Commitments and Contingencies | 9 Months Ended |
Apr. 25, 2015 |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | | | | | | | | | | | | | | | | |
12 | Commitments and Contingencies | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(a) | Operating Leases | | | | | | | | | | | | | | |
The Company leases office space in many U.S. locations. Outside the United States, larger leased sites include sites in Belgium, Canada, China, France, Germany, India, Israel, 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 25, 2015 are as follows (in millions): |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Fiscal Year | Amount | | | | | | | | | | | | |
2015 (remaining three months) | $ | 97 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2016 | 304 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2017 | 210 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2018 | 153 | | | | | | | | | | | | | |
| | | | | | | | | | | |
2019 | 85 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Thereafter | 228 | | | | | | | | | | | | | |
| | | | | | | | | | | |
Total | $ | 1,077 | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(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 allow them to either 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 25, 2015 and July 26, 2014, the Company had total purchase commitments for inventory of $4,495 million and $4,169 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 25, 2015 and July 26, 2014, the liability for these purchase commitments was $153 million and $162 million, respectively, and was included in other current liabilities. |
| | | | | | | | | | | | | | | |
(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): |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| April 25, | | April 26, | | April 25, | | April 26, |
2015 | 2014 | 2015 | 2014 |
Compensation expense related to acquisitions | $ | 72 | | | $ | 95 | | | $ | 264 | | | $ | 505 | |
|
As of April 25, 2015, the Company estimated that future cash compensation expense of up to $366 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. The Company recorded compensation expense of $51 million and $52 million during the three months ended April 25, 2015 and April 26, 2014, respectively, and $155 million and $363 million during the nine months ended April 25, 2015 and April 26, 2014, respectively, 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 $843 million (which includes the $571 million that has been expensed to date), net of forfeitures. 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 $247 million and $255 million as of April 25, 2015 and July 26, 2014, respectively. |
| | | | | | | | | | | | | | | |
(d) | Product Warranties | | | | | | | | | | | | | | |
The following table summarizes the activity related to the product warranty liability (in millions): |
| | | | | | | | |
| | | | | | | | | | | | | | | |
| Nine Months Ended | | | | | | | | |
| April 25, | | April 26, | | | | | | | | |
2015 | 2014 | | | | | | | | |
Balance at beginning of period | $ | 446 | | | $ | 402 | | | | | | | | | |
| | | | | | | |
Provision for warranties issued | 517 | | | 532 | | | | | | | | | |
| | | | | | | |
Payments | (512 | ) | | (504 | ) | | | | | | | | |
Balance at end of period | $ | 451 | | | $ | 430 | | | | | | | | | |
| | | | | | | |
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. |
| | | | | | | | | | | | | | | |
(e) | Financing and Other 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 $6.3 billion and $5.8 billion for the three months ended April 25, 2015 and April 26, 2014, respectively. The volume of channel partner financing was $19.0 billion and $17.9 billion for the nine months ended April 25, 2015 and April 26, 2014, respectively. The balance of the channel partner financing subject to guarantees was $1.2 billion as of each April 25, 2015 and July 26, 2014. |
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 $22 million and $44 million for the three months ended April 25, 2015 and April 26, 2014, respectively, and was $87 million and $89 million for the nine months ended April 25, 2015 and April 26, 2014, respectively. |
Financing Guarantee Summary The aggregate amounts of financing guarantees outstanding at April 25, 2015 and July 26, 2014, 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): |
| | | | | | | | |
| | | | | | | | | | | | | | | |
| April 25, | | July 26, | | | | | | | | |
2015 | 2014 | | | | | | | | |
Maximum potential future payments relating to financing guarantees: | | | | | | | | | | | |
Channel partner | $ | 299 | | | $ | 263 | | | | | | | | | |
| | | | | | | |
End user | 138 | | | 202 | | | | | | | | | |
| | | | | | | |
Total | $ | 437 | | | $ | 465 | | | | | | | | | |
| | | | | | | |
Deferred revenue associated with financing guarantees: | | | | | | | | | | | |
Channel partner | $ | (122 | ) | | $ | (127 | ) | | | | | | | | |
End user | (113 | ) | | (166 | ) | | | | | | | | |
Total | $ | (235 | ) | | $ | (293 | ) | | | | | | | | |
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue | $ | 202 | | | $ | 172 | | | | | | | | | |
| | | | | | | |
Other Guarantees The Company’s other guarantee arrangements as of April 25, 2015 and July 26, 2014 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, 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 a charge to product cost of sales of $655 million being recorded for the second quarter of fiscal 2014. During the third quarter of fiscal 2015, an adjustment of $164 million was recorded, which was a reduction to the liability to reflect net lower than estimated future costs to remediate the impacted customer products. The supplier component remediation liability as of April 25, 2015 and July 26, 2014 was $426 million and $670 million, respectively. |
| | | | | | | | | | | | | | | |
(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 an agreement in, among other cases, 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 U.S. 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 2016 in the case proceeding in the District of Kansas. The trial in Delaware is scheduled for February 2017. The parties conducted mediations, and the Company participated through a mediation involving a service provider customer. Those particular mediations did not resolve the parties’ disputes, but the parties plan to engage in additional dispute resolution efforts, including participation by the Company. The Company believes that the service providers have strong defenses and that its products do not infringe the patents subject to the claims and/or that the patents are invalid. 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, in accordance with its agreement, 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 $291 million for the alleged evasion of import and other taxes, approximately $1.1 billion for interest, and approximately $1.3 billion for various penalties, all determined using an exchange rate as of April 25, 2015. 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 (SEC) 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 SEC and the Department of Justice. 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 2% of the Company’s revenues. |
Rockstar The Company and some of its service provider customers were 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, had purchased a portfolio of patents out of the Nortel Networks’ bankruptcy proceedings (the “Nortel Portfolio”). In connection with this matter, during the first quarter of fiscal 2015 the Company recorded a charge to product cost of sales of $188 million. |
In December 2014, RPX Corporation (“RPX”) and Rockstar entered into an agreement, which closed on January 28, 2015, resulting in over 30 technology companies, including the Company and the various service provider customers described above, obtaining a license to the patents owned by Rockstar. The Company paid approximately $300 million in connection with this transaction, with the payment recorded against the amount previously reserved and as an intangible asset to be amortized over its estimated useful life. In connection with the closing of the transaction, Rockstar dismissed all litigation it had brought against the participating companies. |
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. |