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Commitments And Contingencies | 3 Months Ended
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Oct. 26, 2013
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 Australia, Belgium, China, France, Germany, India, Israel, Italy, Japan, 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 October 26, 2013 are as follows (in millions):
Fiscal Year | Amount
2014 (remaining nine months) | $ | 293 |
2015 | 314 |
2016 | 169 |
2017 | 103 |
2018 | 75 |
Thereafter | 198 |
Total | $ | 1,152 |
(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 October 26, 2013 and July 27, 2013, the Company had total purchase commitments for inventory of $4,020 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 October 26, 2013 and July 27, 2013, the liability for these purchase commitments was $169 million and $172 million, respectively, and was included in other current liabilities.
(c) | Other Commitments
In connection with the Company’s business combinations and asset purchases, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain agreed-upon technology, development, product, or other milestones or the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $304 million and $12 million during the three months ended October 26, 2013 and October 27, 2012, respectively. As of October 26, 2013, the Company estimated that future compensation expense and contingent consideration of up to $853 million may be required to be recognized pursuant to the applicable business combination and asset purchase agreements, which included the remaining potential compensation expense related to Insieme Networks, Inc. as more fully discussed in the subsection entitled “Insieme Networks, Inc.” within section (d) immediately below. 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 $265 million and $263 million as of October 26, 2013 and July 27, 2013, respectively.
(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 October 26, 2013, the Company’s cumulative gross investment in VCE was approximately $578 million, inclusive of accrued interest, and its ownership percentage was approximately 35%. The Company invested $64 million in VCE during the three months ended October 26, 2013. 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 months ended October 26, 2013 and October 27, 2012. As of October 26, 2013, the Company had recorded cumulative losses from VCE of $475 million since inception, of which losses of $53 million and $42 million were recorded for the three months ended October 26, 2013 and October 27, 2012, respectively. The Company’s carrying value in VCE as of October 26, 2013 of $103 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 October 26, 2013. 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 includes $100 million of funding and a license to certain of the Company’s technology. In addition, pursuant to a November 2012 amendment to the agreement between the Company and Insieme, the Company agreed to invest an additional $35 million in Insieme upon the satisfaction of certain conditions. As of October 26, 2013, the Company owned approximately 83% of Insieme as a result of these investments and has 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 three months ended October 26, 2013, the Company exercised its call option and entered into a merger agreement to purchase the remaining interests in Insieme. The merger is expected to close in the second quarter of fiscal 2014, at which time the noncontrolling interest holders will be 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 months ended October 26, 2013, the Company recorded a liability of $257 million for compensation expense related to the fair value of the vested portion of amounts that are expected to be earned by the 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. The maximum amount that could be recorded as compensation expense by the Company is approximately $863 million, including the $257 million that has been expensed through October 26, 2013. The milestone payments, if earned, are expected to be paid primarily during fiscal 2016 and fiscal 2017. 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 October 26, 2013 there were no other variable interest entities required to be consolidated in the Company’s Consolidated Financial Statements.
(e) | Product Warranties and Guarantees
The following table summarizes the activity related to product warranty liability during the three months ended October 26, 2013 and October 27, 2012 (in millions):
| Three Months Ended
| October 26, 2013 |  | October 27, 2012
Balance at beginning of period | $ | 431 |  |  | $ | 415 |
Provision for warranties issued | 240 |  |  | 162 |
Payments | (179 | ) |  | (155 | )
Balance at end of period | $ | 492 |  |  | $ | 422 |
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 October 26, 2013 and July 27, 2013 that were subject to recognition and disclosure requirements were not material. (f) 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 is an indemnifier pursuant to such agreements in a case involving certain of the Company's service provider customers that are subject to patent claims asserted by C-Cation Technologies, LLC (“C-Cation”) in the United States District Court for the Eastern District of Texas filed on January 25, 2011. C-Cation alleges that the service providers infringe C-Cation’s patent through use of Cable Modem Termination Systems and cable modems provided by the Company and other manufacturers. C-Cation is seeking monetary damages and injunctive relief. A consolidated trial is set to begin on December 9, 2013. The Company believes that the service providers have strong defenses and that the Company's products do not infringe the patent. Should the plaintiff prevail, the Company may have an obligation to indemnify its service provider customers for the accused Cisco products. Due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate whether any loss has been incurred as a result of this indemnity claim at this time. 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. (g) Legal Proceedings 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 $394 million for the alleged evasion of import and other taxes, approximately $1.2 billion for interest, and approximately $1.8 billion for various penalties, all determined using an exchange rate as of October 26, 2013. 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. 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 various 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 has opposed. The Court held a hearing on VirnetX’s motion for a new trial in June 2013, but has not issued a ruling. 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. The Company expects XpertUniverse to appeal the trial court’s decision. 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.

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