supplier component remediation liability was $702 million. |
(g) Indemnifications |
In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold such parties harmless against losses arising from a breach of representations or covenants or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. |
The Company has an obligation to indemnify certain expenses pursuant to such agreements in a case involving certain of the Company’s service provider customers that are subject to patent infringement claims asserted by Sprint Communications Company, L.P. (“Sprint”) in the United States District Court for the District of Kansas filed on December 19, 2011 (including one case that was later transferred to the District of Delaware). Sprint alleges that the service providers infringe Sprint’s patents by offering Voice over Internet Protocol-based telephone services utilizing products provided by the Company and other manufacturers. Sprint is seeking monetary damages. Trial dates have been set for the first half of calendar year 2015. The parties intend to conduct a mediation later this calendar year and the Company may be asked to participate. The mediation could result in a resolution of the case for some or all of the Company's service provider customers. The Company believes that the service providers have strong defenses and that its products do not infringe the patents subject to the claims. Due to the uncertainty surrounding the litigation process, which involves numerous defendants, the Company is unable to reasonably estimate the ultimate outcome of this litigation at this time. Should the plaintiff prevail in litigation, mediation, or settlement, the Company may have an obligation to indemnify its service provider customers for damages, mediation awards, or settlement amounts arising from their use of Cisco products. |
In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s Amended and Restated Bylaws contain similar indemnification obligations to the Company’s agents. |
It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows. |
(h) Legal Proceedings |
Brazil Brazilian authorities have investigated the Company’s Brazilian subsidiary and certain of its current and former employees, as well as a Brazilian importer of the Company’s products, and its affiliates and employees, relating to alleged evasion of import taxes and alleged improper transactions involving the subsidiary and the importer. Brazilian tax authorities have assessed claims against the Company’s Brazilian subsidiary based on a theory of joint liability with the Brazilian importer for import taxes, interest, and penalties. In addition to claims asserted by the Brazilian federal tax authorities in prior fiscal years, tax authorities from the Brazilian state of Sao Paulo have asserted similar claims on the same legal basis in prior fiscal years. In the first quarter of fiscal 2013, the Brazilian federal tax authorities asserted an additional claim against the Company’s Brazilian subsidiary based on a theory of joint liability with respect to an alleged underpayment of income taxes, social taxes, interest, and penalties by a Brazilian distributor. |
The asserted claims by Brazilian federal tax authorities are for calendar years 2003 through 2008, and the asserted claims by the tax authorities from the state of Sao Paulo are for calendar years 2005 through 2007. The total asserted claims by Brazilian state and federal tax authorities aggregate to approximately $389 million for the alleged evasion of import and other taxes, approximately $1.3 billion for interest, and approximately $1.7 billion for various penalties, all determined using an exchange rate as of April 26, 2014. The Company has completed a thorough review of the matters and believes the asserted claims against the Company’s Brazilian subsidiary are without merit, and the Company is defending the claims vigorously. While the Company believes there is no legal basis for the alleged liability, due to the complexities and uncertainty surrounding the judicial process in Brazil and the nature of the claims asserting joint liability with the importer, the Company is unable to determine the likelihood of an unfavorable outcome against its Brazilian subsidiary and is unable to reasonably estimate a range of loss, if any. The Company does not expect a final judicial determination for several years. |
Russia and the Commonwealth of Independent States At the request of the U.S. Securities and Exchange Commission and the U.S. Department of Justice, the Company is conducting an investigation into allegations which the Company and those agencies received regarding possible violations of the U.S. Foreign Corrupt Practices Act involving business activities of the Company's operations in Russia and certain of the Commonwealth of Independent States, and by certain resellers of the Company’s products in those countries. The Company takes any such allegations very seriously and is fully cooperating with and sharing the results of its investigation with the Commission and the Department. While the outcome of the Company's investigation is currently not determinable, the Company does not expect that it will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The countries that are the subject of the investigation collectively comprise less than two percent of the Company’s revenues. |
VirnetX The Company was subject to patent claims asserted by VirnetX, Inc. on August 11, 2010 in the United States District Court for the Eastern District of Texas. VirnetX alleged that some Cisco products that implement a method for secure communication using virtual private networks infringe certain patents. VirnetX sought monetary damages. The trial on these claims began on March 4, 2013. On March 14, 2013, the jury entered a verdict finding that the Company’s accused products do not infringe any of VirnetX’s patents asserted in the lawsuit. On April 3, 2013, VirnetX filed a motion seeking a new trial on the issue of infringement, which the Company opposed. The Court held a hearing on VirnetX’s motion for a new trial in June 2013. On March 31, 2014 the court denied VirnetX's new trial motion. VirnetX has not appealed that decision, which is therefore final. |
XpertUniverse The Company was subject to numerous patent, tort, and contract claims asserted by XpertUniverse on March 10, 2009 in the United States District Court for the District of Delaware. Shortly before trial, the Court dismissed on summary judgment all claims initially asserted by XpertUniverse except a claim for infringement of two XpertUniverse patents and a claim for fraud by concealment. XpertUniverse’s remaining patent claims alleged that three Cisco products in the field of expertise location software infringed two XpertUniverse patents. XpertUniverse’s fraud by concealment claim alleged that the Company did not disclose its decision not to admit XpertUniverse into a partner program. The trial on these remaining claims began on March 11, 2013. On March 22, 2013, the jury entered a verdict finding that two of the Company’s products infringed two of XpertUniverse’s patents and awarded XpertUniverse damages of less than $35 thousand. The jury also found for XpertUniverse on its fraud by concealment claim and awarded damages of $70 million. In May and June 2013, the Company filed post-trial motions. On November 20, 2013 the trial court granted the Company's motion for judgment as a matter of law, overturned the jury’s finding on the fraud by concealment claim, and vacated the $70 million verdict. Separately, the trial court agreed with the jury that the Company infringed XpertUniverse’s patents, and affirmed the verdict awarding XpertUniverse approximately $35 thousand in damages plus accrued interest. On February 4, 2014, XpertUniverse filed a notice of appeal from the trial court’s decision. |
Rockstar The Company and some of its service provider customers are subject to patent claims asserted in December 2013 in the Eastern District of Texas and the District of Delaware by subsidiaries of the Rockstar Consortium ("Rockstar"). Rockstar, whose members include Apple, Microsoft, LM Ericsson, Sony, and Blackberry, purchased a portfolio of patents out of the Nortel Networks’ bankruptcy proceedings (the “Nortel Portfolio”). Rockstar’s subsidiaries allege that some of the Company’s NGN Routing, Switching and Collaboration products, as well as video solutions deployed by its service provider customers, infringe some of the patents in the Nortel Portfolio. Rockstar seeks monetary damages. A trial date for one service provider customer has been set for October 2015; no other trial dates have been set. The Company has various defenses to the patent infringement allegations, and has various offensive claims against Rockstar and some of its consortium members available to it as well, and the Company will also explore alternative means of resolution. Due to the uncertainty surrounding the litigation process, which involves numerous lawsuits and parties, the Company is unable to reasonably estimate the ultimate outcome and a range of loss, if any, of these litigations at this time. |
In addition, the Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including intellectual property litigation. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. |