Cisco 2010 Annual Report Download - page 66

Notes to Consolidated Financial Statements
11. Commitments and Contingencies
(a) Operating Leases
The Company leases office space in several U.S. locations. Outside the United States, larger leased sites include sites in Australia,
Belgium, China, Germany, India, Israel, Italy, Japan, Norway, and the United Kingdom. Rent expense totaled $364 million, $328
million, and $291 million in fiscal 2010, 2009, and 2008, respectively. The Company also leases equipment and vehicles. Future
minimum lease payments under all noncancelable operating leases with an initial term in excess of one year as of July 31, 2010 are
as follows (in millions):
Fiscal Year Amount
2011 $ 343
2012 243
2013 167
2014 119
2015 122
Thereafter 310
Total $ 1,304
(b) 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 defined by the Company or that establish the parameters defining the Company’s
requirements. A significant portion of the Company’s reported purchase commitments arising from these agreements consists of
firm, noncancelable, and unconditional commitments. 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 firm orders being placed. As of
July 31, 2010 and July 25, 2009, the Company had total purchase commitments for inventory of $4.319 billion and $1.962 billion,
respectively.
The Company records a liability for firm, noncancelable, and unconditional purchase commitments for quantities in excess of its
future demand forecasts consistent with the valuation of the Company’s excess and obsolete inventory. As of July 31, 2010 and
July 25, 2009, the liability for these purchase commitments was $135 million and $175 million, respectively, and was included in
other current liabilities.
(c) Other Commitments
In connection with the Company’s business combinations and asset purchases, the Company has agreed to pay certain additional
amounts contingent upon the achievement of certain agreed-upon-technology, development, product, or other milestones or the
continued employment with the Company of certain employees of the acquired entities. The Company recognized such
compensation expense of $120 million, $291 million, and $340 million during fiscal 2010, 2009, and 2008, respectively. The largest
component of such compensation expense during the fiscal years presented was related to milestone payments made to former
noncontrolling interest holders of Nuova Systems, Inc. (“Nuova Systems”), the remaining interest of which the Company purchased
in fiscal 2008. As of July 31, 2010, the Company estimated that future compensation expense and contingent consideration of up
to $205 million may be required to be recognized pursuant to these business combination and asset purchase agreements. The
remaining potential compensation expense is primarily related to Nuova Systems.
The Company also has certain funding commitments, primarily related to its investments in privately held companies and
venture funds, some of which are based on the achievement of certain agreed-upon milestones, and some of which are required to
be funded on demand. The funding commitments were $279 million and $313 million as of July 31, 2010 and July 25, 2009,
respectively.
(d) Variable Interest Entities
In the ordinary course of business, the Company has investments in privately held companies and provides financing to certain
customers. These privately held companies and customers may be considered to be variable interest entities. The Company has
evaluated its investments in these privately held companies and its customer financings and has determined that there were no
significant unconsolidated variable interest entities as of July 31, 2010.
64 Cisco Systems, Inc.