Cisco 2010 Annual Report Download - page 63

Notes to Consolidated Financial Statements
at a fixed rate of 5.50% per annum (the “2040 Notes”). To achieve its interest rate risk management objectives, the Company
entered into interest rate swaps, in an aggregate notional amount of $1.5 billion, designated as fair value hedges for a portion of
the 2016 Notes. In effect, these swaps convert the fixed interest rates of a portion of the 2016 Notes to floating interest rates
based on LIBOR plus a fixed number of basis points. Gains and losses in the value of the interest rate swaps substantially offset
changes in the fair value of the hedged portion of the underlying debt.
The effective rates for the fixed-rate debt include the interest on the notes; the accretion of the discount; and, if applicable,
adjustments related to hedging. Based on market prices, the fair value of the Company’s senior notes was $16.3 billion and $10.5
billion as of July 31, 2010 and July 25, 2009, respectively. Interest is payable semiannually on each class of the senior fixed-rate
notes. The notes are redeemable by the Company at any time, subject to a make-whole premium. The Company was in compliance
with all debt covenants as of July 31, 2010.
Other notes and borrowings include notes and credit facilities with a number of financial institutions that are available to certain
foreign subsidiaries of the Company. The amount of borrowings outstanding under these arrangements was $59 million and $2
million at July 31, 2010 and July 25, 2009, respectively.
(b) Credit Facility
The Company has a credit agreement with certain institutional lenders providing for a $3.0 billion unsecured revolving credit facility
that is scheduled to expire on August 17, 2012. Any advances under the credit agreement will accrue interest at rates that are
equal to, based on certain conditions, either (i) the higher of the Federal Funds rate plus 0.50% or Bank of America’s “prime rate”
as announced from time to time or (ii) LIBOR plus a margin that is based on the Company’s senior debt credit ratings as published
by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. The credit agreement requires the Company to comply
with certain covenants, including that it maintain an interest coverage ratio as defined in the agreement. The Company was in
compliance with the required interest coverage ratio and the other covenants as of July 31, 2010.
The Company may also, upon the agreement of either the then-existing lenders or of additional lenders not currently parties to the
agreement, increase the commitments under the credit facility by up to an additional $1.9 billion and/or extend the expiration date of
the credit facility up to August 15, 2014. As of July 31, 2010, the Company had not borrowed any funds under the credit facility.
10. Derivative Instruments
(a) Summary of Derivative Instruments
The Company uses derivative instruments primarily to manage exposures to foreign currency exchange rate, interest rate, and
equity 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 exchange rates, interest rates, and equity 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 does, however,
seek 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.
The fair values of the Company’s derivative instruments and the line items on the Consolidated Balance Sheets to which they
were recorded are summarized as follows (in millions):
DERIVATIVE ASSETS DERIVATIVE LIABILITIES
Balance Sheet Line Item July 31, 2010 July 25, 2009 Balance Sheet Line Item July 31, 2010 July 25, 2009
Derivatives designated as
hedging instruments:
Foreign currency
derivatives Other current assets $82 $ 87 Other current liabilities $7 $36
Interest rate derivatives Other assets 72 — Other long-term liabilities ——
Total 154 87 736
Derivatives not designated
as hedging instruments:
Foreign currency
derivatives Other current assets 622 Other current liabilities 12 30
Equity derivatives Other current assets 12 Other current liabilities ——
Equity derivatives Other assets 22 Other long-term liabilities ——
Total 926 12 30
Total $ 163 $ 113 $19 $66
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