Cisco 2007 Annual Report Download - page 62

2007 Annual Report 65
Notes to Consolidated Financial Statements
Guarantees and Product Warranties
The following table summarizes the activity related to the product warranty liability during fiscal 2007 and 2006 (in millions):
July 28, 2007 July 29, 2006
Balance at beginning of fiscal year $ 309 $ 259
Provision for warranties issued 510 444
Fair value of warranty liability acquired from Scientific-Atlanta — 44
Payments (479) (438)
Balance at end of fiscal year $ 340 $ 309
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 five
years, and for some products the Company provides a limited lifetime warranty.
The Company’s guarantees as of July 28, 2007 and July 29, 2006 that were subject to recognition and disclosure requirements were
not material. In the normal course of business, the Company indemnifies 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 indemnification claim can be made and the amount of the claim. In addition,
the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar
indemnification obligations to the Company’s agents.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited
history with prior indemnification 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, financial
position, or cash flows.
Derivative Instruments
The Company uses derivative instruments primarily to manage exposures to foreign currency, interest rate, and equity security price
risks. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes
in foreign currency, interest rates, and equity security prices. The Company’s derivatives expose it to credit risk to the extent that the
counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting its counterparties
to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is
monitored. Management does not expect material losses as a result of defaults by counterparties.
Foreign Currency Derivatives The Company’s foreign exchange forward and option contracts are summarized as follows (in millions):
July 28, 2007 July 29, 2006
Notional
Amount Fair Value
Notional
Amount Fair Value
Forward contracts:
Purchased $ 1,601 $ 1 $ 1,376 $ (2)
Sold $ 613 $ (8) $ 554 $ (3)
Option contracts:
Purchased $ 652 $ 24 $ 591 $ 20
Sold $ 310 $ (1) $ 573 $ (2)
The Company conducts business globally in numerous currencies. As such, it is exposed to adverse movements in foreign currency
exchange rates. To limit the exposure related to foreign currency changes, the Company enters into foreign currency contracts. The
Company does not enter into foreign exchange forward or option contracts for trading purposes.