Cisco 2006 Annual Report Download - page 60

2006 Annual Report 63
Purchase Commitments with Contract Manufacturers and Suppliers
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services
for its products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component
supply, the Company enters into agreements with contract manufacturers and suppliers that either allow them to procure inventory based
upon criteria as dened by the Company or that establish the parameters dening the Company’s requirements. In certain instances, these
agreements allow the Company the option to cancel, reschedule, and adjust the Company’s requirements based on its business needs
prior to rm orders being placed. Consequently, only a portion of the Company’s reported purchase commitments arising from these
agreements are rm, noncancelable, and unconditional commitments. As of July 29, 2006, the Company had total purchase commitments
for inventory of approximately $2.0 billion, compared with $954 million as of July 30, 2005.
In addition to the above, the Company records a liability for rm, noncancelable, and unconditional purchase commitments for quantities
in excess of its future demand forecasts consistent with the Company’s allowance for inventory. As of July 29, 2006, the liability for these
purchase commitments was $148 million, compared with $87 million as of July 30, 2005, and was included in other accrued liabilities.
Other Commitments
The Company has entered into an agreement to invest approximately $800 million in venture funds managed by SOFTBANK that are
required to be funded on demand. The total commitment is to be invested in venture funds and as senior debt with entities as directed by
SOFTBANK. The Company’s commitment to fund the senior debt is contingent upon the achievement of certain agreed-upon milestones.
As of July 29, 2006, the Company had invested $523 million in the venture funds pursuant to the commitment, compared with $414 million
as of July 30, 2005. In addition, as of July 29, 2006, the Company had invested $49 million in the senior debt pursuant to the commitment,
all of which has been repaid. As of July 30, 2005, the Company had invested $49 million in the senior debt pursuant to the commitment, of
which $47 million had been repaid.
The Company also has certain other funding commitments related to its privately held investments that are based on the achievement of
certain agreed-upon milestones. The funding commitments were approximately $34 million as of July 29, 2006, compared with approximately
$56 million as of July 30, 2005.
Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides nancing to certain customers
through its wholly owned subsidiaries, which may be considered to be variable interest entities. The Company has evaluated its investments
in privately held companies and customer nancings and determined that there were no signicant unconsolidated variable interest entities
as of July 29, 2006.
Guarantees and Product Warranties
The Company’s guarantees issued that are subject to recognition and disclosure requirements as of July 29, 2006 and July 30, 2005 were
not material. The following table summarizes the activity related to the product warranty liability during scal 2006 and 2005 (in millions):
July 29, 2006 July 30, 2005
Balance at beginning of fiscal year $ 259 $ 239
Provision for warranties issued 395 411
Fair value of warranty liability acquired from Scientific-Atlanta 44 —
Payments (389) (391)
Balance at end of fiscal year $ 309 $ 259
The Company accrues for warranty costs as part of its cost of sales based on associated material product costs, labor costs for technical
support staff, and associated overhead. The products sold are generally covered by a warranty for periods ranging from 90 days to ve years,
and for some products the Company provides a limited lifetime warranty.
In the normal course of business, the Company indemnies other parties, including customers, lessors, and parties to other transactions
with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from
a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These
agreements may limit the time within which an indemnication claim can be made and the amount of the claim. In addition, the Company
has entered into indemnication agreements with its ofcers and directors, and the Company’s bylaws contain similar indemnication
obligations to the Company’s agents.
It is not possible to determine the maximum potential amount under these indemnication agreements due to the limited history of
prior indemnication claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by
the Company under these agreements have not had a material effect on the Company’s operating results, nancial position, or cash ows.
Notes to Consolidated Financial Statements