Cisco 2015 Annual Report Download - page 35

• 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.
We believe customer financing is a competitive factor in obtaining business, particularly in serving customers involved in
significant infrastructure projects. Our loan financing arrangements may include not only financing the acquisition of our
products and services but also providing additional funds for other costs associated with network installation and integration of
our products and services.
Our exposure to the credit risks relating to our financing activities described above may increase if our customers are adversely
affected by a global economic downturn or periods of economic uncertainty. Although we have programs in place that are
designed to monitor and mitigate the associated risk, including monitoring of particular risks in certain geographic areas, there
can be no assurance that such programs will be effective in reducing our credit risks.
In the past, there have been significant bankruptcies among customers both on open credit and with loan or lease financing
arrangements, particularly among Internet businesses and service providers, causing us to incur economic or financial losses.
There can be no assurance that additional losses will not be incurred. Although these losses have not been material to date, future
losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. A
portion of our sales is derived through our distributors. These distributors are generally given business terms that allow them to
return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing
programs. We maintain estimated accruals and allowances for such business terms. However, distributors tend to have more
limited financial resources than other resellers and end-user customers and therefore represent potential sources of increased
credit risk, because they may be more likely to lack the reserve resources to meet payment obligations. Additionally, to the degree
that turmoil in the credit markets makes it more difficult for some customers to obtain financing, those customers’ ability to pay
could be adversely impacted, which in turn could have a material adverse impact on our business, operating results, and financial
condition.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS AND
IN INTEREST RATES; IMPAIRMENT OF OUR INVESTMENTS COULD HARM OUR EARNINGS
We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as
available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or
losses reported as a component of accumulated other comprehensive income, net of tax. Our portfolio includes fixed income
securities and equity investments in publicly traded companies, the values of which are subject to market price volatility to the
extent unhedged. If such investments suffer market price declines, as we experienced with some of our investments in the past,
we may recognize in earnings the decline in the fair value of our investments below their cost basis when the decline is judged to
be other than temporary. For information regarding the sensitivity of and risks associated with the market value of portfolio
investments and interest rates, refer to the section titled “Quantitative and Qualitative Disclosures About Market Risk.” Our
investments in private companies are subject to risk of loss of investment capital. These investments are inherently risky because
the markets for the technologies or products they have under development are typically in the early stages and may never
materialize. We could lose our entire investment in these companies.
WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY
IMPACT OUR FINANCIAL RESULTS AND CASH FLOWS
Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as business practices evolve, and they could have a
material adverse impact on our financial results and cash flows. Historically, our primary exposures have related to nondollar-
denominated sales in Japan, Canada, and Australia and certain nondollar-denominated operating expenses and service cost of
sales in Europe, Latin America, and Asia, where we sell primarily in U.S. dollars. Additionally, we have exposures to emerging
market currencies, which can have extreme currency volatility. An increase in the value of the dollar could increase the real cost
to our customers of our products in those markets outside the United States where we sell in dollars, and a weakened dollar could
increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in
foreign currencies.
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