Cisco 2011 Annual Report Download - page 122

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(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 30, 2011 and July 31, 2010, the Company had total purchase commitments for inventory of $4.313
billion and $4.319 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 30, 2011 and July 31, 2010, the liability for these purchase commitments was $168 million
and $135 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 $127 million, $120 million, and $291
million during fiscal 2011, 2010, and 2009, 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., the remaining interest of which the Company purchased in fiscal 2008. As of
July 30, 2011, the Company estimated that future compensation expense and contingent consideration of up to
$59 million may be required to be recognized pursuant to the applicable business combination and asset purchase
agreements.
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 $192 million and $279
million as of July 30, 2011 and July 31, 2010, 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 evaluates on an ongoing basis its investments in these privately held companies
and its customer financings and has determined that as of July 30, 2011 there were no material unconsolidated
variable interest entities.
In fiscal 2010, Cisco and EMC Corporation (“EMC”), together with VMware, Inc. (“VMware”) formed the
Virtual Computing Environment coalition. Similarly, the Company’s investment in Acadia Enterprises LLC
(“Acadia”), a joint venture with EMC in which VMware and Intel have also invested, is designed to pave the way
for new delivery models in cloud computing solutions. During fiscal 2011, the Virtual Computing Environment
coalition and Acadia were combined into a single entity and renamed The Virtual Computing Environment
Company (“VCE”). As of July 30, 2011, the Company’s cumulative investment in the combined VCE entity was
approximately $100 million and it owned approximately 35% of the outstanding equity. The Company accounts
for its investment in VCE under the equity method, and accordingly the Company’s carrying value in VCE has
been reduced by $79 million, reflecting its cumulative share of VCE’s losses primarily in fiscal 2011. Over the
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