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Commitments and Contingencies | 3 Months Ended
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Oct. 29, 2022
Commitments and Contingencies Disclosure [Abstract] |
Commitments and Contingencies | Commitments and Contingencies (a)Purchase Commitments with Contract Manufacturers and Suppliers We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consists of firm, noncancelable, and unconditional commitments. Certain of these inventory purchase commitments with contract manufacturers and suppliers relate to arrangements to secure supply and pricing for certain product components for multi-year periods. In certain instances, these agreements allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. The following table summarizes our inventory purchase commitments with contract manufacturers and suppliers by period (in millions):
| October 29, 2022 |  | July 30, 2022
Less than 1 year | $ | 10,160 |  |  | $ | 9,954 |
1 to 3 years | 1,606 |  |  | 2,240 |
3 to 5 years | 842 |  |  | 770 |
Total | $ | 12,608 |  |  | $ | 12,964 |
We record a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of October 29, 2022 and July 30, 2022, the liability for these purchase commitments was $380 million and $313 million, respectively, and was included in other current liabilities. (b)Other Commitments In connection with our acquisitions, we have 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 Cisco of certain employees of the acquired entities. The following table summarizes the compensation expense related to acquisitions (in millions):
| Three Months Ended
| October 29, 2022 |  | October 30, 2021
Compensation expense related to acquisitions | $ | 74 |  |  | $ | 89 |
As of October 29, 2022, we estimated that future cash compensation expense of up to $388 million may be required to be recognized pursuant to the applicable business combination agreements. We also have certain funding commitments, primarily related to our privately held investments, some of which are based on the achievement of certain agreed-upon milestones or are required to be funded on demand. The funding commitments were $0.3 billion and $0.4 billion as of October 29, 2022 and July 30, 2022, respectively. (c)Product Warranties The following table summarizes the activity related to the product warranty liability (in millions):
| Three Months Ended
| October 29, 2022 |  | October 30, 2021
Balance at beginning of period | $ | 333 |  |  | $ | 336 |
Provisions for warranties issued | 97 |  |  | 114 |
Adjustments for pre-existing warranties | 1 |  |  | 2 |
Settlements | (108) |  |  | (111) |
Balance at end of period | $ | 323 |  |  | $ | 341 |
We accrue for warranty costs as part of our cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. Our products are generally covered by a warranty for periods ranging from 90 days to five years, and for some products we provide a limited lifetime warranty. (d)Financing and Other Guarantees In the ordinary course of business, we provide financing guarantees for various third-party financing arrangements extended to channel partners customers. Payments under these financing guarantee arrangements were not material for the periods presented. Channel Partner Financing Guarantees We facilitate arrangements for third-party financing extended to channel partners, consisting of revolving short-term financing, with payment terms generally ranging from 60 to 90 days. These financing arrangements facilitate the working capital requirements of the channel partners, and, in some cases, we guarantee a portion of these arrangements. The volume of channel partner financing was $7.6 billion and $6.6 billion for the first quarter of fiscal 2023 and 2022, respectively. The balance of the channel partner financing subject to guarantees was $1.5 billion and $1.4 billion as of October 29, 2022 and July 30, 2022, respectively. Financing Guarantee Summary The aggregate amounts of channel partner financing guarantees outstanding at October 29, 2022 and July 30, 2022, 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, 2022 |  | July 30, 2022
Maximum potential future payments | $ | 162 |  |  | $ | 188 |
Deferred revenue | (19) |  |  | (9) |
Total | $ | 143 |  |  | $ | 179 |
(e)Indemnifications In the normal course of business, we have indemnification obligations to other parties, including customers, lessors, and parties to other transactions with us, with respect to certain matters. We have agreed to indemnify 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 or circumstances within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential amount for claims made under the indemnification obligations due to uncertainties in the litigation process, coordination with and contributions by other parties and the defendants in these types of cases, and the unique facts and circumstances involved in each particular case and agreement. Historically, indemnity payments made by us have not had a material effect on our Consolidated Financial Statements. In addition, we have entered into indemnification agreements with our officers and directors, and our Amended and Restated Bylaws contain similar indemnification obligations to our agents. (f)Legal Proceedings Brazil Brazilian authorities have investigated our Brazilian subsidiary and certain of its former employees, as well as a Brazilian importer of our 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 our 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 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 $153 million for the alleged evasion of import and other taxes, $820 million for interest, and $378 million for various penalties, all determined using an exchange rate as of October 29, 2022. We have completed a thorough review of the matters and believe the asserted claims against our Brazilian subsidiary are without merit, and we are defending the claims vigorously. While we believe 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, we are unable to determine the likelihood of an unfavorable outcome against our Brazilian subsidiary and are unable to reasonably estimate a range of loss, if any. We do not expect a final judicial determination for several years. Centripetal On February 13, 2018, Centripetal Networks, Inc. (“Centripetal”) asserted patent infringement claims against us in the U.S. District Court for the Eastern District of Virginia, alleging that several of our products and services infringe eleven Centripetal U.S. patents. The district court case went to trial on five asserted patents. Subsequently, on October 5, 2020, the district court issued a judgment finding validity and willful infringement of four of the asserted patents and non-infringement of the fifth patent and awarded $1.9 billion in damages and $14 million in pre-judgment interest, declined to issue an injunction but, instead, awarded Centripetal a royalty against future revenue for an initial three-year term at a 10% rate, with a minimum and maximum annual royalty of $168 million and $300 million, respectively, and for a second three-year term at a 5% rate, with a minimum and maximum annual royalty of $84 million and $150 million, respectively. We appealed and, on June 23, 2022, the Federal Circuit vacated the district court’s final judgment, remanded the case back to the district court to be assigned to a new judge and ordered the district court to conduct additional proceedings. On August 9, 2022, Centripetal filed a petition for writ of certiorari in the U.S. Supreme Court challenging the Federal Circuit’s decision. Cisco filed its opposition brief on October 26, 2022 and the proceedings are ongoing. Between April 2020 and February 2022, Centripetal filed complaints in the District Court of Dusseldorf in Germany (“German Court”), asserting a total of five patents and one utility model. Centripetal sought damages and injunctive relief in all cases. On December 10, 2021, the German Court rejected Centripetal’s complaints on two patents, and Centripetal appealed. A hearing for a Cisco nullity action in the Federal Patent Court in Germany on one of those two patents occurred on August 1, 2022, and we are waiting for the Court’s opinion. On December 21, 2021, the German Court stayed its decision on infringement of the third patent pending a decision by the Federal Patent Court in a related nullity proceeding. On May 17, 2022, Centripetal withdrew its complaint for infringement of the German utility model. The German Court has set a hearing on the remaining two Centripetal complaints for November 22, 2022. Due to uncertainty surrounding patent litigation processes in the U.S. and Europe, we are unable to reasonably estimate the ultimate outcome of the litigations at this time. If we do not prevail in either litigation, we believe that any damages ultimately assessed would not have a material effect on our Consolidated Financial Statements. Ramot On June 12, 2019, Ramot at Tel Aviv University Ltd. (“Ramot”) asserted patent infringement claims against us in the U.S. District Court for the Eastern District of Texas (“E.D. Tex.”), seeking damages, including enhanced damages, and a royalty on future sales. Ramot alleges that certain Cisco optical transceiver modules and line cards infringe three patents. The PTO preliminarily found all asserted claims unpatentable in ex parte reexamination proceedings and the pending District Court case has been stayed. On February 26, 2021, Ramot asserted patent infringement claims against Acacia Communications, Inc. (“Acacia”) in the District of Delaware (“D. Del.”), seeking damages, including enhanced damages, and a royalty on future sales. Ramot alleges that certain Acacia optical transceiver modules and integrated circuits infringe two of the three patents that Ramot asserted in the E.D. Tex. case and this case is also stayed pending reexamination proceedings. On September 28, 2021 and May 24, 2022, Cisco and Acacia filed two declaratory judgment actions of noninfringement against Ramot in D. Del on other Ramot patents in the same family as those involved in the pending cases above. Ramot counterclaimed and filed another suit in E.D. Tex. for infringement of the same patents and seeks damages, including enhanced damages, and a royalty on future sales. While we believe that we have strong non-infringement and invalidity arguments in these litigations, and that Ramot’s damages theories in such cases are not supported by prevailing law, we are unable to reasonably estimate the ultimate outcome of these litigations at this time due to uncertainties in the litigation processes. If we do not prevail in court in these litigations, we believe any damages ultimately assessed would not have a material effect on our Consolidated Financial Statements. Viasat On November 6, 2019, Viasat, Inc. (“Viasat”) filed suit against Acacia in the California Superior Court for San Diego County (“SDSC”), alleging contract and trade secret claims for certain Acacia products sold from January 1, 2019 forward (“Viasat 2”). Viasat 2 is similar to a previous suit Viasat filed against Acacia and which resolved in July 2022 for an immaterial amount (“Viasat 1”). On June 9, 2020, Viasat filed a third suit in SDSC alleging contract and trade secrets claims for sales of additional Acacia products (“Viasat 3”, together with Viasat 2, the “Viasat Cases”). In October 2022, an amended complaint was filed in Viasat 3 asserting the same claims but alleging additional information. On July 28, 2017, Acacia filed suit in the Commonwealth of Massachusetts Superior Court against Viasat alleging claims for defamation, unfair competition, business torts, and declaratory judgment of no trade secret misappropriation (the “Massachusetts Action”). On April 5, 2018, Viasat counterclaimed with contract, trade secret, and unfair competition claims. Following resolution of Viasat 1, Acacia and Viasat jointly agreed to dismiss the Massachusetts Action in October 2022, thereby resolving the case. We are unable to reasonably estimate the ultimate outcome of any of the Viasat Cases at this time due to uncertainties in the litigation processes. If we do not prevail, we believe that any relief ultimately assessed in any of the Viasat Cases would not have a material effect on our Consolidated Financial Statements. Egenera On August 8, 2016, Egenera, Inc. (“Egenera”) asserted infringement claims against us in the U.S. District Court for the District of Massachusetts, alleging that Cisco’s Unified Computing System Manager infringes three patents. Egenera sought damages, including enhanced damages, and an injunction. Two of the asserted patents were dismissed, leaving Egenera’s infringement claim based on one asserted patent. On March 25, 2022, the PTO preliminarily found all of the asserted claims of the remaining patent unpatentable in ex parte reexamination proceedings. On August 15, 2022, after a jury trial for the remaining patent, the jury returned a verdict in favor of Cisco. On October 27, 2022, Egenera filed a motion for judgment of infringement and a motion for new trial. Cisco opposed those motions and the post-trial proceedings are ongoing. In addition to the above matters, we are subject to other 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, we do not believe that the ultimate costs to resolve these matters will have a material effect on our Consolidated Financial Statements. For additional information regarding intellectual property litigation, see “Part II, Item 1A. Risk Factors—We may be found to infringe on intellectual property rights of others” herein.

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