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Management's
Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements regarding
future events and our future results that are based on current expectations,
estimates, forecasts, and projections about the industries in which
we operate and the beliefs and assumptions of our management. Words
such as "expects," "anticipates," "targets,"
"goals," "projects," "intends," "plans,"
"believes," "seeks," "estimates," variations
of such words, and similar expressions are intended to identify such
forward-looking statements. Readers are cautioned that these forward-looking
statements are only predictions and are subject to risks, uncertainties,
and assumptions that are difficult to predict. Therefore, actual results
may differ materially and adversely from those expressed in any forward-looking
statements. Readers are referred to risks and uncertainties identified
below, as well as on the inside cover of this Annual Report and in
the documents filed by us with the Securities and Exchange Commission,
specifically the most recent reports on Forms 10-K, 10-Q, and 8-K,
each as it may be amended from time to time. We undertake no obligation
to revise or update publicly any forward-looking statements for any
reason.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United
States requires management to make judgments, assumptions, and estimates
that affect the amounts reported in the Consolidated Financial Statements
and accompanying notes. Note 2 to the Consolidated Financial Statements
describes the significant accounting policies and methods used in
the preparation of the Consolidated Financial Statements. Estimates
are used for, but not limited to, the accounting for the allowance
for doubtful accounts and sales returns, inventory allowances, warranty
costs, investment impairments, goodwill impairments, contingencies,
restructuring costs and other special charges, and taxes. Actual results
could differ materially from these estimates. The following critical
accounting policies are impacted significantly by judgments, assumptions,
and estimates used in the preparation of the Consolidated Financial
Statements.
The allowance for doubtful accounts is based on our assessment of
the collectibility of specific customer accounts and the aging of
the accounts receivable. If there were a deterioration of a major
customer's creditworthiness, or actual defaults were higher than our
historical experience, our estimates of the recoverability of amounts
due to us could be overstated, which could have an adverse impact
on our revenue.
A reserve for sales returns is established based on historical trends
in product return rates. If the actual future returns were to deviate
from the historical data on which the reserve had been established,
our revenue could be adversely affected.
Inventory purchases and commitments are based upon future demand forecasts.
If there were to be a sudden and significant decrease in demand for
our products, or if there were a higher incidence of inventory obsolescence
because of rapidly changing technology and customer requirements,
we could be required to increase our inventory allowances and our
gross margins could be adversely affected.
We accrue for warranty costs based on historical trends in product
return rates and the expected material and labor costs to provide
warranty services. If we were to experience an increase in warranty
claims compared with our historical experience, or costs of servicing
warranty claims were greater than the expectations on which the accrual
had been based, our gross margins could be adversely affected.
We have experienced significant volatility in the market prices of
our publicly traded equity investments. These investments are recorded
on the Consolidated Balance Sheets at fair value with unrealized gains
and losses reported as a separate component of accumulated other comprehensive
income (loss), net of any related tax effect. We recognize an impairment
charge in the Consolidated Statements of Operations when the decline
in the fair value of our publicly traded equity investments below
their cost basis is judged to be other-than-temporary. We consider
various factors in determining whether we should recognize an impairment
charge including, but not limited to, the length of time and extent
to which the fair value has been less than our cost basis, the financial
condition and near-term prospects of the issuer, and our intent and
ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in market value. The ultimate value
realized on these equity investments is subject to market price volatility
until they are sold.
We perform goodwill impairment tests on an annual basis and between
annual tests in certain circumstances for each reporting unit, which
are the operating segments as described in Note 12 to the Consolidated
Financial Statements. In response to changes in industry and market
conditions, we may be required to strategically realign our resources
and consider restructuring, disposing, or otherwise exiting businesses,
which could result in an impairment of goodwill.
We are subject to the possibility of various loss contingencies arising
in the ordinary course of business. We consider the likelihood of
loss or impairment of an asset or the incurrence of a liability, as
well as our ability to reasonably estimate the amount of loss in determining
loss contingencies. An estimated loss contingency is accrued when
it is probable that an asset has been impaired or a liability has
been incurred and the amount of loss can be reasonably estimated.
We regularly evaluate current information available to us to determine
whether such accruals should be adjusted.
Comparison of Fiscal 2002 and 2001
Net Sales
We manage our business based on four geographic theaters: the Americas;
Europe, the Middle East, and Africa ("EMEA"); Asia Pacific;
and Japan. Net sales, which include product and service revenue, for
each theater are summarized in the following table (in millions, except
percentages):
Net sales in fiscal 2002 decreased by $3.4 billion or 15.2% from $22.3
billion in fiscal 2001 to $18.9 billion. The decrease was primarily
related to a decline in net product sales resulting from unfavorable
global economic conditions and reduced levels of information technology-related
capital spending compared with a year ago. The economic slowdown has
had a significant impact on the telecommunications industry.
Product Revenue
From a geographic perspective, net product sales in the Americas theater,
which include the United States, Canada, Mexico, and Latin America,
decreased by $1.7 billion or 17.3% from $10.0 billion in fiscal 2001
to $8.3 billion in fiscal 2002 and represented 52.8% of our total
product sales. The decrease was primarily related to the decline in
net product sales in the service provider market, in particular the
Incumbent Local Exchange Carriers (ILEC) and Interexchange Carriers
(IXC) sectors. The slowdown in the U.S. economy, over-capacity, changes
in the service provider market, and constraints on information technology-related
capital spending have had a significant adverse effect on many of
our service provider customers. The enterprise market experienced
a lower decrease in net product sales as compared with the service
provider market primarily because of the need for large corporations,
specifically in the manufacturing, health care, education, and retail
sectors, and the U.S. government, to maintain their networks.
Net product sales in EMEA in fiscal 2002 decreased by $1.4 billion
or 23.1% from $5.9 billion in fiscal 2001 to $4.5 billion and represented
29.0% of our total product sales. Similar to the Americas theater,
the decrease in net product sales was related to the slowdown in the
European telecommunications sector and the enterprise market due to
companies closely managing their capital spending.
Net product sales in Asia Pacific in fiscal 2002 decreased by $600
million or 27.4% from $2.2 billion in fiscal 2001 to $1.6 billion
and represented 10.2% of our total product sales. The decrease was
primarily related to the decline in net product sales in the enterprise
and service provider markets, in particular the service provider market
in China, which experienced increased consolidation and restructuring.
Net product sales in Japan in fiscal 2002 decreased by $196 million
or 13.5% from $1.5 billion in fiscal 2001 to $1.3 billion and represented
the remaining 8.0% of our total product sales. The decrease was primarily
related to contractions in the electronics sector partially offset
by net product sales to the government sector.
The following table presents net sales for groups of similar products
and services (in millions):
Net product sales related to routers, which represented 35.8% of our
total product sales in fiscal 2002, decreased by $1.6 billion or 21.9%
from $7.2 billion in fiscal 2001 to $5.6 billion primarily due to
decreases in sales of our high-end and edge routers. Net product sales
related to switches, which represented 48.2% of our total product
sales in fiscal 2002, experienced a decrease of $1.4 billion or 15.8%
from $9.0 billion in fiscal 2001 to $7.6 billion primarily due to
decreases in sales of our modular and WAN multiservice switches. Net
product sales related to access products, which represented 6.3% of
our total product sales in fiscal 2002, decreased by $875 million
or 47.2% from $1.9 billion in fiscal 2001 to $980 million primarily
related to decreases in sales of our access concentrators and digital
subscriber line access multiplexer (DSLAM) products.
Service Revenue
Net service revenue in fiscal 2002 increased by $512 million or 18.7%
from $2.7 billion in fiscal 2001 to $3.2 billion. The increase in
net service revenue was primarily related to technical support, which
provides maintenance and problem resolution services for our products.
In addition, revenue from consultative support of our technologies
for specific customer networking needs increased. During fiscal 2002,
service contract renewals associated with product sales increased
compared with the prior fiscal year. Net service revenue is generally
deferred and, in most cases, recognized ratably over the service period
obligations, which are typically one to three years.
Gross Margin
The following table shows the standard margin for each theater and
the total gross margin (in millions, except percentages):
Standard margin varies due to a number of reasons including, but not
limited to, shifts in product mix, sales discounts, and sales channels.
Production overhead is primarily related to labor, depreciation on
equipment, and facilities charges associated with manufacturing activities.
Manufacturing variances and other related costs are primarily related
to provision for inventory, which included the additional excess inventory
charge of $2.2 billion in fiscal 2001 as discussed below, as well
as freight and other nonstandard costs.
Gross margin for product and service in fiscal 2002 and 2001 was as
follows (in millions, except percentages):
Product Gross Margin
The increase in product gross margin from 47.9% in fiscal 2001 to
62.3% in fiscal 2002 was primarily related to the effect of a charge
for additional excess inventory of $2.2 billion recorded in the third
quarter of fiscal 2001 and benefits recognized thereafter as described
below. Excluding the additional excess inventory charge and the subsequent
benefits, product gross margin was 58.9% in fiscal 2002, compared
with 58.4% in fiscal 2001. The slight increase in product gross margin
of 0.5% was primarily due to lower component costs that were partially
offset by lower shipment volumes.
Because of a sudden and significant decrease in demand for our products
in the third quarter of fiscal 2001, inventory levels exceeded our
estimated requirements based on demand forecasts and an additional
excess inventory charge of $2.2 billion was recorded in accordance
with our accounting policy. In fiscal 2002, the provision for inventory
was reduced by a $525 million benefit related to inventory used to
manufacture products sold in excess of our expectations and the settlement
of purchase commitments for less than the estimated amount previously
included as part of the additional excess inventory charge (see Note
4 to the Consolidated Financial Statements). The following is a summary
of the change in the additional excess inventory reserve (in millions):
Product gross margin may be adversely affected in the future by increases
in material or labor costs, excess inventory and obsolescence charges,
changes in shipment volume, loss of cost savings due to changes in
component pricing, charges incurred due to inventory holding periods
if parts ordering does not correctly anticipate product demand, price
competition, and changes in channels of distribution or in the mix
of products sold. If warranty costs associated with our products are
greater than we have experienced, product gross margin may also be
adversely affected. Product gross margin may also be affected by geographic
mix, as well as the mix of configurations within each product group.
Two-tier distribution channels are given privileges to return a portion
of inventory, receive credits for changes in selling prices, and participate
in various cooperative marketing programs. In addition, increasing
two-tier distribution channels generally results in greater difficulty
in forecasting the mix of our products and, to a certain degree, the
timing of orders from our customers. We recognize revenue to two-tier
distributors based on information provided by our distributors and
also maintain accruals and allowances for all cooperative marketing
and other programs.
Service Gross Margin
The increase in service gross margin from 62.6% in fiscal 2001 to
69.6% in fiscal 2002 was primarily due to higher service revenue and
cost efficiencies in the delivery of our services. Service gross margin
will typically experience some variability over time due to various
factors, such as the changes in mix between technical support and
consultative services, as well as the timing of contract renewals.
Research and Development, Sales and Marketing, and General and Administrative
Expenses
Research and development ("R&D"), sales and marketing,
and general and administrative ("G&A") expenses are
summarized in the following table (in millions, except percentages):
In the third quarter of fiscal 2001, we announced a restructuring
program to prioritize our initiatives around a focus on profit contribution,
high-growth areas of our business, reduction of expenses, and improved
efficiency. This restructuring program included a worldwide workforce
reduction, consolidation of excess facilities, and restructuring of
certain business functions. For additional information regarding the
restructuring program, see Note 4 to the Consolidated Financial Statements.
During the third quarter of fiscal 2002, we increased the restructuring
liabilities related to the consolidation of excess facilities and
other charges by $93 million due to changes in real estate market
conditions. The increase in the restructuring liabilities related
to the consolidation of excess facilities and other charges was recorded
as R&D ($39 million), sales and marketing ($42 million), and G&A
($8 million) expenses and cost of sales ($4 million) in the Consolidated
Statements of Operations.
R&D, sales and marketing, and G&A expenses decreased in absolute
dollars from the prior fiscal year primarily due to the impact of
the restructuring program and cost control measures to contain hiring
and to reduce discretionary spending. Total R&D, sales and marketing,
and G&A expenses in the fourth quarter of fiscal 2002 decreased
by approximately $600 million compared with the quarter prior to the
restructuring charge.
R&D expenses in fiscal 2002 were $3.4 billion, compared with $3.9
billion in fiscal 2001, a decrease of $474 million or 12.1%. A significant
portion of the decrease in R&D expenses was due to lower expenditures
on prototypes, lower depreciation on lab equipment, and reduced discretionary
spending. We have continued to invest in R&D efforts in a wide
variety of areas such as data, voice, and video over IP; advanced
access and aggregation technologies such as cable, wireless, and other
broadband technologies; advanced enterprise switching; optical transport;
storage networking; content networking; security; network management;
and advanced core and edge routing technologies; among others. We
have also continued to purchase or license technology in order to
bring a broad range of products to market in a timely fashion. If
we believe that we are unable to enter a particular market in a timely
manner with internally developed products, we may license technology
from other businesses or acquire businesses as an alternative to internal
R&D. All of our R&D costs have been expensed as incurred.
Sales and marketing expenses in fiscal 2002 were $4.3 billion, compared
with $5.3 billion in fiscal 2001, a decrease of $1.0 billion or 19.5%.
The decrease in sales and marketing expenses was primarily due to
a decrease in the size of our sales force and marketing organization,
reduced marketing and advertising investments, and reduced general
promotional and marketing program expenses.
G&A expenses in fiscal 2002 were $618 million, compared with $778
million in fiscal 2001, a decrease of $160 million or 20.6%. The decrease
in G&A expenses was primarily related to the reductions in investments
in infrastructure, personnel in support and administrative functions,
and discretionary spending.
Amortization of Goodwill
We elected to early-adopt Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"), effective the beginning of fiscal 2002. SFAS 142 requires
goodwill to be tested for impairment on an annual basis and between
annual tests in certain circumstances, and written down when impaired,
rather than amortized as previous accounting standards required. In
accordance with SFAS 142, we ceased amortizing goodwill. Based on
the impairment tests performed, there was no impairment of goodwill
in fiscal 2002. There can be no assurance that future goodwill impairment
tests will not result in a charge to earnings. For additional information
regarding SFAS 142, see Note 2 to the Consolidated Financial Statements.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets included in operating
expenses was $699 million in fiscal 2002, compared with $365 million
in fiscal 2001. The increase in the amortization of purchased intangible
assets was primarily related to additional amortization from recent
acquisitions, accelerated amortization for certain technology and
patent intangibles due to a reduction in their estimated useful lives,
and a write down of certain technology and patent intangibles. This
write down totaled $159 million and was due to the continued downturn
in the optical market primarily related to the reduced demand for
long haul products, resulting in a significant adverse impact on the
expected future cash flows of these purchased intangible assets. For
additional information regarding purchased intangible assets, see
Note 3 to the Consolidated Financial Statements.
In-Process Research and Development
The amount expensed to in-process research and development ("in-process
R&D") was related to our purchase acquisitions and was expensed
upon acquisition because technological feasibility had not been established
and no future alternative uses existed (see Note 3 to the Consolidated
Financial Statements). The fair value of the existing purchased technology
and patents, as well as the technology under development, was determined
using the income approach, which discounts expected future cash flows
to present value. The discount rates used in the present value calculations
were typically derived from a weighted-average cost of capital analysis
and venture capital surveys, adjusted upward to reflect additional
risks inherent in the development life cycle. We consider the pricing
model for products related to these acquisitions to be standard within
the high-technology communications equipment industry. However, we
do not expect to achieve a material amount of expense reductions as
a result of integrating the acquired in-process technology. Therefore,
the valuation assumptions do not include significant anticipated cost
savings.
The development of these technologies remains a significant risk due
to the remaining efforts to achieve technical viability, rapidly changing
customer markets, uncertain standards for new products, and significant
competitive threats from numerous companies. The nature of the efforts
to develop these technologies into commercially viable products consists
principally of planning, designing, experimenting, and testing activities
necessary to determine that the technologies can meet market expectations,
including functionality and technical requirements. Failure to bring
these products to market in a timely manner could result in a loss
of market share or a lost opportunity to capitalize on emerging markets,
and could have a material adverse impact on our business and operating
results.
The following table summarizes the key assumptions underlying the
valuations for our significant purchase acquisitions completed in
fiscal 2002 and 2001 (in millions, except percentages):
The assumptions primarily consist of an expected completion date for
the in-process projects, estimated costs to complete the projects,
revenue and expense projections assuming the products have entered
the market, and discount rates based on the risks associated with
the development life cycle of the in-process technology acquired.
Failure to achieve the expected levels of revenue and net income from
these products will negatively impact the return on investment expected
at the time that the acquisitions were completed and may result in
impairment charges. Actual results from the acquired companies to
date did not have a material adverse impact on our business and operating
results except for certain purchase acquisitions where the purchased
intangible assets were impaired and written down as reflected in the
Consolidated Statements of Operations.
Interest and Other Income (Loss), Net
Interest and other income (loss), net, is summarized in the following
table (in millions):
Interest income was $895 million in fiscal 2002, compared with $967
million in fiscal 2001. The decrease in interest income was primarily
due to lower average interest rates.
Other income (loss) primarily consists of net realized gains (losses)
and impairment charges on investments, as well as provision for losses
on investments in privately held companies. Other income (loss) was
($1.1) billion in fiscal 2002, compared with $163 million in fiscal
2001. The net loss in fiscal 2002 included a charge of $858 million
recorded in the first quarter related to the impairment of certain
publicly traded equity securities in our investment portfolio. This
impairment charge was due to the decline in the fair value of our
publicly traded equity investments below the cost basis that was judged
to be other-than-temporary.
Provision for Income Taxes
The effective tax rate was 30.1% for fiscal 2002 and (16.0%) for fiscal
2001. The effective tax rate differs from the statutory rate primarily
due to the impact of nondeductible in-process R&D, acquisition-related
costs, research and experimentation tax credits, state taxes, and
the tax impact of non-U.S. operations.
Our future effective tax rates could be adversely affected by earnings
being lower than anticipated in countries where we have lower statutory
rates, changes in the valuation of our deferred tax assets or liabilities,
or changes in tax laws or interpretations thereof. In addition, we
are subject to the examination of our income tax returns by the Internal
Revenue Service and other tax authorities. We regularly assess the
likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes.
Comparison of Fiscal 2001 and 2000
Net product revenue in fiscal 2001 was $19.6 billion, compared with
$17.0 billion in fiscal 2000, an increase of 15.0%. The increase in
net product revenue was primarily a result of increased unit sales
of router and switch products, growth in the sales of add-on boards
that provide increased functionality, and optical transport products.
Net service revenue in fiscal 2001 was $2.7 billion, compared with
$1.9 billion in fiscal 2000, an increase of 42.0%. The increase in
net service revenue was primarily related to an increase in product
sales and installed base of equipment needing maintenance support.
Gross margin in fiscal 2001 was 49.7%, compared with 64.4% in fiscal
2000. The decrease in the gross margin was primarily due to an additional
excess inventory charge that was recorded in the third quarter of
fiscal 2001, as previously discussed.
R&D, sales and marketing, and G&A expenses are summarized
in the following table (in millions, except percentages):
The increase in R&D, sales and marketing, and G&A expenses
compared with fiscal 2000 was consistent with our overall increase
in net sales during the first half of fiscal 2001. R&D, sales
and marketing, and G&A expenses as a percentage of net sales for
fiscal 2001 increased compared with the prior fiscal year primarily
due to a decline in net sales during the second half of fiscal 2001.
R&D expenses in fiscal 2001 increased by 45.0% from fiscal 2000.
The increase reflected our R&D efforts in a wide variety of areas.
A significant portion of the increase was due to the addition of new
personnel, partly through acquisitions, as well as higher expenditures
on prototypes and depreciation on additional lab equipment.
Sales and marketing expenses in fiscal 2001 increased by 34.2% from
fiscal 2000. The increase in sales and marketing expenses was primarily
due to an increase in the size of our direct sales force and related
commissions, additional marketing and advertising investments associated
with existing and new product introductions, the expansion of distribution
channels and markets, and general corporate branding.
G&A expenses in fiscal 2001 increased by 22.9% from fiscal 2000.
The increase in G&A expenses was primarily related to the addition
of new personnel and investments in infrastructure.
During fiscal 2001, we recorded restructuring costs and other special
charges of $1.2 billion and an additional excess inventory charge
of $2.2 billion. For additional information regarding the restructuring
program, see Note 4 to the Consolidated Financial Statements.
Amortization of goodwill was $690 million in fiscal 2001, compared
with $154 million in fiscal 2000. Amortization of purchased intangible
assets included in operating expenses was $365 million in fiscal 2001,
compared with $137 million in fiscal 2000. Amortization of goodwill
and purchased intangible assets increased as we acquired companies
and technologies.
Interest and other income (loss), net, was $1.1 billion in both fiscal
2001 and 2000. Interest income increased in fiscal 2001 to $967 million,
compared with $615 million in fiscal 2000. The increase in interest
income was primarily related to the general increase in cash and investments
generated from our operations. Other income (loss) decreased in fiscal
2001 to $163 million, compared with $493 million in fiscal 2000. The
decrease in other income (loss) was primarily related to lower net
realized gains on investments.
The effective tax rate was (16.0%) for fiscal 2001 and 38.6% for fiscal
2000. The effective tax rate differs from the statutory rate primarily
due to the impact of nondeductible in-process R&D, acquisition-related
costs, research and experimentation tax credits, state taxes, and
the tax impact of non-U.S. operations.
Recent Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 establishes a single accounting model, based
on the framework established in Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121"), for long-lived assets to be disposed of by sale, and resolves
implementation issues related to SFAS 121. We are required to adopt
SFAS 144 no later than the first quarter of fiscal 2003. We do not
expect the adoption of SFAS 144 to have a material impact on our operating
results or financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability
is incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We do not expect the adoption
of SFAS 146 to have a material impact on our operating results or
financial position.
Liquidity and Capital Resources
The following sections discuss the effects of the changes in our balance
sheets, cash flows, and commitments on our liquidity and capital resources.
Balance Sheet and Cash Flows
Cash and Cash Equivalents and Total Investments Cash and cash equivalents
and total investments were $21.5 billion at July 27, 2002, an increase
of $2.9 billion or 15.9% from $18.5 billion at July 28, 2001. The
increase was primarily a result of cash provided by operating activities
of $6.6 billion and cash provided by the issuance of common stock
of $655 million. This increase was partially offset by cash used in
capital expenditures of $2.6 billion primarily related to the purchase
of land and buildings under synthetic lease agreements as discussed
below, cash used for the repurchase of common stock of $1.9 billion,
and a net decrease of approximately $500 million in the fair value
of investments (see Quantitative and Qualitative Disclosures About
Market Risk).
We expect that cash provided by operating activities may fluctuate
in future periods as a result of a number of factors, including fluctuations
in our operating results, shipment linearity, accounts receivable
collections, inventory management, and the timing of tax and other
payments. For additional discussion, see the Risk Factors section
in our Form 10-K.
Accounts Receivable, Net Accounts receivable was $1.1 billion
at July 27, 2002, a decrease of $361 million or 24.6% from $1.5 billion
at July 28, 2001. Days sales outstanding ("DSO") in receivables
decreased to 21 days at July 27, 2002 from 31 days at July 28, 2001.
The decrease in accounts receivable and DSO was primarily due to shipment
linearity and collections performance. Our targeted range for DSO
performance is 40 to 50 days.
Inventories, Net Inventories were $880 million at July 27, 2002, a
decrease of $804 million or 47.7% from $1.7 billion at July 28, 2001.
Inventories consist of raw materials, work in process, finished goods,
and demonstration systems. Approximately 37.4% of our finished goods
inventory was located at distributor sites. Inventory turns, excluding
the additional excess inventory benefits previously discussed, were
7.1 turns in the fourth quarter of fiscal 2002 and 4.6 turns in the
fourth quarter of fiscal 2001. The improved inventory levels and associated
inventory turns reflected our ongoing inventory management efforts.
Inventory management remains an area of focus as we balance the need
to maintain strategic inventory levels to ensure competitive lead
times against the risk of inventory obsolescence because of rapidly
changing technology and customer requirements.
Property and Equipment, Net Property and equipment were $4.1
billion at July 27, 2002, an increase of $1.5 billion or 58.3% from
$2.6 billion at July 28, 2001. In fiscal 2002, we elected to purchase
all of the land and buildings, as well as sites under construction,
under synthetic lease agreements. The total purchase price was approximately
$1.9 billion and was primarily funded by the liquidation of restricted
investments and lease deposits. As a result, we no longer have any
sites under such synthetic lease agreements.
Commitments
Certain Investments in Privately Held Companies We have entered into
investment agreements with two privately held companies, AYR Networks,
Inc. ("AYR") and Andiamo Systems, Inc. ("Andiamo").
On July 25, 2002, we announced a definitive agreement to acquire the
remaining interests of AYR for a purchase price of approximately $113
million payable in common stock. This acquisition will be accounted
for under the purchase method and is expected to close in the first
quarter of fiscal 2003.
In the case of Andiamo, as of July 27, 2002, we had an option to acquire
the remaining interests not owned by us for consideration consisting
of shares of our common stock. In addition, Andiamo had a put option
enabling them to require us to acquire the remaining interests not
owned by us, subject to the fulfillment of various conditions, including
the achievement of specified technology and other milestones. As of
July 27, 2002, we funded $63 million of our $84 million investment
commitment to Andiamo. Upon full funding of the commitment and based
on certain terms and conditions, we will hold a promissory note that
is convertible into approximately 44% of the equity of Andiamo. We
are also committed to provide additional funding to Andiamo through
the closing of the acquisition of approximately $100 million. Since
making our initial investment in the third quarter of fiscal 2001,
we have expensed the entire amount funded as R&D costs, as if
such expenses constituted our development costs.
On August 19, 2002, we entered into a definitive agreement to acquire
Andiamo, which represented the exercise of our rights (see Note 14
to the Consolidated Financial Statements).
Purchase Commitments with Contract Manufacturers and Suppliers We
use several contract manufacturers and suppliers to provide manufacturing
services for our products. During the normal course of business, in
order to reduce manufacturing lead times and ensure adequate component
supply, we enter into agreements with certain contract manufacturers
and suppliers that allow them to procure inventory based upon criteria
as defined by us. As of July 27, 2002, we have purchase commitments
for inventory of approximately $800 million.
Other Commitments In fiscal 2001, we entered into an agreement to
invest approximately $1.0 billion in venture funds managed by SOFTBANK
Corp. and its affiliates ("SOFTBANK"). These venture funds
are required to be funded upon demand by SOFTBANK. As of July 27,
2002, we have funded $100 million of this investment commitment.
We provide structured financing to certain qualified customers to
be used for the purchase of equipment and other needs through our
wholly-owned subsidiary, Cisco Systems Capital Corporation. At July
27, 2002, the outstanding loan commitments were approximately $948
million, subject to the customers achieving certain financial covenants,
of which approximately $209 million was eligible for draw down. These
loan commitments may be funded over a two- to three-year period, provided
that these customers achieve specific business milestones and financial
covenants.
We have entered into several agreements to purchase or construct real
estate, subject to the satisfaction of certain conditions. As of July
27, 2002, the total amount of commitments, if certain conditions are
met, was approximately $491 million.
At July 27, 2002, we have a commitment of approximately $190 million
to purchase the remaining portion of the minority interest of Cisco
Systems, K.K. (Japan).
We also have certain other funding commitments of approximately $152
million at July 27, 2002 related to our privately held investments.
Stock Repurchase Program
In September 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market or
negotiated transactions. Under the program, up to $3 billion of our
common stock could be reacquired over two years. In August 2002, the
Board of Directors increased our stock repurchase program by $5 billion
to a total of $8 billion of our common stock available for repurchase
through September 12, 2003.
During fiscal 2002, we repurchased and retired approximately 124 million
shares of our common stock for an aggregate purchase price of approximately
$1.9 billion. Including the amount approved by the Board of Directors
in August 2002 as discussed above, the remaining authorized amount
for stock repurchase is $6.1 billion.
Based on past performance and current expectations, we believe that
our cash and cash equivalents, short-term investments, and cash generated
from operations will satisfy our working capital needs, capital expenditures,
investment requirements, stock repurchases, commitments (see Note
8 to the Consolidated Financial Statements), future customer financings,
and other liquidity requirements associated with our existing operations
through at least the next 12 months. In addition, there are no transactions,
arrangements, and other relationships with unconsolidated entities
or other persons that are reasonably likely to materially affect liquidity
or the availability of our requirements for capital resources.
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