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Commitments and Contingencies | 3 Months Ended
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Oct. 29, 2016
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | 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, Canada, China, Germany, India, Israel, Japan, the Netherlands 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 29, 2016 are as follows (in millions):
Fiscal Year | Amount
2017 (remaining nine months) | $ | 280 |
2018 | 292 |
2019 | 178 |
2020 | 128 |
2021 | 76 |
Thereafter | 162 |
Total | $ | 1,116 |
(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 29, 2016 and July 30, 2016, the Company had total purchase commitments for inventory of $3,920 million and $3,896 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 29, 2016 and July 30, 2016, the liability for these purchase commitments was $161 million and $159 million, respectively, and was included in other current liabilities.
(c) | Other Commitments
In connection with the Company’s acquisitions, 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
| October 29, 2016 |  | October 24, 2015
Compensation expense related to acquisitions | $ | 64 |  |  | $ | 73 |
As of October 29, 2016, the Company estimated that future cash compensation expense of up to $299 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. ("Insieme"), as more fully discussed immediately below. Insieme Networks, Inc. In the third quarter of fiscal 2012, the Company made an investment in 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 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 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 $20 million and $51 million during the three months ended October 29, 2016 and October 24, 2015, respectively, related to the fair value of the vested portion of amounts that were earned or are expected to be earned by the former noncontrolling interest holders. Continued vesting will result in additional 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 $834 million (which includes the $803 million that has been expensed to date), net of forfeitures. The former noncontrolling interest holders earned the maximum amount related to these two milestone payments and were paid approximately $323 million and $291 million during the first quarters of fiscal 2017 and fiscal 2016, respectively. As of October 29, 2016, the Company paid a total of approximately $712 million pursuant to these two milestone payments.
(d) | Product Warranties
The following table summarizes the activity related to the product warranty liability (in millions):
| Three Months Ended
| October 29, 2016 |  | October 24, 2015
Balance at beginning of period | $ | 414 |  |  | $ | 449 |
Provisions for warranty issued | 176 |  |  | 160 |
Adjustments for pre-existing warranties | — |  |  | (10 | )
Settlements | (177 | ) |  | (166 | )
Balance at end of period | $ | 413 |  |  | $ | 433 |
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 $6.9 billion for each of the three months ended October 29, 2016 and October 24, 2015. The balance of the channel partner financing subject to guarantees was $1.0 billion and $1.1 billion as of October 29, 2016 and July 30, 2016, 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 $6 million and $23 million for the three months ended October 29, 2016 and October 24, 2015, respectively. Financing Guarantee Summary The aggregate amounts of financing guarantees outstanding at October 29, 2016 and July 30, 2016, 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 29, 2016 |  | July 30, 2016
Maximum potential future payments relating to financing guarantees: |  |  |
Channel partner | $ | 248 |  |  | $ | 281 |
End user | 88 |  |  | 96 |
Total | $ | 336 |  |  | $ | 377 |
Deferred revenue associated with financing guarantees: |  |  |
Channel partner | $ | (77 | ) |  | $ | (85 | )
End user | (70 | ) |  | (76 | )
Total | $ | (147 | ) |  | $ | (161 | )
Maximum potential future payments relating to financing guarantees, net of associated deferred revenue | $ | 189 |  |  | $ | 216 |
Other Guarantees The Company’s other guarantee arrangements as of October 29, 2016 and July 30, 2016 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 were 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 were beyond the Company's warranty terms, the Company has been 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 fiscal 2016 and 2015, adjustments to product cost of sales of $74 million and $164 million, respectively, were recorded to reduce the liability, reflecting net lower than previously estimated future costs to remediate the impacted customer products. The supplier component remediation liability as of October 29, 2016 and July 30, 2016 was $265 million and $276 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 been asked to provide indemnification in matters involving certain of the Company’s service provider customers that are subject to patent infringement claims asserted by Sprint Communications Company, L.P. in Kansas and Delaware. Sprint alleges that the service provider customers infringe Sprint’s patents by offering VoIP telephone services utilizing products provided by the Company and other manufacturers. Sprint seeks monetary damages. Sprint’s Kansas cases were stayed pending resolution of Sprint’s appeal of the Delaware court’s judgment that certain Sprint patents were invalid. The Court of Appeals for the Federal Circuit overturned the Delaware court’s judgment on September 23, 2016. As a result, Sprint’s Kansas cases are set for trial on February 13 and March 6, 2017 against Time Warner Cable and Comcast respectively, and its Delaware case was reset for trial on November 6, 2017 against Cox Communications. The Company believes that the service providers have strong defenses and arguments that the Company's products do not infringe the patents and/or that Sprint's 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 Sprint prevail in litigation, mediation, or settlement, the Company, in accordance with its agreements, may have an obligation to indemnify its service provider customers for damages, mediation awards, or settlement amounts arising from their use of Cisco products. At this time, the Company does not anticipate that the outcome of the matters would be material. 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. The asserted claims by Brazilian federal tax authorities that remain are for calendar years 2003 through 2007, 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 $253 million for the alleged evasion of import and other taxes, $1.3 billion for interest, and $1.2 billion for various penalties, all determined using an exchange rate as of October 29, 2016. 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. Backflip Software Backflip Software, Inc. brought claims against the Company as disclosed in the Company’s Form 10-K filed on September 8, 2016. Prior to the commencement of trial set for September 12, 2016, the parties executed a Settlement and Release Agreement resolving all aspects of the case and the Court dismissed the case in its entirety on October 17, 2016. The settlement did not have a material impact on the Company's results of operations. SRI International On September 4, 2013, SRI International, Inc. (“SRI”) asserted patent infringement claims against the Company in the U.S. District Court for the District of Delaware, accusing Cisco products and services in the area of network intrusion detection of infringing two U.S. patents. SRI sought monetary damages of at least a reasonable royalty and enhanced damages. On May 12, 2016, the jury returned a verdict finding willful infringement of the asserted patents. The jury awarded SRI damages of $23.7 million, and the Court will decide whether to award enhanced damages and attorneys’ fees and whether an ongoing royalty should be awarded through the expiration of the patents in 2018. In June 2016, the Company filed post-trial motions. The Company also intends to pursue an appeal to the United States Court of Appeals for the Federal Circuit on various grounds. The Company believes it has strong arguments to overturn the jury verdict and/or reduce the damages award. While the ultimate outcome of the case may still result in a loss, the Company does not expect it to be material. SSL SSL Services, LLC (“SSL”) has asserted claims for patent infringement against the Company in the U.S. District Court for the Eastern District of Texas. The proceeding was instituted on March 25, 2015. SSL alleges that the Company's AnyConnect products that include Virtual Private Networking functions infringed a U.S. patent owned by SSL. SSL seeks money damages from the Company. On August 18, 2015, Cisco petitioned the Patent Trial and Appeal Board (“PTAB”) of the United States Patent and Trademark Office to review whether the patent SSL has asserted against the Company is valid over prior art. On February 23, 2016, a PTAB multi-judge panel found a reasonable likelihood that Cisco would prevail in showing that SSL’s patent claims are unpatentable and instituted proceedings. The PTAB held a hearing to review the Company's petition on November 15, 2016 and we are awaiting a decision. The district court issued an order on June 28, 2016 staying the district court case pending the final written decision from the PTAB. The Company believes it has strong arguments that the Company's products do not infringe and the patent is invalid. If the Company does not prevail and a jury were to find that the Company's AnyConnect products infringe, the Company believes damages, as appropriately measured, would be immaterial. Due to uncertainty surrounding patent litigation processes, however, the Company is unable to reasonably estimate the ultimate outcome of this litigation at this time. Kangtega Cisco Systems GmbH (“Cisco GmbH”) is subject to patent claims by Kangtega GmbH (“Kangtega”), instituted on June 6, 2013, alleging that Cisco GmbH infringes in Germany a European Patent by marketing in Germany network intrusion-detection (or firewall) products known as the “ASA” firewall offering. On April 29, 2014, the Mannheim Regional Court dismissed the infringement action, finding no infringement by Cisco GmbH of the asserted patent. On November 23, 2016, a court of appeal in Germany (Oberlandesgericht Karlsruhe) will hear an appeal of that judgment. The matter had been set for July 13, 2016, but that hearing was postponed until November 23, 2016. In addition, on July 25, 2016 the German Federal Patent Court issued its grounds for a decision denying Cisco’s nullity request with respect to the Kangtega patent. The nullity decision, which is open to appeal, regards patent validity and was issued in a separate proceeding from the infringement action in which Cisco has previously prevailed. In the infringement action, Kangtega seeks an injunction which would prohibit Cisco GmbH’s activities in Germany with respect to the ASA firewall offering unless Cisco GmbH takes a license from Kangtega or the Company redesigns the products. The Company believes that the lower court ruling in Cisco's favor in the infringement action was correct and should be affirmed. The Company does not anticipate that the outcome of the case would be material. However, due to uncertainty surrounding the litigation process, the Company is unable to reasonably estimate the outcome of the appeal and any subsequent appeals to a higher court 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.

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