Document
Table of Contents

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
_____________________________________
FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 2016

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
          
For the transition period from              to             
Commission file number 0-18225 
_____________________________________
image-logoa06.jpg
CISCO SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California
 
77-0059951
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
170 West Tasman Drive
San Jose, California 95134
(Address of principal executive office and zip code)
(408) 526-4000
(Registrant’s telephone number, including area code)
_____________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No  o  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No  o  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨  No  x
Number of shares of the registrant’s common stock outstanding as of November 17, 2016: 5,019,758,934
____________________________________ 


1

Table of Contents

Cisco Systems, Inc.
Form 10-Q for the Quarter Ended October 29, 2016
INDEX
 
 
 
 
Page
Part I
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Part II.
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION 
Item 1.
Financial Statements (Unaudited)
CISCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
(Unaudited)
 
October 29, 2016
 
July 30, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,583

 
$
7,631

Investments
62,385

 
58,125

Accounts receivable, net of allowance for doubtful accounts of $247 at October 29, 2016 and $249 at July 30, 2016
4,805

 
5,847

Inventories
1,176

 
1,217

Financing receivables, net
4,541

 
4,272

Other current assets
1,651

 
1,627

Total current assets
83,141

 
78,719

Property and equipment, net
3,499

 
3,506

Financing receivables, net
4,784

 
4,158

Goodwill
26,823

 
26,625

Purchased intangible assets, net
2,297

 
2,501

Deferred tax assets
4,057

 
4,299

Other assets
1,686

 
1,844

TOTAL ASSETS
$
126,287

 
$
121,652

LIABILITIES AND EQUITY

 

Current liabilities:

 

Short-term debt
$
4,155

 
$
4,160

Accounts payable
996

 
1,056

Income taxes payable
32

 
517

Accrued compensation
2,619

 
2,951

Deferred revenue
10,215

 
10,155

Other current liabilities
5,200

 
6,072

Total current liabilities
23,217

 
24,911

Long-term debt
30,634

 
24,483

Income taxes payable
883

 
925

Deferred revenue
6,736

 
6,317

Other long-term liabilities
1,404

 
1,431

Total liabilities
62,874

 
58,067

Commitments and contingencies (Note 12)

 

Equity:
 
 
 
Cisco shareholders’ equity:
 
 
 
Preferred stock, no par value: 5 shares authorized; none issued and outstanding

 

Common stock and additional paid-in capital, $0.001 par value: 20,000 shares authorized; 5,024 and 5,029 shares issued and outstanding at October 29, 2016 and July 30, 2016, respectively
44,236

 
44,516

Retained earnings
19,694

 
19,396

Accumulated other comprehensive income (loss)
(524
)
 
(326
)
Total Cisco shareholders’ equity
63,406

 
63,586

Noncontrolling interests
7

 
(1
)
Total equity
63,413

 
63,585

TOTAL LIABILITIES AND EQUITY
$
126,287

 
$
121,652

See Notes to Consolidated Financial Statements.

3

Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per-share amounts)
(Unaudited) 
 
Three Months Ended
 
October 29, 2016
 
October 24, 2015
REVENUE:
 
 
 
Product
$
9,302

 
$
9,844

Service
3,050

 
2,838

Total revenue
12,352


12,682

COST OF SALES:



Product
3,403

 
3,853

Service
1,065

 
997

Total cost of sales
4,468


4,850

GROSS MARGIN
7,884

 
7,832

OPERATING EXPENSES:



Research and development
1,545

 
1,560

Sales and marketing
2,418

 
2,443

General and administrative
555

 
539

Amortization of purchased intangible assets
78

 
69

Restructuring and other charges
411

 
142

Total operating expenses
5,007


4,753

OPERATING INCOME
2,877


3,079

Interest income
295

 
225

Interest expense
(198
)
 
(159
)
Other income (loss), net
(21
)
 
(8
)
Interest and other income (loss), net
76


58

INCOME BEFORE PROVISION FOR INCOME TAXES
2,953


3,137

Provision for income taxes
631

 
707

NET INCOME
$
2,322


$
2,430




 


Net income per share:


 


Basic
$
0.46


$
0.48

Diluted
$
0.46


$
0.48

Shares used in per-share calculation:





Basic
5,027

 
5,080

Diluted
5,066

 
5,113







Cash dividends declared per common share
$
0.26

 
$
0.21

See Notes to Consolidated Financial Statements.

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Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
 
Three Months Ended
 
October 29, 2016
 
October 24, 2015
Net income
$
2,322

 
$
2,430

Available-for-sale investments:
 
 
 
Change in net unrealized gains, net of tax benefit (expense) of $81 and $56 for the three months ended October 29, 2016 and October 24, 2015, respectively
(121
)
 
(100
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $5 and $0 for the three months ended October 29, 2016 and October 24, 2015, respectively
(10
)
 
1


(131
)
 
(99
)
Cash flow hedging instruments:
 
 
 
Change in unrealized gains and losses, net of tax benefit (expense) of $3 for each of the three months ended October 29, 2016 and October 24, 2015, respectively
(43
)
 
(1
)
Net (gains) losses reclassified into earnings, net of tax (benefit) expense of $(1) for each of the three months ended October 29, 2016 and October 24, 2015, respectively
11

 
2


(32
)
 
1

Net change in cumulative translation adjustment and actuarial gains and losses net of tax benefit (expense) of $(1) and $(39) for the three months ended October 29, 2016, and October 24, 2015, respectively
(27
)
 
(216
)
Other comprehensive income (loss)
(190
)
 
(314
)
Comprehensive income
2,132

 
2,116

Comprehensive (income) loss attributable to noncontrolling interests
(8
)
 
1

Comprehensive income attributable to Cisco Systems, Inc.
$
2,124

 
$
2,117

See Notes to Consolidated Financial Statements.


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Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Three Months Ended

October 29, 2016
 
October 24, 2015
Cash flows from operating activities:
 
 
 
Net income
$
2,322

 
$
2,430

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation, amortization, and other
599

 
507

Share-based compensation expense
372

 
376

Provision for receivables
15

 
7

Deferred income taxes
158

 
193

Excess tax benefits from share-based compensation
(91
)
 
(73
)
(Gains) losses on investments and other, net
32

 
(4
)
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

 

Accounts receivable
1,049

 
631

Inventories
44

 
130

Financing receivables
(900
)
 
(206
)
Other assets
191

 
129

Accounts payable
(63
)
 
4

Income taxes, net
(440
)
 
(315
)
Accrued compensation
(333
)
 
(434
)
Deferred revenue
462

 
(19
)
Other liabilities
(687
)
 
(590
)
Net cash provided by operating activities
2,730

 
2,766

Cash flows from investing activities:
 
 
 
Purchases of investments
(18,667
)
 
(10,823
)
Proceeds from sales of investments
11,337

 
6,675

Proceeds from maturities of investments
2,449

 
4,133

Acquisition of businesses, net of cash and cash equivalents acquired
(251
)
 
(614
)
Purchases of investments in privately held companies
(38
)
 
(78
)
Return of investments in privately held companies
24

 
24

Acquisition of property and equipment
(275
)
 
(262
)
Proceeds from sales of property and equipment
2

 
6

Other
23

 
(11
)
Net cash used in investing activities
(5,396
)
 
(950
)
Cash flows from financing activities:
 
 
 
Issuances of common stock
88

 
385

Repurchases of common stockrepurchase program
(1,023
)
 
(1,210
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(401
)
 
(382
)
Short-term borrowings, original maturities less than 90 days, net

 
(4
)
Issuances of debt
6,232

 

Repayments of debt
(1
)
 
(852
)
Excess tax benefits from share-based compensation
91

 
73

Dividends paid
(1,308
)
 
(1,068
)
Other
(60
)
 
123

Net cash provided by (used in) financing activities
3,618

 
(2,935
)
Net increase (decrease) in cash and cash equivalents
952

 
(1,119
)
Cash and cash equivalents, beginning of period
7,631

 
6,877

Cash and cash equivalents, end of period
$
8,583

 
$
5,758

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
248


$
264

Cash paid for income taxes, net
$
913


$
828

See Notes to Consolidated Financial Statements.

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Table of Contents

CISCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions, except per-share amounts)
(Unaudited)
 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total  Equity
BALANCE AT JULY 30, 2016
5,029

 
$
44,516

 
$
19,396

 
$
(326
)
 
$
63,586

 
$
(1
)
 
$
63,585

Net income
 
 
 
 
2,322

 
 
 
2,322

 
 
 
2,322

Other comprehensive income (loss)
 
 
 
 
 
 
(198
)
 
(198
)
 
8

 
(190
)
Issuance of common stock
40

 
88

 
 
 
 
 
88

 
 
 
88

Repurchase of common stock
(32
)
 
(285
)
 
(716
)
 
 
 
(1,001
)
 
 
 
(1,001
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(13
)
 
(401
)
 
 
 
 
 
(401
)
 
 
 
(401
)
Cash dividends declared ($0.26 per common share)
 
 
 
 
(1,308
)
 
 
 
(1,308
)
 
 
 
(1,308
)
Tax effects from employee stock incentive plans
 
 
(60
)
 
 
 
 
 
(60
)
 
 
 
(60
)
Share-based compensation
 
 
372

 
 
 
 
 
372

 
 
 
372

Purchase acquisitions and other
 
 
6

 
 
 
 
 
6

 
 
 
6

BALANCE AT OCTOBER 29, 2016
5,024

 
$
44,236

 
$
19,694

 
$
(524
)
 
$
63,406

 
$
7

 
$
63,413


 
Shares of
Common
Stock
 
Common Stock
and
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Cisco
Shareholders’
Equity
 
Non-controlling
Interests
 
Total  Equity
BALANCE AT JULY 25, 2015
5,085

 
$
43,592

 
$
16,045

 
$
61

 
$
59,698

 
$
9

 
$
59,707

Net income
 
 
 
 
2,430

 
 
 
2,430

 
 
 
2,430

Other comprehensive income (loss)
 
 
 
 
 
 
(313
)
 
(313
)
 
(1
)
 
(314
)
Issuance of common stock
57

 
385

 
 
 
 
 
385

 
 
 
385

Repurchase of common stock
(45
)
 
(386
)
 
(821
)
 
 
 
(1,207
)
 
 
 
(1,207
)
Shares repurchased for tax withholdings on vesting of restricted stock units
(15
)
 
(382
)
 
 
 
 
 
(382
)
 
 
 
(382
)
Cash dividends declared ($0.21 per common share)
 
 
 
 
(1,068
)
 
 
 
(1,068
)
 
 
 
(1,068
)
Tax effects from employee stock incentive plans
 
 
39

 
 
 
 
 
39

 
 
 
39

Share-based compensation
 
 
376

 
 
 
 
 
376

 
 
 
376

Purchase acquisitions and other
 
 
19

 
 
 
 
 
19

 
 
 
19

BALANCE AT OCTOBER 24, 2015
5,082

 
$
43,643

 
$
16,586

 
$
(252
)
 
$
59,977

 
$
8

 
$
59,985


Supplemental Information
In September 2001, the Company’s Board of Directors authorized a stock repurchase program. As of October 29, 2016, the Company’s Board of Directors had authorized an aggregate repurchase of up to $112 billion of common stock under this program with no termination date. For additional information regarding stock repurchase, see Note 13 to the Consolidated Financial Statements. The stock repurchases since the inception of this program and the related impacts on Cisco shareholders’ equity are summarized in the following table (in millions): 
 
Shares of
Common
Stock
 
Common Stock
and Additional
Paid-In Capital
 
Retained
Earnings
 
Total Cisco
Shareholders’
Equity
Repurchases of common stock under the repurchase program
4,623

 
$
24,180

 
$
73,418

 
$
97,598

See Notes to Consolidated Financial Statements.


7

Table of Contents

CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
Basis of Presentation
The fiscal year for Cisco Systems, Inc. (the “Company” or “Cisco”) is the 52 or 53 weeks ending on the last Saturday in July. Fiscal 2017 is a 52-week fiscal year, and fiscal 2016 was a 53-week fiscal year. The Consolidated Financial Statements include the accounts of Cisco and its subsidiaries. All intercompany accounts and transactions have been eliminated. The Company conducts business globally and is primarily managed on a geographic basis in the following three geographic segments: the Americas; Europe, Middle East, and Africa (EMEA); and Asia Pacific, Japan, and China (APJC).
The accompanying financial data as of October 29, 2016 and for the three months ended October 29, 2016 and October 24, 2015 has been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The July 30, 2016 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 30, 2016.
The Company consolidates its investments in a venture fund managed by SOFTBANK Corp. and its affiliates (“SOFTBANK”) as this is a variable interest entity and the Company is the primary beneficiary. The noncontrolling interests attributed to SOFTBANK are presented as a separate component from the Company’s equity in the equity section of the Consolidated Balance Sheets. SOFTBANK’s share of the earnings in the venture fund are not presented separately in the Consolidated Statements of Operations as these amounts are not material for any of the fiscal periods presented.
In the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet as of October 29, 2016; the results of operations, the statements of comprehensive income, the statements of cash flows and equity for the three months ended October 29, 2016 and October 24, 2015 as applicable, have been made. The results of operations for the three months ended October 29, 2016 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. The Company has evaluated subsequent events through the date that the financial statements were issued.

2.
Recent Accounting Pronouncements
(a) New Accounting Updates Recently Adopted
Consolidation of Certain Types of Legal Entities In February 2015, the FASB issued an accounting standard update that changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The accounting standard update became effective for the Company beginning in the first quarter of fiscal 2017. The application of this accounting standard update did not have any impact on the Company's Consolidated Balance Sheet or Statement of Operations upon adoption, but the Company has provided additional disclosures in Note 8 pursuant to this accounting standard update.
(b) Recent Accounting Standards or Updates Not Yet Effective
Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standard update related to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This accounting standard update, as amended, will be effective for the Company beginning in the first quarter of fiscal 2019. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective basis"). Early adoption is permitted, but no earlier than fiscal 2018. The Company expects to adopt this accounting standard update on a modified retrospective basis in the first quarter of fiscal 2019, and it is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.


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Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Financial Instruments In January 2016, the FASB issued an accounting standard update that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Leases In February 2016, the FASB issued an accounting standard update related to leases requiring lessees to recognize operating and financing lease liabilities on the balance sheet, as well as corresponding right-of-use assets. The new lease standard also makes some changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. In addition, disclosures will be required to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2020 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Share-Based Compensation In March 2016, the FASB issued an accounting standard update that impacts the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the Consolidated Statements of Cash Flows. The accounting standard will be effective for the Company beginning the first quarter of fiscal 2018, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Credit Losses of Financial Instruments In June 2016, the FASB issued an accounting standard update that requires measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a modified retrospective basis, and early adoption in fiscal 2020 is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.
Classification of Cash Flow Elements In August 2016, the FASB issued an accounting standard update related to the classification of certain cash receipts and cash payments on the statement of cash flows. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Statements of Cash Flows.
Income Taxes on Intra-Entity Transfers of Assets In October 2016, the FASB issued an accounting standard update that requires recognition of the income tax consequences of intra-entity transfers of assets (other than inventory) at the transaction date. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a modified retrospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.


3.
Acquisitions and Divestitures
The Company completed three acquisitions during the three months ended October 29, 2016. A summary of the allocation of the total purchase consideration is presented as follows (in millions):
 
Purchase Consideration
 
Purchased Intangible Assets
 
Goodwill
CloudLock
$
249

 
$
36

 
$
213

Others (two in total)
9

 
5

 
4

Total
$
258

 
$
41

 
$
217

On August 1, 2016, the Company completed its acquisition of privately held CloudLock Inc. ("CloudLock"), a provider of cloud security that specializes in cloud access security broker technology that provides enterprises with visibility and analytics around user behavior and sensitive data in cloud services. Revenue from the CloudLock acquisition has been included in the Company's Security product category.
The total purchase consideration related to the Company’s acquisitions completed during the three months ended October 29, 2016 consisted of cash consideration and vested share-based awards assumed. The total cash and cash equivalents acquired from these acquisitions was approximately $1 million. Total transaction costs related to the Company’s acquisition activities were $1 million

9

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

and $5 million for the three months ended October 29, 2016 and October 24, 2015, respectively. These transaction costs were expensed as incurred in general and administrative expenses ("G&A") in the Consolidated Statements of Operations.
The Company’s purchase price allocation for acquisitions completed during recent periods is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information that existed as of the acquisition date but at that time was unknown to the Company may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill retroactive to the period in which the acquisition occurred.
The goodwill generated from the Company’s acquisitions completed during the three months ended October 29, 2016 is primarily related to expected synergies. The goodwill is generally not deductible for income tax purposes.
The Consolidated Financial Statements include the operating results of each acquisition from the date of acquisition. Pro forma results of operations for the acquisitions completed during the three months ended October 29, 2016 have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company’s financial results.

4.
Goodwill and Purchased Intangible Assets
(a)
Goodwill
The following table presents the goodwill allocated to the Company’s reportable segments as of and during the three months ended October 29, 2016 (in millions):
 
Balance at
 
 
 
 
 
Balance at
 
July 30, 2016
 
Acquisitions
 
Other
 
October 29, 2016
Americas
$
16,529

 
$
132

 
$
(13
)
 
$
16,648

EMEA
6,269

 
62

 
(4
)
 
6,327

APJC
3,827

 
23

 
(2
)
 
3,848

Total
$
26,625

 
$
217

 
$
(19
)
 
$
26,823

“Other” in the table above primarily consists of foreign currency translation, as well as immaterial purchase accounting adjustments.
(b)
Purchased Intangible Assets
The following table presents details of the Company’s intangible assets acquired through acquisitions completed during the three months ended October 29, 2016 (in millions, except years):
 
FINITE LIVES
 
INDEFINITE
LIVES
 
TOTAL
 
TECHNOLOGY
 
CUSTOMER
RELATIONSHIPS
 
OTHER
 
IPR&D
 
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Weighted-
Average Useful
Life (in Years)
 
Amount
 
Amount
 
Amount
CloudLock
6.0
 
$
32

 
4.0
 
$
3

 
1.5
 
$
1

 
$

 
$
36

Others (two in total)
3.0
 
5

 
0.0
 

 
0.0
 

 

 
5

Total
 
 
$
37

 
 
 
$
3

 
 
 
$
1

 
$

 
$
41

The following tables present details of the Company’s purchased intangible assets (in millions): 
October 29, 2016
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
2,861

 
$
(1,334
)
 
$
1,527

Customer relationships
 
1,737

 
(1,220
)
 
517

Other
 
58

 
(21
)
 
37

Total purchased intangible assets with finite lives
 
4,656

 
(2,575
)
 
2,081

In-process research and development, with indefinite lives
 
216

 

 
216

       Total
 
$
4,872

 
$
(2,575
)
 
$
2,297

 

10

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

July 30, 2016
 
Gross
 
Accumulated Amortization
 
Net
Purchased intangible assets with finite lives:
 
 
 
 
 
 
Technology
 
$
3,038

 
$
(1,391
)
 
$
1,647

Customer relationships
 
1,793

 
(1,203
)
 
590

Other
 
85

 
(43
)
 
42

Total purchased intangible assets with finite lives
 
4,916

 
(2,637
)
 
2,279

In-process research and development, with indefinite lives
 
222

 

 
222

       Total
 
$
5,138

 
$
(2,637
)
 
$
2,501

Purchased intangible assets include intangible assets acquired through acquisitions as well as through direct purchases or licenses.
Impairment charges related to purchased intangible assets for the three months ended October 29, 2016 were $42 million. Impairment charges were primarily as a result of declines in estimated fair values of certain purchased intangible assets resulting from the reduction or elimination of expected future cash flows associated with certain of the Company’s technology and IPR&D intangible assets. Of these impairment charges, $38 million was recorded to restructuring and other charges upon the Company's decision to exit certain product lines, and the corresponding elimination of future associated cash flows. There were no impairment charges related to purchased intangible assets for the corresponding period in fiscal 2016.
The following table presents the amortization of purchased intangible assets including impairment charges related to purchased intangible assets (in millions):
 
Three Months Ended
 
October 29, 2016
 
October 24, 2015
Amortization of purchased intangible assets:
 
 
 
Cost of sales
$
129

 
$
146

Operating expenses
 
 


Amortization of purchased intangible assets
78

 
69

Restructuring and other charges
38

 

Total
$
245

 
$
215

The estimated future amortization expense of purchased intangible assets with finite lives as of October 29, 2016 is as follows (in millions):
Fiscal Year
Amount
2017 (remaining nine months)
$
524

2018
579

2019
493

2020
281

2021
137

Thereafter
67

   Total
$
2,081



11

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

5.
Restructuring and Other Charges
In August 2016, the Company announced a restructuring plan (the "Fiscal 2017 Plan") that will impact up to 5,500 employees, representing approximately 7% of its global workforce. The Company's aggregate pretax estimated charges pursuant to the restructuring plan are expected to be up to $700 million, consisting primarily of severance and other one-time termination benefits, and other associated costs. These charges are primarily cash-based, and the Company expects the Fiscal 2017 Plan to be substantially completed by the end of fiscal 2017.
In connection with a restructuring action announced in August 2014 (the “Fiscal 2015 Plan”), the Company incurred cumulative charges of approximately $756 million. The Company completed the Fiscal 2015 Plan in fiscal 2016.
The following tables summarize the activities related to the restructuring and other charges (in millions):
 
 
FISCAL 2015 AND PRIOR PLANS
 
FISCAL 2017 PLAN
 
 
 
 
Employee
Severance
 
Other
 
Employee
Severance
 
Other
 
Total
Liability as of July 30, 2016
 
$
21

 
$
24

 
$

 
$

 
$
45

Charges
 

 

 
369

 
42

 
411

Cash payments
 
(12
)
 

 
(257
)
 
(1
)
 
(270
)
Non-cash items
 
(4
)
 
(2
)
 

 
(41
)
 
(47
)
Liability as of October 29, 2016
 
$
5

 
$
22

 
$
112

 
$

 
$
139

 
 
FISCAL 2015 AND PRIOR PLANS
 
 
 
 
Employee
Severance
 
Other
 
Total
Liability as of July 25, 2015
 
$
60

 
$
29

 
$
89

Charges
 
125

 
17

 
142

Cash payments
 
(123
)
 
(6
)
 
(129
)
Non-cash items
 

 
(16
)
 
(16
)
Liability as of October 24, 2015
 
$
62

 
$
24

 
$
86



12

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

6.
Balance Sheet Details
The following tables provide details of selected balance sheet items (in millions):
 
 
October 29,
2016
 
July 30,
2016
Inventories:
 
 
 
 
Raw materials
 
$
111

 
$
91

Finished goods:
 
 
 

Distributor inventory and deferred cost of sales
 
481

 
457

Manufactured finished goods
 
328

 
415

Total finished goods
 
809

 
872

Service-related spares
 
237

 
236

Demonstration systems
 
19

 
18

Total
 
$
1,176

 
$
1,217

Property and equipment, net:
 
 
 
 
Gross property and equipment:
 
 
 
 
Land, buildings, and building and leasehold improvements
 
$
4,819

 
$
4,778

Computer equipment and related software
 
1,292

 
1,288

Production, engineering, and other equipment
 
5,708

 
5,658

Operating lease assets
 
301

 
296

Furniture and fixtures
 
548

 
543

Total gross property and equipment
 
12,668

 
12,563

Less: accumulated depreciation and amortization
 
(9,169
)
 
(9,057
)
Total
 
$
3,499

 
$
3,506

Deferred revenue:
 
 
 
 
Service
 
$
10,424

 
$
10,621

Product:
 

 
 
Deferred revenue related to recurring software and subscription businesses
 
3,801

 
3,308

Deferred revenue related to two-tier distributors
 
439

 
377

Other product deferred revenue
 
2,287

 
2,166

Total product deferred revenue
 
6,527

 
5,851

Total
 
$
16,951

 
$
16,472

Reported as:
 

 
 
Current
 
$
10,215

 
$
10,155

Noncurrent
 
6,736

 
6,317

Total
 
$
16,951

 
$
16,472




13

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

7.
Financing Receivables and Operating Leases
(a)
Financing Receivables
Financing receivables primarily consist of lease receivables, loan receivables, and financed service contracts and other. Lease receivables represent sales-type and direct-financing leases resulting from the sale of the Company’s and complementary third-party products and are typically collateralized by a security interest in the underlying assets. Loan receivables represent financing arrangements related to the sale of the Company’s products and services, which may include additional funding for other costs associated with network installation and integration of the Company’s products and services. Lease receivables consist of arrangements with terms of four years on average, while loan receivables generally have terms of up to three years. The financed service contracts and other category includes financing receivables related to technical support and advanced services, software, and receivables related to financing of certain indirect costs associated with leases. Revenue related to the technical support services is typically deferred and included in deferred service revenue and is recognized ratably over the period during which the related services are to be performed, which typically ranges from one to three years.
A summary of the Company's financing receivables is presented as follows (in millions):
October 29, 2016
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Gross
$
3,202

 
$
2,236

 
$
4,239

 
$
9,677

Residual value
197

 

 

 
197

Unearned income
(163
)
 

 

 
(163
)
Allowance for credit loss
(227
)
 
(111
)
 
(48
)
 
(386
)
Total, net
$
3,009

 
$
2,125

 
$
4,191

 
$
9,325

Reported as:
 
 
 
 
 
 
 
Current
$
1,504

 
$
1,021

 
$
2,016

 
$
4,541

Noncurrent
1,505

 
1,104

 
2,175

 
4,784

Total, net
$
3,009

 
$
2,125

 
$
4,191

 
$
9,325

July 30, 2016
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Gross
$
3,272

 
$
2,135

 
$
3,370

 
$
8,777

Residual value
202

 

 

 
202

Unearned income
(174
)
 

 

 
(174
)
Allowance for credit loss
(230
)
 
(97
)
 
(48
)
 
(375
)
Total, net
$
3,070

 
$
2,038

 
$
3,322

 
$
8,430

Reported as:
 
 
 
 
 
 
 
Current
$
1,490

 
$
988

 
$
1,794

 
$
4,272

Noncurrent
1,580

 
1,050

 
1,528

 
4,158

Total, net
$
3,070

 
$
2,038

 
$
3,322

 
$
8,430

As of October 29, 2016 and July 30, 2016, the deferred service revenue related to "Financed Service Contracts and Other" was $2,371 million and $1,716 million, respectively.
Future minimum lease payments to the Company on lease receivables as of October 29, 2016 are summarized as follows (in millions):
Fiscal Year
Amount
2017 (remaining nine months)
$
1,222

2018
1,066

2019
587

2020
260

2021
65

Thereafter
2

Total
$
3,202

Actual cash collections may differ from the contractual maturities due to early customer buyouts, refinancings, or defaults.

14

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(b)
Credit Quality of Financing Receivables
Gross receivables, excluding residual value, less unearned income categorized by the Company’s internal credit risk rating as of October 29, 2016 and July 30, 2016 are summarized as follows (in millions):
 
INTERNAL CREDIT RISK RATING
October 29, 2016
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,652

 
$
1,293

 
$
94

 
$
3,039

Loan receivables
1,081

 
976

 
179

 
2,236

Financed service contracts and other
2,898

 
1,313

 
28

 
4,239

Total
$
5,631

 
$
3,582

 
$
301

 
$
9,514

 
INTERNAL CREDIT RISK RATING
July 30, 2016
1 to 4
 
5 to 6
 
7 and Higher
 
Total
Lease receivables
$
1,703

 
$
1,294

 
$
101

 
$
3,098

Loan receivables
986

 
967

 
182

 
2,135

Financed service contracts and other
2,077

 
1,271

 
22

 
3,370

Total
$
4,766

 
$
3,532

 
$
305

 
$
8,603

The Company determines the adequacy of its allowance for credit loss by assessing the risks and losses inherent in its financing receivables by portfolio segment. The portfolio segment is based on the types of financing offered by the Company to its customers, which consist of the following: lease receivables, loan receivables, and financed service contracts and other.
The Company’s internal credit risk ratings of 1 through 4 correspond to investment-grade ratings, while credit risk ratings of 5 and 6 correspond to non-investment grade ratings. Credit risk ratings of 7 and higher correspond to substandard ratings.
In circumstances when collectibility is not deemed reasonably assured, the associated revenue is deferred in accordance with the Company’s revenue recognition policies, and the related allowance for credit loss, if any, is included in deferred revenue. The Company also records deferred revenue associated with financing receivables when there are remaining performance obligations, as it does for financed service contracts. Total allowances for credit loss and deferred revenue as of October 29, 2016 and July 30, 2016 were $2,779 million and $2,112 million, respectively, and they were associated with total financing receivables before allowance for credit loss of $9,711 million and $8,805 million as of their respective period ends.
The following tables present the aging analysis of gross receivables, excluding residual value and less unearned income as of October 29, 2016 and July 30, 2016 (in millions):
 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
October 29, 2016
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
86

 
$
70

 
$
249

 
$
405

 
$
2,634

 
$
3,039

 
$
55

 
$
55

Loan receivables
25

 
23

 
95

 
143

 
2,093

 
2,236

 
42

 
42

Financed service contracts and other
317

 
338

 
367

 
1,022

 
3,217

 
4,239

 
29

 
9

Total
$
428

 
$
431

 
$
711

 
$
1,570

 
$
7,944

 
$
9,514

 
$
126

 
$
106

 
DAYS PAST DUE
(INCLUDES BILLED AND UNBILLED)
 
 
 
 
 
 
 
 
July 30, 2016
31-60
 
61-90 
 
91+
 
Total
Past Due
 
Current
 
Total
 
Nonaccrual
Financing
Receivables
 
Impaired
Financing
Receivables
Lease receivables
$
111

 
$
25

 
$
251

 
$
387

 
$
2,711

 
$
3,098

 
$
60

 
$
60

Loan receivables
30

 
9

 
37

 
76

 
2,059

 
2,135

 
42

 
42

Financed service contracts and other
213

 
152

 
565

 
930

 
2,440

 
3,370

 
30

 
10

Total
$
354

 
$
186

 
$
853

 
$
1,393

 
$
7,210

 
$
8,603

 
$
132

 
$
112

Past due financing receivables are those that are 31 days or more past due according to their contractual payment terms. The data in the preceding tables is presented by contract, and the aging classification of each contract is based on the oldest outstanding receivable, and therefore past due amounts also include unbilled and current receivables within the same contract. The balances

15

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

of either unbilled or current financing receivables included in the category of 91 days plus past due for financing receivables were $436 million and $670 million as of October 29, 2016 and July 30, 2016, respectively.
As of October 29, 2016, the Company had financing receivables of $236 million, net of unbilled or current receivables, that were in the category of 91 days plus past due but remained on accrual status as they are well secured and in the process of collection. Such balance was $144 million as of July 30, 2016.
(c)
Allowance for Credit Loss Rollforward
The allowances for credit loss and the related financing receivables are summarized as follows (in millions):
 
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 30, 2016
$
230

 
$
97

 
$
48

 
$
375

Provisions
(4
)
 
12

 

 
8

Foreign exchange and other
1

 
2

 

 
3

Allowance for credit loss as of October 29, 2016
$
227

 
$
111

 
$
48

 
$
386


 
CREDIT LOSS ALLOWANCES
 
Lease
Receivables
 
Loan
Receivables
 
Financed Service
Contracts and Other
 
Total
Allowance for credit loss as of July 25, 2015
$
259

 
$
87

 
$
36

 
$
382

Provisions

 
4

 

 
4

Recoveries (write-offs), net
(4
)
 

 
(3
)
 
(7
)
Foreign exchange and other

 
(1
)
 

 
(1
)
Allowance for credit loss as of October 24, 2015
$
255

 
$
90

 
$
33

 
$
378

The Company assesses the allowance for credit loss related to financing receivables on either an individual or a collective basis. The Company considers various factors in evaluating lease and loan receivables and the earned portion of financed service contracts for possible impairment on an individual basis. These factors include the Company’s historical experience, credit quality and age of the receivable balances, and economic conditions that may affect a customer’s ability to pay. When the evaluation indicates that it is probable that all amounts due pursuant to the contractual terms of the financing agreement, including scheduled interest payments, are unable to be collected, the financing receivable is considered impaired. All such outstanding amounts, including any accrued interest, will be assessed and fully reserved at the customer level. The Company’s internal credit risk ratings are categorized as 1 through 10, with the lowest credit risk rating representing the highest quality financing receivables.
Typically, the Company also considers receivables with a risk rating of 8 or higher to be impaired and will include them in the individual assessment for allowance. These balances, as of October 29, 2016 and July 30, 2016, are presented under “(b) Credit Quality of Financing Receivables” above.
The Company evaluates the remainder of its financing receivables portfolio for impairment on a collective basis and records an allowance for credit loss at the portfolio segment level. When evaluating the financing receivables on a collective basis, the Company uses expected default frequency rates published by a major third-party credit-rating agency as well as its own historical loss rate in the event of default, while also systematically giving effect to economic conditions, concentration of risk, and correlation.
(d)
Operating Leases
The Company provides financing of certain equipment through operating leases, and the amounts are included in property and equipment in the Consolidated Balance Sheets. Amounts relating to equipment on operating lease assets and the associated accumulated depreciation are summarized as follows (in millions):

16

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
October 29, 2016
 
July 30, 2016
Operating lease assets
$
301

 
$
296

Accumulated depreciation
(168
)
 
(161
)
Operating lease assets, net
$
133

 
$
135

Minimum future rentals on noncancelable operating leases as of October 29, 2016 are summarized as follows (in millions):
Fiscal Year
Amount
2017 (remaining nine months)
$
179

2018
142

2019
53

2020
8

2021
4

Thereafter
1

Total
$
387


8.
Investments
(a)
Summary of Available-for-Sale Investments
The following tables summarize the Company’s available-for-sale investments (in millions):
October 29, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
25,905

 
$
24

 
$
(33
)
 
$
25,896

U.S. government agency securities
2,619

 
4

 
(1
)
 
2,622

Non-U.S. government and agency securities
1,104

 
1

 
(1
)
 
1,104

Corporate debt securities
29,046

 
177

 
(60
)
 
29,163

U.S. agency mortgage-backed securities
2,069

 
16

 
(2
)
 
2,083

Total fixed income securities
60,743

 
222

 
(97
)
 
60,868

Publicly traded equity securities
1,225

 
346

 
(54
)
 
1,517

Total (1)
$
61,968

 
$
568

 
$
(151
)
 
$
62,385

July 30, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Fixed income securities:
 
 
 
 
 
 
 
U.S. government securities
$
26,473

 
$
73

 
$
(2
)
 
$
26,544

U.S. government agency securities
2,809

 
8

 

 
2,817

Non-U.S. government and agency securities
1,096

 
4

 

 
1,100

Corporate debt securities
24,044

 
263

 
(15
)
 
24,292

U.S. agency mortgage-backed securities
1,846

 
22

 

 
1,868

Total fixed income securities
56,268

 
370

 
(17
)
 
56,621

Publicly traded equity securities
1,211

 
333

 
(40
)
 
1,504

Total (1)
$
57,479

 
$
703

 
$
(57
)
 
$
58,125

(1) Includes investments that were pending settlement as of the respective fiscal years. The net unsettled investment purchases were $328 million and $654 million as of October 29, 2016 and July 30, 2016, respectively.
Non-U.S. government and agency securities include agency and corporate debt securities that are guaranteed by non-U.S. governments.


17

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(b)
Gains and Losses on Available-for-Sale Investments
The following table presents the gross realized gains and gross realized losses related to the Company’s available-for-sale investments (in millions):
 
Three Months Ended
 
October 29, 2016
 
October 24, 2015
Gross realized gains
$
30

 
$
35

Gross realized losses
(15
)
 
(36
)
Total
$
15

 
$
(1
)
The following table presents the realized net gains (losses) related to the Company’s available-for-sale investments by security type (in millions):
 
Three Months Ended
 
October 29, 2016
 
October 24, 2015
Net gains/(losses) on investments in publicly traded equity securities
$
5

 
$
(9
)
Net gains/(losses) on investments in fixed income securities
10

 
8

Total
$
15

 
$
(1
)

The following tables present the breakdown of the available-for-sale investments with gross unrealized losses and the duration that those losses had been unrealized at October 29, 2016 and July 30, 2016 (in millions):
 
UNREALIZED LOSSES
LESS THAN 12 MONTHS
 
UNREALIZED LOSSES
12 MONTHS OR GREATER
 
TOTAL
October 29, 2016
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross 
Unrealized 
Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities 
$
11,766

 
$
(33
)
 
$
100

 
$

 
$
11,866

 
$
(33
)
U.S. government agency securities
596

 
(1
)
 

 

 
596

 
(1
)
Non-U.S. government and agency securities
498

 
(1
)
 

 

 
498

 
(1
)
Corporate debt securities
9,013

 
(57
)
 
572

 
(3
)
 
9,585

 
(60
)
U.S. agency mortgage-backed securities
594

 
(2
)
 

 

 
594

 
(2
)
Total fixed income securities
22,467

 
(94
)

672


(3
)

23,139


(97
)
Publicly traded equity securities
291

 
(53
)
 
3

 
(1
)
 
294

 
(54
)
Total
$
22,758

 
$
(147
)
 
$
675

 
$
(4
)
 
$
23,433

 
$
(151
)

18

Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
UNREALIZED LOSSES
LESS THAN 12 MONTHS
 
UNREALIZED LOSSES
12 MONTHS OR GREATER
 
TOTAL
July 30, 2016
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross 
Unrealized 
Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government securities 
$
2,414

 
$
(2
)
 
$

 
$

 
$
2,414

 
$
(2
)
U.S. government agency securities
144

 

 

 

 
144

 

Non-U.S. government and agency securities
61

 

 

 

 
61

 

Corporate debt securities
2,499

 
(7
)
 
1,208

 
(8
)
 
3,707

 
(15
)
U.S. agency mortgage-backed securities
174

 

 

 

 
174

 

Total fixed income securities
5,292

 
(9
)
 
1,208

 
(8
)
 
6,500

 
(17
)
Publicly traded equity securities
188

 
(40
)
 

 

 
188

 
(40
)
Total
$
5,480

 
$
(49
)
 
$
1,208

 
$
(8
)
 
$
6,688

 
$
(57
)
As of October 29, 2016, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of October 29, 2016, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three months ended October 29, 2016.
The Company has evaluated its publicly traded equity securities as of October 29, 2016 and has determined that there was no indication of other-than-temporary impairments in the respective categories of unrealized losses. This determination was based on several factors, which include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and the Company’s intent and ability to hold the publicly traded equity securities for a period of time sufficient to allow for any anticipated recovery in market value.
(c)
Maturities of Fixed Income Securities
The following table summarizes the maturities of the Company’s fixed income securities as of October 29, 2016 (in millions): 
 
Amortized Cost
 
Fair Value
Less than 1 year
$
12,967

 
$
12,977

Due in 1 to 2 years
17,042

 
17,071

Due in 2 to 5 years
25,125

 
25,230

Due after 5 years
3,540

 
3,507

Mortgage-backed securities with no single maturity
2,069

 
2,083

Total
$
60,743

 
$
60,868


Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations. The remaining contractual principal maturities for mortgage-backed securities were allocated assuming no prepayments.
(d)
Securities Lending
The Company periodically engages in securities lending activities with certain of its available for sale investments. These transactions are accounted for as a secured lending of the securities, and the securities are typically loaned only on an overnight basis. The average daily balance of securities lending for the three months ended October 29, 2016 and October 24, 2015 was $1.5 billion and $0.5 billion, respectively. The Company requires collateral equal to at least 102% of the fair market value of the loaned security and that the collateral be in the form of cash or liquid, high-quality assets. The Company engages in these secured lending transactions only with highly creditworthy counterparties, and the associated portfolio custodian has agreed to indemnify the Company against collateral losses. The Company did not experience any losses in connection with the secured lending of securities during the periods presented. As of October 29, 2016 and July 30, 2016, the Company had no outstanding securities lending transactions.

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Table of Contents
CISCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

(e)
Investments in Privately Held Companies
The carrying value of the Company’s investments in privately held companies was included in other assets. For such investments that were accounted for under the equity and cost method as of October 29, 2016 and July 30, 2016, the amounts are summarized in the following table (in millions):
 
October 29, 2016