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.
In addition, any statements that refer to projections of our future financial performance, our
anticipated growth and trends in our businesses, and other characterizations of future events
or circumstances, are 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 to Shareholders and under "Risk Factors," and
elsewhere in our Annual Report on Form 10-K. We undertake no obligation to revise or update
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 us 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. We consider the accounting policies described below to be our critical
accounting policies. These critical accounting policies are impacted significantly by
judgments, assumptions, and estimates used in the preparation of the Consolidated Financial
Statements and actual results could differ materially from the amounts reported based on
these policies.
Revenue Recognition
We recognize product revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is reasonably assured. In
instances where final acceptance of the product, system, or solution is specified by the
customer, revenue is deferred until all acceptance criteria have been met. Our total
deferred revenue for products was $1.4 billion and $1.7 billion as of July 26, 2003 and July
27, 2002, respectively. Service revenue is generally deferred and, in most cases, recognized
ratably over the period during which the services are to be performed, which is typically
from one to three years. Our total deferred revenue for services was $2.5 billion and $2.2
billion as of July 26, 2003 and July 27, 2002, respectively.
Contracts and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are used to verify
delivery. We assess whether the fee is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund or
adjustment. We assess collectibility based primarily on the creditworthiness of the customer
as determined by credit checks and analysis, as well as the customer's payment history.
When a sale involves multiple elements, such as sales of products that include services, the
entire fee from the arrangement is allocated to each respective element based on its
relative fair value and recognized when revenue recognition criteria for each element are
met. The amount of product revenue recognized is impacted by our judgments as to whether an
arrangement includes multiple elements and if so, whether vendor-specific objective evidence
of fair value exists for those elements. Changes to the elements in an arrangement and the
ability to establish vendor-specific objective evidence for those elements could affect the
timing of the revenue recognition.
We make sales to two-tier distribution channels and recognize revenue based on a sell-through
method utilizing information provided by our distributors. These distributors are given
business terms that allow them to return a portion of inventory, receive credits for changes
in selling prices, and participate in various cooperative marketing programs. We maintain
estimated accruals and allowances for such exposures. If actual credits received by
distributors for inventory returns, changes in selling prices, and cooperative marketing
programs were to deviate significantly from our estimates, which are based on historical
experience, our revenue could be adversely affected.
Allowance for Doubtful Accounts and Sales Returns
Our accounts receivable balance, net of allowance for doubtful accounts, was $1.4 billion as
of July 26, 2003, compared with $1.1 billion as of July 27, 2002. The allowance for doubtful
accounts as of July 26, 2003 was $183 million, compared with $335 million as of July 27,
2002. The allowance is based on our assessment of the collectibility of customer accounts.
We regularly review the allowance by considering factors such as historical experience,
credit quality, age of the accounts receivable balances, and current economic conditions
that may affect a customer's ability to pay.
Our provision (credit) for doubtful accounts was ($59) million, $91 million, and $268
million for fiscal 2003, 2002, and 2001, respectively. In fiscal 2003, we recorded a credit
for doubtful accounts as a result of the improvement in the collectibility of specific
customer accounts due to improved credit quality and resolution of disputes. If a major
customer's creditworthiness deteriorates, or if actual defaults are higher than our
historical experience, or if other circumstances arise, our estimates of the recoverability
of amounts due to us could be overstated, and additional allowances could be required, which
could have an adverse impact on our revenue.
A reserve for sales returns is established based on historical trends in product return
rates. The reserve for sales returns as of July 26, 2003 and July 27, 2002 included $73
million and $113 million, respectively, for estimated future returns that were recorded as a
reduction of our accounts receivable. 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.
Allowance for Inventory
Our inventory balance was $873 million as of July 26, 2003, compared with $880 million as of
July 27, 2002. Our inventory allowances as of July 26, 2003 were $122 million, compared with
$226 million as of July 27, 2002. We provide inventory allowances based on excess and obsolete
inventories determined primarily by future demand forecasts. The allowance is measured as the
difference between the cost of the inventory and market based upon assumptions about future demand
and charged to the provision for inventory, which is a component of our cost of sales. At the
point of the loss recognition, a new, lower-cost basis for that inventory is established, and
subsequent changes in facts and circumstances do not result in the restoration or increase in
that newly established cost basis.
Our provision for inventory was $70 million, $131 million, and $2.1 billion for fiscal 2003, 2002,
and 2001, respectively. 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 margin could be adversely affected. Inventory management remains an area of focus
as we balance the need to maintain strategic inventory levels to ensure competitive lead times
versus the risk of inventory obsolescence because of rapidly changing technology and customer
requirements.
Warranty Costs
The liability for product warranties, included as other accrued liabilities, was $246 million as of July 26, 2003,
compared with $242 million as of July 27, 2002. (See Note 8 to the Consolidated Financial Statements.) Our products sold
are generally covered by a warranty for periods of 90 days, one year, or five years, and for some products, we provide a
limited lifetime warranty. We accrue for warranty costs as part of our cost of sales based on associated material costs
and technical support labor costs. Material cost is primarily estimated based upon historical trends in the volume of
product returns within the warranty period and the cost to repair or replace the equipment. Technical support labor cost
is primarily estimated based upon historical trends in the rate of customer calls and the cost to support the customer
calls within the warranty period.
The provision for warranties issued during fiscal 2003 and 2002 was $342 million and $443 million, respectively. If we
experience an increase in warranty claims compared with our historical experience, or if costs of servicing warranty
claims are greater than the expectations on which the accrual has been based, our gross margin could be adversely
affected.
Investment Impairments
Our publicly traded equity investments are reflected on the Consolidated Balance Sheets as of July 26, 2003 at a fair
value of $745 million, compared with $567 million as of July 27, 2002. (See Note 7 to the Consolidated Financial
Statements.) We recognize an impairment charge when the decline in the fair value of our publicly traded equity
investments below their cost basis is judged to be other-than-temporary. The ultimate value realized on these equity
investments is subject to market price volatility until they are sold. 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 company, and our
intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market
value. Our ongoing consideration of these factors could result in additional impairment charges in the future, which
could adversely affect our net income. During the first quarter of fiscal 2003 and 2002, we recognized a charge of $412
million and $858 million, respectively, attributable to the impairment of certain publicly traded equity securities.
We also have investments in privately held companies, many of which can still be considered to be in the startup or
development stages. As of July 26, 2003, our investments in privately held companies were $516 million, compared with
$477 million as of July 27, 2002, and were included in other assets. (See Note 5 to the Consolidated Financial
Statements.) We monitor these investments for impairment and make appropriate reductions in carrying values if we
determine an impairment charge is required based primarily on the financial condition and near-term prospects of these
companies. These investments are inherently risky, as the markets for the technologies or products these companies are
developing are typically in the early stages and may never materialize. Our impairment charges on investments in
privately held companies were $281 million and $420 million during fiscal 2003 and 2002, respectively.
Goodwill Impairments
Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established
valuation techniques in the high-technology communications equipment industry and based on valuations performed by an
independent third party. Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts
assigned to identifiable assets acquired less liabilities assumed. We perform goodwill impairment tests on an annual
basis and between annual tests in certain circumstances for each reporting unit. The goodwill recorded on the
Consolidated Balance Sheets as of July 26, 2003 was $4.0 billion, compared with $3.6 billion as of July 27, 2002. In
response to changes in industry and market conditions, we could be required to strategically realign our resources and
consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill.
Based on impairment tests performed using independent third-party valuations, there was no impairment in our goodwill
in fiscal 2003 and 2002.
Income Taxes
Our effective tax rates differ from the statutory rate due to the impact of nondeductible in-process research and
development ("in-process R&D"), acquisition-related costs, research and experimentation tax credits, state taxes, and the
tax impact of non-U.S. operations. Our effective tax rate was 28.6%, 30.1%, and (16.0%) for fiscal 2003, 2002, and 2001,
respectively. 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 continuous 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.
Loss Contingencies
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 and whether new accruals are required.
SELECTED FINANCIAL DATA FOR FISCAL 2003, 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):
We have reclassified our net sales for each geographic theater for fiscal 2002 and 2001 to conform to the current year's
presentation, which reflects the breakdown of service revenue for EMEA, Asia Pacific, and Japan theaters, all of which
were previously included in the Americas theater.
The following table is a breakdown of net sales between product and
service revenue (in millions, except percentages):
The following table is a breakdown of net product sales by theater (in millions, except percentages):
The following table presents net sales for groups of similar products (in millions, except percentages):
We have reclassified our net sales for groups of similar products in fiscal 2002 and 2001 to conform to the current
year's presentation. The reclassification was primarily related to our net sales of Advanced Technology products, which
were previously included in the "Routers" product category and are now included in the "Other" product category in the
table above. The reclassification had an impact of less than 1% on each product category in proportion to total product
revenue.
Gross Margin
The following table shows the standard margin for each theater and the total gross margin for products and services
(in millions, except percentages):
Gross margin for products and services in fiscal 2003, 2002, and 2001 was as follows (in millions, except percentages):
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):
DISCUSSION OF FISCAL 2003 AND 2002
Net Sales
Net sales in fiscal 2003 were $18.9 billion, compared with $18.9 billion in fiscal 2002, a decrease of $37 million or
0.2%. Net product sales for fiscal 2003 decreased by $104 million, compared with fiscal 2002 partially offset by an
increase of $67 million in service revenue. The decrease in net product sales was due to the impact of a combination of a
challenging global economic environment, geopolitical issues, and continued constraints on information technology-related
capital spending, particularly with respect to our service provider customers. The increase in service revenue was
primarily due to increased technical support service contract initiations and renewals associated with product sales.
Net Product Sales by Theater
Net product sales in the Americas theater consist of net product sales in the United States and Americas International,
which includes Canada, Mexico, and Latin America. Net product sales in the Americas theater in fiscal 2003 decreased by
$168 million or 2.0% from $8.3 billion in fiscal 2002 to $8.1 billion. Net product sales in the United States were $7.4
billion in fiscal 2003, compared with $7.4 billion in fiscal 2002, a decrease of $69 million or 0.9%. Net product sales
in Americas International in fiscal 2003 were $759 million, compared with $858 million in fiscal 2002, a decrease of $99
million or 11.5%. The decrease in net product sales reflects the slowdown in the United States and other economies,
over-capacity, and constraints on information technology-related capital spending, which have continued to affect both
enterprise and service provider customers, especially service provider customers. This decrease was partially offset by
growth in our net product sales to the United States federal government, which increased by approximately 20% in fiscal
2003 compared with fiscal 2002.
Net product sales in the EMEA theater in fiscal 2003 increased by $72 million or 1.6% from $4.5 billion in fiscal 2002 to
$4.6 billion, as incumbent service providers began deploying products and some enterprise markets experienced modest
growth. In Asia Pacific, net product sales in fiscal 2003 increased by $94 million or 5.9% from $1.6 billion in fiscal
2002 to $1.7 billion due to infrastructure builds, broadband acceleration, and investments by Asian telecom carriers. Net
product sales in the Japan theater in fiscal 2003 decreased by $102 million or 8.1% from $1.3 billion in fiscal 2002 to
$1.2 billion due to ongoing economic challenges in the theater.
Net Product Sales by Groups of Similar Products
Net product sales related to routers in fiscal 2003 decreased by $628 million or 11.4% from $5.5 billion in fiscal 2002
to $4.9 billion due to decreases in sales of midrange and low-end routers. Net product sales related to switches in
fiscal 2003 increased by $70 million or 0.9% from $7.7 billion in fiscal 2002 to $7.7 billion due to increases in sales
of fixed LAN and WAN switches partially offset by a decrease in sales of modular LAN switches. Net product sales related
to access products in fiscal 2003 decreased by $77 million or 7.4% from $1.0 billion in fiscal 2002 to $965 million due
to decreases in sales of digital subscriber line (DSL) and dial access products partially offset by an increase in sales
of wireless LAN products. Net product sales related to other products in fiscal 2003 increased by $531 million or 35.7%
from $1.5 billion in fiscal 2002 to $2.0 billion due to increases in sales of security and IP telephony products.
Net product sales may be adversely affected in the future by changes in the geopolitical environment and global economic
conditions; sales cycles and implementation cycles of our products; changes in the mix of our customers between service
provider and enterprise; changes in the mix of direct sales and indirect sales; variations in sales channels; and final
acceptance criteria of the product, system, or solution as specified by the customer. Service provider customers typically
have longer implementation cycles, require a broader range of services including design services, and often have
acceptance provisions, which can lead to a delay in revenue recognition. To improve customer satisfaction, we continue to
attempt to reduce our manufacturing lead times, which may result in corresponding reductions in order backlog. A decline
in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and
operating results. Net product sales may also be adversely affected by fluctuations in demand for our products,
especially with respect to Internet businesses and telecommunications service providers, price and product competition in
the communications and networking industries, introduction and market acceptance of new technologies and products,
adoption of new networking standards, and financial difficulties experienced by our customers.
Two-tier distributors are given business terms that allow them 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 a sell-through
method utilizing information provided by our distributors, and we maintain accruals and allowances for all cooperative
marketing and other programs.
Net Service Revenue
Net service revenue in fiscal 2003 increased by $67 million or 2.1% from $3.2 billion in fiscal 2002 to $3.3 billion due
to increased technical support service contract initiations and renewals associated with product sales that have resulted
in a higher installed base of equipment being serviced and revenue from advanced services, which relates to consulting
support services of our technologies for specific networking needs. Net service revenue is generally deferred and, in
most cases, recognized ratably over the service period, which is typically one to three years. Net service revenue will
typically experience some variability over time due to various factors such as the timing of technical support service
contract initiations and renewals. In addition, our revenue from advanced services may increase to a higher proportion of
total service revenue due to our continued focus on providing comprehensive support of our customers' networking devices,
applications, and infrastructures.
Gross Margin
Gross margin in fiscal 2003 increased from 63.5% in fiscal 2002 to 70.1% due to an increase in product gross margin
partially offset by a decrease in service gross margin as discussed below.
Product Gross Margin
Product gross margin increased from 62.3% in fiscal 2002 to 70.5% in fiscal 2003, an increase of 8.2%. This increase was
due to an increase in standard margin combined with decreases in production overhead and manufacturing and other related
costs.
Standard margin increased by 3.5% in fiscal 2003, compared with fiscal 2002, due to lower component costs and value
engineering, partially offset by the impact of product pricing reductions and changes in the mix of products sold. Value
engineering is the process by which the production costs are reduced through component redesign, board configuration,
test processes, and transformation processes.
Production overhead and manufacturing and other related costs decreased in fiscal 2003, compared with fiscal 2002, which
resulted in an increase in product gross margin of 4.7%. Production overhead in fiscal 2003 decreased by $104 million
from $651 million in fiscal 2002 to $547 million related to lower labor, depreciation on equipment, and facilities
charges associated with manufacturing activities. In addition, manufacturing and other related costs in fiscal 2003
decreased by $652 million from $2.0 billion in fiscal 2002 to $1.4 billion due to lower warranty, provision for inventory,
and other nonstandard costs. The provision for inventory in fiscal 2002 included an excess inventory benefit of $422
million related to inventory previously written off and utilized in production or sold.
Product gross margin may be adversely affected in the future by changes in the mix of products sold or channels of
distribution, sales discounts, 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, impact of value engineering, inventory
holding charges, price competition and introduction of new products or entering new markets, and different pricing and
cost structures of new markets. 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.
Service Gross Margin
Service gross margin decreased from 69.6% in fiscal 2002 to 68.3% in fiscal 2003, a decrease of 1.3%. Service gross
margin will typically experience some variability over time due to various factors such as the change in mix between
technical support services and advanced services, as well as the timing of technical support service contract initiations
and renewals.
Research and Development, Sales and Marketing, and General and Administrative Expenses
R&D expenses in fiscal 2003 decreased by $313 million or 9.1% from $3.4 billion in fiscal 2002 to $3.1 billion
primarily due to a decrease in expenditures on prototypes of approximately $120 million due, in part, to our ongoing cost
control measures. In addition, the decrease in R&D expenses was also due to lower depreciation on lab equipment and other
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, mobility, and other
broadband technologies; advanced enterprise switching; optical technology; storage area networking; content networking;
security; network management; and advanced core and edge routing technologies. 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 2003 decreased by $148 million or 3.5% from $4.3 billion in fiscal 2002 to $4.1
billion due to a decrease in sales expenses of $176 million partially offset by an increase in marketing expenses of $28
million. Sales expenses decreased in fiscal 2003, compared with fiscal 2002, due to the decrease in expenses related to
our sales programs and other reduced discretionary spending. In addition, we experienced a decrease in the size of our
sales force during fiscal 2003. Our marketing expenses increased in fiscal 2003, compared with fiscal 2002, as we have
continued to invest in both our new growth market opportunities and our branding strategy. During fiscal 2003, we
invested approximately $98 million in a new marketing campaign.
G&A expenses in fiscal 2003 increased by $84 million or 13.6% from $618 million in fiscal 2002 to $702 million. The
increase in G&A expenses for fiscal 2003, compared with fiscal 2002, was primarily related to real estate allocations.
We hedge foreign currency forecasted transactions related to operating expenses with currency options. The effects of
foreign currency fluctuations, net of hedging, increased total R&D, sales and marketing, and G&A expenses by
approximately 1% in fiscal 2003 compared with fiscal 2002.
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 fiscal 2003, we increased the restructuring liabilities related to the
consolidation of excess facilities and other charges by $45 million, which was recorded during the first and fourth
quarter of fiscal 2003, due to changes in real estate market conditions. The increase in restructuring liabilities was
recorded as expenses related to R&D ($18 million), sales and marketing ($18 million), G&A ($4 million), and cost
of sales ($5 million) in the Consolidated Statements of Operations. During fiscal 2002, we increased the restructuring
liabilities related to the consolidation of excess facilities and other charges by $93 million, which was recorded in the
third quarter of fiscal 2002, due to changes in real estate market conditions. The increase in restructuring liabilities
was recorded as expenses related to R&D ($39 million), sales and marketing ($42 million), G&A ($8 million), and
cost of sales ($4 million) in the Consolidated Statements of Operations. There can be no assurance that future changes in
real estate market conditions will not result in additional real estate liabilities.
Amortization of Purchased Intangible Assets
Amortization of purchased intangible assets included in operating expenses was $394 million in fiscal 2003, compared with
$699 million in fiscal 2002. The decrease in the amortization of purchased intangible assets in fiscal 2003, compared
with fiscal 2002, was primarily due to the accelerated amortization for certain technology and patent intangibles in the
prior year period, and a decrease in the write-down of certain technology and patent intangibles. The write-down of
certain technology and patent intangibles in fiscal 2003 was $49 million, compared with $159 million in fiscal 2002. The
write-downs of certain technology and patent intangibles were related to a decrease in the expected future cash flows for
these purchased intangible assets. (For additional information regarding purchased intangible assets, see Note 3 to the
Consolidated Financial Statements.)
In-Process Research and Development
Our methodology for allocating the purchase price relating to purchase acquisitions to in-process R&D is determined
through established valuation techniques in the high-technology communications equipment industry and based on valuations
performed by an independent third party. In-process R&D expense in fiscal 2003 was $4 million, compared with $65
million in fiscal 2002. (See Note 3 to the Consolidated Financial Statements for additional information regarding the
acquisitions completed in fiscal 2003 and 2002 and the in-process R&D recorded for each acquisition.) The amount
expensed to in-process R&D was expensed upon acquisition because technological feasibility had not been established
and no future alternative uses existed.
The fair value of the existing purchased technology and patents, as well as the technology under development, is
determined 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 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.
For purchase acquisitions completed to date, 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 several companies. The nature of the efforts to develop these technologies into
commercially viable products consists primarily 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 valuation for our purchase acquisitions completed in
fiscal 2003 and 2002, for which in-process R&D was recorded (in millions, except percentages):
The key 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
purchase acquisitions 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 Income
Interest income was $660 million in fiscal 2003, compared with $895 million in fiscal 2002. The decrease of $235 million
or 26.3% in interest income in fiscal 2003, compared with fiscal 2002, was primarily due to lower average interest rates
on our portfolio of fixed income securities.
Other Loss, Net
The components of other loss, net, are as follows (in millions):
The net losses relating to investments in securities in fiscal 2003 and 2002 included a charge of $412 million and $858
million, respectively, related to the impairment of certain publicly traded equity securities during the first quarter
periods. The impairment charges were due to the decline in the fair value of certain publicly traded equity investments
below their cost basis that was judged to be other-than-temporary.
Provision for Income Taxes
The effective tax rate was 28.6% for fiscal 2003 and 30.1% for fiscal 2002. 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 continuous 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.
DISCUSSION OF FISCAL 2002 AND 2001
Net Sales
Net sales in fiscal 2002 decreased by $3.4 billion or 15.2% from $22.3 billion in fiscal 2001 to $18.9 billion, primarily
related to a decrease in net product sales. The decrease in net product sales was due to unfavorable global economic
conditions and reduced levels of information technology-related capital spending compared with fiscal 2001. The economic
slowdown has had a significant impact on the telecommunications industry, in particular service provider customers.
Net Product Sales by Theater
Net product sales in the Americas theater decreased by $1.7 billion or 17.3% from $10.0 billion in fiscal 2001 to $8.3
billion in fiscal 2002. The decrease was primarily related to the decline in net product sales in the service provider
market, in particular the incumbent local exchange carrier (ILEC) and interexchange carrier (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 had a significant adverse effect on many of our service provider customers. The
enterprise market experienced a lower decrease in net product sales compared with the service provider market primarily
because of the need for large corporations, specifically in the manufacturing, health-care, education, and retail sectors,
as well as 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. 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. 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 13.4% from $1.5 billion in fiscal 2001 to $1.3
billion. The decrease was primarily related to contraction in the electronics sector partially offset by net product
sales to the government sector.
Net Product Sales by Groups of Similar Products
Net product sales related to routers decreased by $1.6 billion or 22.7% from $7.1 billion in fiscal 2001 to $5.5 billion,
primarily due to decreases in sales of our high-end and edge routers. Net product sales related to switches experienced a
decrease of $1.5 billion or 16.3% from $9.1 billion in fiscal 2001 to $7.7 billion, primarily due to decreases in sales
of our modular LAN and WAN multiservice switches. Net product sales related to access products decreased by $827 million
or 44.2% from $1.9 billion in fiscal 2001 to $1.0 billion, primarily due to decreases in sales of our access
concentrators and DSL access multiplexer (DSLAM) products.
Net 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 services, which provide 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, technical support service contract renewals associated
with product sales increased, compared with the prior fiscal year.
Gross Margin
Gross margin in fiscal 2002 was 63.5%, compared with 49.7% in fiscal 2001.
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, there was a slight increase in product gross margin that 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, which included an additional liability for purchase commitments, was recorded in accordance with our accounting
policy. In fiscal 2002, the provision for inventory and the additional liability for purchase commitments were 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.
The following is a summary of the change in the additional excess inventory reserve (in millions):
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.
Research and Development, Sales and Marketing, and General and Administrative Expenses
Total R&D, sales and marketing, and G&A expenses decreased in absolute dollars from fiscal 2001, 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.
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.
Restructuring Costs and Other Special Charges
During fiscal 2001, we recorded restructuring costs and other special charges of $1.2 billion. (For additional
information, see Note 4 to the Consolidated Financial Statements.)
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.
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 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.
In-Process Research and Development
In-process R&D expense in fiscal 2002 was $65 million, compared with $855 million in fiscal 2001. (See Note 3 to the
Consolidated Financial Statements for additional information regarding the acquisitions completed in fiscal 2002 and 2001
and the in-process R&D recorded for each acquisition.) 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):
Interest Income
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), Net
Other income (loss), net 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.
RECENT ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), was
issued in January 2003. FIN 46 requires that if an entity is the primary beneficiary of a variable interest entity, the
assets, liabilities, and results of operations of the variable interest entity should be included in the Consolidated
Financial Statements of the entity. The provisions of FIN 46 are effective immediately for all arrangements entered into
after January 31, 2003. For those arrangements entered into prior to January 31, 2003, the provisions of FIN 46 are
required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. (For
additional information regarding variable interest entities and the impact of the adoption of FIN 46, see Note 8 to the
Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The following sections discuss the effects of 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 $20.7 billion as of
July 26, 2003, a decrease of $804 million or 3.7% from $21.5 billion at July 27, 2002. The decrease was primarily a
result of cash used for the repurchase of common stock of $6.0 billion and capital expenditures of $717 million partially
offset by cash provided by operating activities of $5.2 billion and cash provided by the issuance of common stock of $578
million related to employee stock option exercises and employee stock purchases.
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 section entitled "Risk Factors"
in our Annual Report on Form 10-K.)
Accounts Receivable, Net Accounts receivable, net was $1.4 billion and $1.1 billion as of July 26, 2003 and July
27, 2002, respectively. Days sales outstanding ("DSO") in receivables as of July 26, 2003 and July 27, 2002 were 26 days
and 21 days, respectively. Our accounts receivable and DSO are primarily impacted by shipment linearity and collections
performance. Shipment linearity is a measure of the level of shipments throughout a particular quarter. A steady level of
shipments and good collections performance will result in reduced DSO compared with a higher level of shipments toward
the end of the quarter, which will result in a shorter amount of time to collect the related accounts receivable and will
result in increased DSO.
Inventories Inventories were $873 million as of July 26, 2003, a decrease of $7.0 million or 0.8% from $880
million at July 27, 2002. Inventories consist of raw materials, work in process, finished goods, and demonstration
systems. As of July 26, 2003, approximately 37.5% of our finished goods inventory was located at distributor sites, and
represents the deferred cost of sales relating to unrecognized revenue on sales to those distributors. Our finished goods
inventory is accounted for at the lower of cost or market.
Inventory turns were 6.8 in the fourth quarter of fiscal 2003, compared with 7.1 in the fourth quarter of fiscal 2002.
Inventory levels and the associated inventory turns reflect 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.
Commitments
Leases We lease office space in several U.S. locations, as well as locations elsewhere in the Americas International,
EMEA, Asia Pacific, and Japan. Rent expense totaled $196 million, $265 million, and $381 million in fiscal 2003, 2002,
and 2001, respectively. Future annual minimum lease payments under all non-cancelable operating leases with an initial
term in excess of one year as of July 26, 2003 were as follows (in millions):
We had entered into several agreements to lease sites in San Jose, California, where our headquarters is located, and
certain other facilities, both completed and under construction, in the areas of San Jose, California; Boxborough,
Massachusetts; Salem, New Hampshire; Richardson, Texas; and Research Triangle Park, North Carolina. Under these
agreements, we could, at our option, purchase the land or both land and buildings. We could purchase the buildings at
approximately the amount expended by the lessors to construct the buildings. As part of the lease agreements, we had
restricted certain of our investment securities as collateral for specified obligations of the lessors. In fiscal 2002,
we elected to purchase all of the land and buildings as well as sites under construction under the above 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 lease agreements.
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 26,
2003, we have purchase commitments for inventory of approximately $718 million, compared with $825 million as of July 27,
2002. These purchase commitments are expected to be fullfilled within one year.
We record a liability for purchase commitments related to on-order inventory that is in excess of our future demand
forecasts. As of July 26, 2003, the liability for purchase commitments was $99 million, compared with $238 million as of
July 27, 2002, and was included in other accrued liabilities.
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"), which are required to be funded on demand. In fiscal
2003, this agreement was amended to a commitment of up to $800 million, of which up to $550 million is to be invested in
venture funds under terms similar to the original agreement and $250 million invested as senior debt with entities as
directed by SOFTBANK. Our commitment to fund the senior debt is contingent upon the achievement of certain agreed-upon
milestones. As of July 26, 2003, we have invested $247 million in the venture funds and $49 million in the senior debt,
and both were recorded as investments in privately held companies in our Consolidated Balance Sheets. We had invested
$100 million of the original venture funds commitment as of July 27, 2002.
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. These loan commitments may be funded over a two-
to three-year period, provided that these customers achieve specific business milestones and satisfy certain financial
covenants. Our outstanding loan commitments were approximately $97 million, of which approximately $38 million was
eligible for draw-down as of July 26, 2003, compared with outstanding loan commitments of approximately $948 million, of
which approximately $209 million was eligible for draw-down as of July 27, 2002. The decrease in loan commitments as of
July 26, 2003, compared with July 27, 2002, was related to terminations and reductions of these commitments due to
customers not meeting specific business milestones and not satisfying certain financial covenants. As of July 26, 2003,
structured loans were $42 million, compared with $61 million as of July 27, 2002.
We have entered into several agreements to purchase or develop real estate, subject to the satisfaction of certain
conditions. As of July 26, 2003, the total amount of commitments, if certain conditions are met, was approximately $38
million, compared with approximately $491 million as of July 27, 2002. The decrease in real estate commitments as of July
26, 2003, compared with July 27, 2002, was due to a combination of completed real estate construction and renegotiated
commitments. The payments due under these commitments are based on the completion of construction of the real estate or
the achievement of other milestones.
As of July 26, 2003, we have a commitment of approximately $130 million to purchase the remaining portion of the minority
interest of Cisco Systems, K.K. (Japan), compared with approximately $190 million as of July 27, 2002, and the payments
under these commitments are based on a put option held by the minority shareholders.
We also have certain other funding commitments related to our privately held investments that are based on the
achievement of certain agreed-upon milestones. The funding commitments were approximately $95 million as of July 26,
2003, compared with approximately $152 million as of July 27, 2002.
Off-Balance Sheet Arrangements Based on recently adopted regulations of the Securities and Exchange Commission,
our investments in unconsolidated variable interest entities as of July 26, 2003, which we have disclosed in our previous
filings, are considered off-balance sheet arrangements. However, in regard to our investment in Andiamo Systems, Inc.
("Andiamo") as discussed below, we are required to consolidate Andiamo beginning the first day of the first quarter of
fiscal 2004, and as a result, our investment in Andiamo will no longer be considered an off-balance sheet arrangement in
fiscal 2004.
In April 2001, we entered into a commitment to provide convertible debt funding of approximately $84 million to Andiamo,
a storage switch developer. This debt will be convertible into approximately 44% of the equity in Andiamo, subject to
certain terms and conditions. In connection with this investment, we obtained a call option that provided us the right to
purchase Andiamo. The purchase price under the call option is based on a valuation of Andiamo using a negotiated formula
as discussed below. We also entered into a commitment to provide non-convertible debt funding to Andiamo of approximately
$100 million through the close of the acquisition, subject to periodic funding.
On August 19, 2002, we entered into a definitive agreement to acquire privately held Andiamo, which represents the
exercise of our rights under the call option. The acquisition of Andiamo is expected to close in the third quarter of
fiscal 2004, but no later than July 31, 2004. Under the terms of the agreement, our common stock and options will be
exchanged for all outstanding shares and options of Andiamo not owned by us at the closing of the acquisition. The amount
of the purchase price for the remaining equity interests in Andiamo not then held by us is not determinable at this time,
but will be based primarily upon a formula-based valuation of Andiamo to be determined by applying a multiple to the
actual, annualized revenue generated from sales by us of products attributable to Andiamo during a three-month period
shortly preceding the closing. Under our agreements with Andiamo, we are the exclusive manufacturer and distributor of
all Andiamo products. The multiple will be equal to our average market capitalization during a specified period divided
by our annualized revenue for a three-month period prior to closing, subject to adjustment as follows: (i) if the
multiple so calculated is less than 10, then the multiple to be used for purposes of determining the transaction price
shall be the midpoint between 10 and the multiple so calculated; (ii) if the multiple so calculated is greater than 15,
then the multiple to be used for purposes of determining the transaction price shall be the midpoint between 15 and the
multiple so calculated. There is no minimum purchase price, and the maximum purchase price is limited to approximately
$2.5 billion in shares of our common stock valued at the time of closing. The acquisition has received the required
approvals of the Board of Directors from both companies and is subject to various closing conditions and approvals,
including stockholder approval by Andiamo. As of July 26, 2003, we have invested $84 million in the convertible debt
and $76 million in the non-convertible debt. Substantially all of our investment in Andiamo has been expensed as research
and development costs, as if such expenses constituted our development costs.
We have evaluated our debt investment in Andiamo and have determined that Andiamo is a variable interest entity under FIN
46. We have concluded that we are the primary beneficiary as defined by FIN 46, and as a result, we are required to
consolidate Andiamo beginning the first day of the first quarter of fiscal 2004.
FIN 46 will require us to account for Andiamo as if we had consolidated it since our initial investment in April 2001. If
we consolidated Andiamo from the date of our initial investment, we would be required to account for the call option as a
repurchase right. Under Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," and related interpretations, variable accounting is required for substantially all Andiamo
employee stock and options because the ending purchase price is primarily derived from a revenue-based formula.
Therefore, beginning in the first quarter of fiscal 2004, we will revalue the stock and options of Andiamo each quarter
based on an independent valuation of Andiamo until the completion of the acquisition, which is expected in the third
quarter of fiscal 2004, but no later than July 31, 2004.
Effective July 27, 2003, the first day of fiscal 2004, we will record a non-cash cumulative charge of approximately $400
million (representing the amount of variable compensation from April 2001 through July 2003). This will be reported as a
separate line item in the Consolidated Statements of Operations as a cumulative effect of a change in accounting
principle, net of tax. The charge is based on the value of the Andiamo employee stock and options and their expected
vesting upon FIN 46 adoption pursuant to the independent evaluation, and does not necessarily reflect the value of
Andiamo as a whole nor indicate the expected valuation of Andiamo upon acquisition. Subsequent to the adoption of FIN 46,
changes to the value of Andiamo and continued vesting of the employee stock and options will result in adjustments to the
non-cash stock compensation charge and will be reflected as operating expenses. These adjustments will be recorded
commencing in the first quarter of fiscal 2004 and will continue until such time as the acquisition of Andiamo is
completed, which is expected to close in the third quarter of fiscal 2004, but no later than July 31, 2004. The value of
Andiamo computed under the negotiated formula is largely based on revenues derived from specific storage switch
products.
The estimated range of the future non-cash variable stock compensation adjustments and the final purchase price of
Andiamo are subject to uncertainty. The valuation of Andiamo is subject to change based on the ability of Andiamo to meet
its revenue projections, the market for its products, its ability to develop relevant technology, as well as other
factors, and will be based on a valuation performed by an independent third party using a consistent methodology.
Excluding the non-cash stock compensation cumulative charge and any future non-cash variable stock compensation
adjustments, the impact of consolidating Andiamo will not materially affect our operating results or financial
condition.
In the ordinary course of business, we have investments in other privately held companies and provide structured
financing to certain customers through our wholly owned subsidiary, Cisco Systems Capital Corporation, which may be
considered variable interest entities. We have evaluated our investments in these other privately held companies and
structured financings and have determined that there will be no material impact on our operating results or financial
condition upon the adoption of FIN 46.
Under FIN 46, certain events can require a reassessment of our investments in privately held companies or structured
financings to determine if they are variable interest entities and which of the stakeholders will be the primary
beneficiary. As a result of such events, we may be required to make additional disclosures or consolidate these entities.
We may not have the ability to influence these events.
Stock Repurchase Program
In September 2001, the Board of Directors authorized a stock repurchase program to acquire outstanding common stock.
Under the program, up to $3.0 billion of our common stock could be repurchased over two years. In August 2002, the Board
of Directors increased our stock repurchase program by $5.0 billion available for repurchase through September 12, 2003.
In March 2003, the Board of Directors increased our stock repurchase program by an additional $5.0 billion with no
termination date.
During fiscal 2003, we repurchased and retired 424 million shares of our common stock for an aggregate purchase price of
$6.0 billion. As of July 26, 2003, we have repurchased and retired 548 million shares of our common stock for an
aggregate purchase price of $7.8 billion since inception of the program, and the remaining authorized amount for stock
repurchases under this program was $5.2 billion.
Liquidity and Capital Resource Requirements
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.
We believe that the most strategic uses of our cash resources include repurchase of shares, strategic investments to gain
access to new technologies, acquisitions, financing activities, and working capital. 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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