Cisco 2014 Annual Report Download - page 115

As of July 26, 2014, the Company estimated that future cash compensation expense of up to $574 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 fiscal 2014, the Company recorded
compensation expense of $416 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 $855 million, net of forfeitures and including the $416 million that has been expensed in fiscal
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 $255 million and $263 million as of July 26, 2014 and July 27, 2013,
respectively.
(d) Product Warranties
The following table summarizes the activity related to the product warranty liability (in millions):
July 26, 2014 July 27, 2013 July 28, 2012
Balance at beginning of fiscal year ...................... $ 402 $ 373 $ 340
Provision for warranties issued ......................... 704 649 617
Payments .......................................... (660) (620) (584)
Balance at end of fiscal year ........................... $ 446 $ 402 $ 373
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 $24.6 billion, $23.8 billion, and
$21.3 billion for fiscal 2014, 2013, and 2012, respectively. The balance of the channel partner financing subject to guarantees
was $1.2 billion and $1.4 billion as of July 26, 2014 and July 27, 2013, 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 $129 million
for fiscal 2014, $185 million for fiscal 2013, and $227 million for fiscal 2012.
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