Cisco 2014 Annual Report Download - page 34

PRODUCT QUALITY PROBLEMS COULD LEAD TO REDUCED REVENUE, GROSS MARGINS, AND NET
INCOME
We produce highly complex products that incorporate leading-edge technology, including both hardware and software.
Software typically contains bugs that can unexpectedly interfere with expected operations. There can be no assurance that our
pre-shipment testing programs will be adequate to detect all defects, either ones in individual products or ones that could affect
numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities, or affect gross margins.
From time to time, we have had to replace certain components and provide remediation in response to the discovery of defects
or bugs in products that we had shipped. There can be no assurance that such remediation, depending on the product involved,
would not have a material impact. An inability to cure a product defect could result in the failure of a product line, temporary
or permanent withdrawal from a product or market, damage to our reputation, inventory costs, or product reengineering
expenses, any of which could have a material impact on our revenue, margins, and net income. For example, in the second
quarter of fiscal 2014, we recorded a pre-tax charge of $655 million related to the expected remediation costs for certain
products sold in prior fiscal years containing memory components manufactured by a single supplier between 2005 and 2010.
DUE TO THE GLOBAL NATURE OF OUR OPERATIONS, POLITICAL OR ECONOMIC CHANGES OR OTHER
FACTORS IN A SPECIFIC COUNTRY OR REGION COULD HARM OUR OPERATING RESULTS AND
FINANCIAL CONDITION
We conduct significant sales and customer support operations in countries around the world. As such, our growth depends in
part on our increasing sales into emerging countries. We also depend on non-U.S. operations of our contract manufacturers,
component suppliers and distribution partners. Although sales in several of our emerging countries decreased in recent periods,
including in fiscal 2014, several of our emerging countries generally have been relatively fast growing, and we have
announced plans to expand our commitments and expectations in certain of those countries. We expect that the weakness we
experienced in recent periods in several emerging countries will continue for at least several quarters. Our future results could
be materially adversely affected by a variety of political, economic or other factors relating to our operations inside and
outside the United States, including impacts from the U.S. federal budget including the effect of the sequestration beginning in
2013; global central bank monetary policy; issues related to the political relationship between the United States and other
countries which can affect the willingness of customers in those countries to purchase products from companies headquartered
in the United States; and the challenging and inconsistent global macroeconomic environment, any or all of which could have
a material adverse effect on our operating results and financial condition, including, among others, the following:
• Foreign currency exchange rates
• Political or social unrest
• Economic instability or weakness or natural disasters in a specific country or region; environmental and trade
protection measures and other legal and regulatory requirements, some of which may affect our ability to import our
products, to export our products from, or sell our products in various countries
• Political considerations that affect service provider and government spending patterns
• Health or similar issues, such as a pandemic or epidemic
• Difficulties in staffing and managing international operations
• Adverse tax consequences, including imposition of withholding or other taxes on our global operations
WE ARE EXPOSED TO THE CREDIT RISK OF SOME OF OUR CUSTOMERS AND TO CREDIT EXPOSURES
IN WEAKENED MARKETS, WHICH COULD RESULT IN MATERIAL LOSSES
Most of our sales are on an open credit basis, with typical payment terms of 30 days in the United States and, because of local
customs or conditions, longer in some markets outside the United States. We monitor individual customer payment capability
in granting such open credit arrangements, seek to limit such open credit to amounts we believe the customers can pay, and
maintain reserves we believe are adequate to cover exposure for doubtful accounts. Beyond our open credit arrangements, we
have also experienced demands for customer financing and facilitation of leasing arrangements. We expect demand for
customer financing to continue, and recently we have been experiencing an increase in this demand as the credit markets have
been impacted by the challenging and inconsistent global macroeconomic environment, including increased demand from
customers in certain emerging countries.
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