Cisco 2014 Annual Report Download - page 65

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Amortization of Purchased Intangible Assets
The following table presents the amortization of purchased intangible assets (in millions):
Years Ended July 26, 2014 July 27, 2013 July 28, 2012
Amortization of purchased intangible assets:
Cost of sales ....................................................... $ 742 $ 606 $424
Operating expenses .................................................. 275 395 383
Total ......................................................... $1,017 $1,001 $807
Amortization of purchased intangible assets increased in both fiscal 2014 and fiscal 2013 as compared with the respective
prior fiscal years. The increases were primarily due to amortization of purchased intangible assets from our recent acquisitions
partially offset by certain purchased intangible assets having become fully amortized.
The fair value of acquired technology and patents, as well as acquired technology under development, is determined at
acquisition date primarily using the income approach, which discounts expected future cash flows to present value. The
discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis and
then adjusted to reflect risks inherent in the development lifecycle as appropriate. We consider the pricing model for products
related to these acquisitions to be standard within the high-technology communications industry, and the applicable discount
rates represent the rates that market participants would use for valuation of such intangible assets.
Restructuring and Other Charges
Fiscal 2014 Plan and Fiscal 2011 Plans
In August 2013, we announced a workforce reduction plan that would impact up to 4,000 employees, or 5%, of our global
workforce. In connection with this Fiscal 2014 Plan, during fiscal 2014 we incurred within operating expenses restructuring
and other charges of approximately $418 million which were related primarily to employee severance charges for employees
impacted by our workforce reduction plan under the Fiscal 2014 Plan. We have completed the Fiscal 2014 Plan and we do not
expect any remaining charges related to this action. In fiscal 2013 and fiscal 2012, we incurred within operating expenses net
restructuring and other charges of $105 million and $304 million, respectively, which were related primarily to employee
severance charges for employees impacted by our workforce reduction under Fiscal 2011 Plans.
Fiscal 2015 Plan
In August 2014, we announced a restructuring plan that will impact up to 6,000 employees, representing approximately 8% of
our global workforce. We expect to take action under this plan beginning in the first quarter of fiscal 2015. We currently
estimate that we will recognize pre-tax charges in an amount not expected to exceed $700 million consisting of severance and
other one-time termination benefits, and other associated costs.
Operating Income
The following table presents our operating income and our operating income as a percentage of revenue (in millions, except
percentages):
Years Ended July 26, 2014 July 27, 2013 July 28, 2012
Operating income ....................................................... $9,345 $11,196 $10,065
Operating income as a percentage of revenue ................................. 19.8% 23.0% 21.9%
For fiscal 2014, as compared with fiscal 2013, operating income decreased by 17%, and as a percentage of revenue operating
income decreased by 3.2 percentage points. The decrease resulted from the following: a decrease in revenue; a gross margin
percentage decline, driven in part by the $655 million supplier component remediation charge (or 1.4 percentage points); the
$416 million compensation expense recorded in fiscal 2014 in connection with our acquisition of the remaining interest in
Insieme; and an increase in restructuring and other charges related to the workforce reduction under the Fiscal 2014 Plan.
In fiscal 2013 our results reflected solid execution on delivering profitable growth, as we grew operating income faster than
revenue. In fiscal 2013, as compared with fiscal 2012, operating income increased by 11%, and as a percentage of revenue
operating income increased by 1.1 percentage points. The increases resulted from the following: revenue growth of 6%;
continuing focus on expense management, which resulted in lower sales and marketing and G&A expenses as a percentage of
revenue; and lower restructuring and other charges.
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