Cisco 2011 Annual Report Download - page 53

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component of our cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is
established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that
newly established cost basis.
We record a liability for firm, noncancelable, and unconditional purchase commitments with contract
manufacturers and suppliers for quantities in excess of our future demand forecasts consistent with the valuation
of our excess and obsolete inventory. As of July 30, 2011, the liability for these purchase commitments was $168
million, compared with $135 million as of July 31, 2010, and was included in other current liabilities.
Our provision for inventory was $196 million, $94 million, and $93 million for fiscal 2011, 2010, and 2009,
respectively. The provision for the liability related to purchase commitments with contract manufacturers and
suppliers was $114 million, $8 million, and $87 million in fiscal 2011, 2010, and 2009, respectively. The
increase in the provision for inventory and the provision for the liability related to purchase commitments with
contract manufacturers and suppliers was due in part to charges recorded in connection with the restructuring and
realignment of our consumer business. Additionally, the provision for the liability related to purchase
commitments with contract manufacturers and suppliers increased due to higher provisions related to certain
component supplies that we secured for our extended needs, and due to higher contract manufacturer excess and
obsolescence charges. If there were to be a sudden and significant decrease in demand for our products, or if
there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer
requirements, we could be required to increase our inventory write-downs, and our liability for purchase
commitments with contract manufacturers and suppliers, and accordingly gross margin could be adversely
affected. We regularly evaluate our exposure for inventory write-downs and the adequacy of our liability for
purchase commitments. Inventory and supply chain management remain areas of focus as we balance the need to
maintain supply chain flexibility to help ensure competitive lead times with the risk of inventory obsolescence,
particularly in light of current macroeconomic uncertainties and conditions and the resulting potential for
changes in future demand forecast.
Warranty Costs
The liability for product warranties, included in other current liabilities, was $342 million as of July 30, 2011,
compared with $360 million as of July 31, 2010. See Note 12 to the Consolidated Financial Statements. Our
products are generally covered by a warranty for periods ranging from 90 days to five years, and for some
products we provide a limited lifetime warranty. We accrue for warranty costs as part of our cost of sales based
on associated material costs, technical support labor costs, and associated overhead. Material cost is estimated
based primarily upon historical trends in the volume of product returns within the warranty period and the cost to
repair or replace the equipment. Technical support labor cost is estimated based primarily upon historical trends
in the rate of customer cases and the cost to support the customer cases within the warranty period. Overhead
cost is applied based on estimated time to support warranty activities.
The provision for product warranties issued during fiscal 2011, 2010, and 2009 was $456 million, $469 million,
and $374 million, respectively. If we experience an increase in warranty claims compared with our historical
experience, or if the cost of servicing warranty claims is greater than expected, our gross margin could be
adversely affected.
Share-Based Compensation Expense
Share-based compensation expense is presented as follows (in millions):
Years Ended July 30, 2011 July 31, 2010 July 25, 2009
Share-based compensation expense ........... $1,620 $1,517 $1,231
Prior to the initial declaration of a quarterly cash dividend on March 17, 2011, the fair value of restricted stock
and restricted stock units was measured based on an expected dividend yield of 0% as we did not historically pay
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