This release includes non-GAAP net income, non-GAAP effective tax rates, non-GAAP net income per share data and non-GAAP inventory turns.
These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. Cisco believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Cisco's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Cisco's results of operations in conjunction with the corresponding GAAP measures.
Cisco believes that the presentation of non-GAAP net income, non-GAAP effective tax rates, and non-GAAP net income per share data, when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations. In addition, Cisco believes that the presentation of non-GAAP inventory turns provides useful information to investors and management regarding financial and business trends relating to inventory management based on the operating activities of the period presented.
For its internal budgeting process, Cisco's management uses financial statements that do not include, when applicable, share-based compensation expense, amortization of acquisition-related intangible assets, impact to cost of sales from purchase accounting adjustments to inventory, other acquisition-related/divestiture costs, significant asset impairments and restructurings, the income tax effects of the foregoing, and significant tax matters. Cisco's management also uses the foregoing non-GAAP measures, in addition to the corresponding GAAP measures, in reviewing the financial results of Cisco. In prior periods, Cisco has excluded other items that it no longer excludes for purposes of its non-GAAP financial measures. From time to time in the future, there may be other items, such as significant gains or losses from contingencies that Cisco may exclude for purposes of its internal budgeting process and in reviewing its financial results.
For additional information on the items excluded by Cisco from one or more of its non-GAAP financial measures, refer to the Form 8-K regarding this release furnished today to the Securities and Exchange Commission.
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CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per-share amounts) (Unaudited) Three Months Ended Six Months Ended ------------------------ ------------------------ January 26, January 28, January 26, January 28, 2013 2012 2013 2012 ----------- ----------- ----------- -----------NET SALES: Product $ 9,437 $ 9,118 $ 18,734 $ 18,070 Service 2,661 2,409 5,240 4,713 ----------- ----------- ----------- ----------- Total net sales 12,098 11,527 23,974 22,783 ----------- ----------- ----------- -----------COST OF SALES: Product 3,857 3,650 7,605 7,213 Service 898 812 1,787 1,615 ----------- ----------- ----------- ----------- Total cost of sales 4,755 4,462 9,392 8,828 ----------- ----------- ----------- -----------GROSS MARGIN 7,343 7,065 14,582 13,955OPERATING EXPENSES: Research and development 1,452 1,339 2,883 2,714 Sales and marketing 2,387 2,395 4,803 4,847 General and administrative 584 497 1,144 1,049 Amortization of purchased intangible assets 118 97 240 196 Restructuring and other charges 13 3 72 205 ----------- ----------- ----------- ----------- Total operating expenses 4,554 4,331 9,142 9,011 ----------- ----------- ----------- -----------OPERATING INCOME 2,789 2,734 5,440 4,944 Interest income 160 158 321 322 Interest expense (147) (150) (295) (298) Other income (loss), net (22) 7 (55) 26 ----------- ----------- ----------- ----------- Interest and other income (loss), net (9) 15 (29) 50 ----------- ----------- ----------- -----------INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 2,780 2,749 5,411 4,994Provision for (benefit from) income taxes (363) 567 176 1,035 ----------- ----------- ----------- ----------- NET INCOME $ 3,143 $ 2,182 $ 5,235 $ 3,959 =========== =========== =========== ===========Net income per share: Basic $ 0.59 $ 0.41 $ 0.99 $ 0.74 =========== =========== =========== =========== Diluted $ 0.59 $ 0.40 $ 0.98 $ 0.73 =========== =========== =========== ===========Shares used in per-share calculation: Basic 5,318 5,368 5,310 5,381 =========== =========== =========== =========== Diluted 5,357 5,401 5,344 5,404 =========== =========== =========== ===========Cash dividends declared per common share $ 0.14 $ 0.06 $ 0.28 $ 0.12 =========== =========== =========== =========== RECONCILIATION OF GAAP TO NON-GAAP NET INCOME (In millions, except per-share amounts) Three Months Ended Six Months Ended ------------------------ ------------------------ January 26, January 28, January 26, January 28, 2013 2012 2013 2012 ----------- ----------- ----------- -----------GAAP net income $ 3,143 $ 2,182 $ 5,235 $ 3,959 Adjustments to cost of sales: Share-based compensation expense 47 54 92 104 Amortization of acquisition-related intangible assets 136 90 270 177 Impact to cost of sales from purchase accounting adjustments to inventory 16 -- 40 -- Significant asset impairments and restructurings -- (16) -- (21) ----------- ----------- ----------- ----------- Total adjustments to GAAP cost of sales 199 128 402 260 ----------- ----------- ----------- ----------- Adjustments to operating expenses: Share-based compensation expense 255 302 519 593 Amortization of acquisition-related intangible assets 118 97 240 196 Other acquisition- related/divestiture costs 39 7 54 15 Significant asset impairments and restructurings 13 3 72 205 ----------- ----------- ----------- ----------- Total adjustments to GAAP operating expenses 425 409 885 1,009 ----------- ----------- ----------- ----------- Total adjustments to GAAP income before provision for income taxes 624 537 1,287 1,269 ----------- ----------- ----------- ----------- Income tax effect of non-GAAP adjustments (179) (156) (365) (343) Significant tax matters (1) (2) (866) -- (866) -- ----------- ----------- ----------- ----------- Total adjustments to GAAP provision for income taxes (1,045) (156) (1,231) (343) ----------- ----------- ----------- -----------Non-GAAP net income $ 2,722 $ 2,563 $ 5,291 $ 4,885 ----------- ----------- ----------- -----------Diluted net income per share:GAAP $ 0.59 $ 0.40 $ 0.98 $ 0.73 ----------- ----------- ----------- -----------Non-GAAP $ 0.51 $ 0.47 $ 0.99 $ 0.90 ----------- ----------- ----------- -----------(1) In the second quarter of fiscal 2013, the American Taxpayer Relief Act of 2012 reinstated the U.S. federal R&D tax credit, retroactive to January 1, 2012. GAAP net income for the second quarter and first six months of fiscal 2013 included a $132 million tax benefit as a result. Non-GAAP net income for the second quarter and first six months of fiscal 2013 excluded the $72 million tax benefit related to fiscal 2012 R&D expenses.(2) In the second quarter of fiscal 2013, the Internal Revenue Service and Cisco settled all outstanding items related to Cisco's federal income tax returns for the fiscal years ended July 27, 2002 through July 28, 2007. As a result of the settlement, Cisco recorded a net tax benefit of $794 million, which included related interest. RECONCILIATION OF GAAP TO NON-GAAP EFFECTIVE TAX RATE Three Months Ended Six Months Ended ------------------------- ------------------------ January 26, January 28, January 26, January 28, 2013 2012 2013 2012 ----------- ----------- ----------- -----------GAAP effective tax rate (13.1)% 20.6% 3.3% 20.7%Tax effect of non-GAAP adjustments to net income 33.1% 1.4% 17.7% 1.3% ----------- ----------- ----------- -----------Non-GAAP effective tax rate 20.0% 22.0% 21.0% 22.0% ----------- ----------- ----------- ----------- CONDENSED CONSOLIDATED BALANCE SHEETS (In millions) (Unaudited) January 26, July 28, 2013 2012 ----------- -----------ASSETSCurrent assets: Cash and cash equivalents $ 6,847 $ 9,799 Investments 39,529 38,917 Accounts receivable, net of allowance for doubtful accounts of $218 at January 26, 2013 and $207 at July 28, 2012 4,462 4,369 Inventories 1,574 1,663 Financing receivables, net 3,894 3,661 Deferred tax assets 2,297 2,294 Other current assets 2,122 1,230 ----------- ----------- Total current assets 60,725 61,933Property and equipment, net 3,403 3,402Financing receivables, net 3,837 3,585Goodwill 21,361 16,998Purchased intangible assets, net 3,542 1,959Other assets 3,510 3,882 ----------- -----------TOTAL ASSETS $ 96,378 $ 91,759 =========== ===========LIABILITIES AND EQUITYCurrent liabilities: Short-term debt $ 37 $ 31 Accounts payable 890 859 Income taxes payable 87 276 Accrued compensation 2,921 2,928 Deferred revenue 9,108 8,852 Other current liabilities 4,907 4,785 ----------- ----------- Total current liabilities 17,950 17,731Long-term debt 16,254 16,297Income taxes payable 1,340 1,844Deferred revenue 4,213 4,028Other long-term liabilities 1,096 558 ----------- -----------Total liabilities 40,853 40,458Total equity 55,525 51,301 ----------- -----------TOTAL LIABILITIES AND EQUITY $ 96,378 $ 91,759 =========== =========== CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited) Six Months Ended ------------------------ January 26, January 28, 2013 2012 ----------- -----------Cash flows from operating activities: Net income $ 5,235 $ 3,959 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization, and other 1,223 1,185 Share-based compensation expense 608 695 Provision for receivables 12 43 Deferred income taxes 148 29 Excess tax benefits from share-based compensation (32) (32) Net losses (gains) on investments 14 (11) Change in operating assets and liabilities, net of effects of acquisitions and divestitures: Accounts receivable 100 761 Inventories 194 (194) Financing receivables (403) (551) Other assets (63) (505) Accounts payable (17) (78) Income taxes, net (1,444) 146 Accrued compensation (161) (508) Deferred revenue 407 304 Other liabilities (7) 191 ----------- ----------- Net cash provided by operating activities 5,814 5,434 ----------- -----------Cash flows from investing activities: Purchases of investments (14,234) (17,810) Proceeds from sales of investments 4,991 12,291 Proceeds from maturities of investments 8,652 4,039 Acquisition of property and equipment (552) (549) Acquisition of businesses, net of cash and cash equivalents acquired (6,035) (109) Purchases of investments in privately held companies (116) (231) Return of investments in privately held companies 68 124 Other 30 160 ----------- ----------- Net cash used in investing activities (7,196) (2,085) ----------- -----------Cash flows from financing activities: Issuances of common stock 652 653 Repurchases of common stock - repurchase program (645) (2,210) Shares repurchased for tax withholdings on vesting of restricted stock units (212) (145) Short-term borrowings, maturities less than 90 days, net 4 17 Excess tax benefits from share-based compensation 32 32 Dividends paid (1,487) (644) Other 86 (153) ----------- ----------- Net cash used in financing activities (1,570) (2,450) ----------- -----------Net (decrease) increase in cash and cash equivalents (2,952) 899Cash and cash equivalents, beginning of period 9,799 7,662 ----------- -----------Cash and cash equivalents, end of period $ 6,847 $ 8,561 =========== ===========Cash paid for:Interest $ 341 $ 340Income taxes $ 1,472 $ 860 ADDITIONAL FINANCIAL INFORMATION (In millions) (Unaudited) January 26, July 28, 2013 2012 ----------- -----------Cash and Cash Equivalents and Investments: Cash and cash equivalents $ 6,847 $ 9,799 Fixed income securities 37,421 37,297 Publicly traded equity securities 2,108 1,620 ----------- ----------- Total $ 46,376 $ 48,716 =========== ===========Inventories: Raw materials $ 113 $ 127 Work in process 24 35 Finished goods: Distributor inventory and deferred cost of sales 648 630 Manufactured finished goods 498 597 ----------- ----------- Total finished goods 1,146 1,227 Service-related spares 248 213 Demonstration systems 43 61 ----------- ----------- Total $ 1,574 $ 1,663 =========== ===========Property and equipment, net: Land, buildings, and building and leasehold improvements $ 4,491 $ 4,363 Computer equipment and related software 1,455 1,469 Production, engineering, and other equipment 5,642 5,364 Operating lease assets 304 300 Furniture and fixtures 493 487 ----------- ----------- 12,385 11,983 Less accumulated depreciation and amortization (8,982) (8,581) ----------- ----------- Total $ 3,403 $ 3,402 =========== ===========Other assets: Deferred tax assets $ 1,807 $ 2,270 Investments in privately held companies 869 858 Other 834 754 ----------- ----------- Total $ 3,510 $ 3,882 =========== ===========Deferred revenue: Service $ 9,055 $ 9,173 Product: Unrecognized revenue on product shipments and other deferred revenue 3,309 2,975 Cash receipts related to unrecognized revenue from two-tier distributors 957 732 ----------- ----------- Total product deferred revenue 4,266 3,707 ----------- ----------- Total $ 13,321 $ 12,880 =========== ===========Reported as: Current $ 9,108 $ 8,852 Noncurrent 4,213 4,028 ----------- ----------- Total $ 13,321 $ 12,880 =========== =========== SUMMARY OF SHARE-BASED COMPENSATION EXPENSE (In millions) Three Months Ended Six Months Ended ------------------------ ------------------------ January 26, January 28, January 26, January 28, 2013 2012 2013 2012 ----------- ----------- ----------- -----------Cost of sales - product $ 11 $ 14 $ 21 $ 27Cost of sales - service 36 40 71 77 ----------- ----------- ----------- -----------Share-based compensation expense in cost of sales 47 54 92 104 ----------- ----------- ----------- -----------Research and development 72 99 156 200Sales and marketing 135 149 265 291General and administrative 48 54 98 102Restructuring and other charges -- (2) (3) (2) ----------- ----------- ----------- -----------Share-based compensation expense in operating expenses 255 300 516 591 ----------- ----------- ----------- -----------Total share-based compensation expense $ 302 $ 354 $ 608 $ 695 =========== =========== =========== ===========Income tax benefit for share-based compensation $ (80) $ (93) $ (159) $ (183) =========== =========== =========== =========== ACCOUNTS RECEIVABLE AND DSO (In millions, except DSO) January 26, October 27, January 28, 2013 2012 2012 ----------- ----------- -----------Accounts receivable, net $ 4,462 $ 3,942 $ 3,876Days sales outstanding in accounts receivable (DSO) 34 30 31 INVENTORY TURNS AND RECONCILIATION OF GAAP TO NON-GAAP COST OF SALES USED IN INVENTORY TURNS (In millions, except annualized inventory turns) Three Months Ended ------------------------------------- January 26, October 27, January 28, 2013 2012 2012 ----------- ----------- -----------Annualized inventory turns - GAAP 11.6 11.0 11.1 Cost of sales adjustments (0.5) (0.5) (0.3) ----------- ----------- -----------Annualized inventory turns - non-GAAP 11.1 10.5 10.8GAAP cost of sales $ 4,755 $ 4,637 $ 4,462Cost of sales adjustments: Share-based compensation expense (47) (45) (54) Amortization of acquisition-related intangible assets (136) (134) (90) Impact to cost of sales from purchase accounting adjustments to inventory (16) (24) -- Significant asset impairments and restructurings -- -- 16 ----------- ----------- -----------Non-GAAP cost of sales $ 4,556 $ 4,434 $ 4,334 ----------- ----------- ----------- REPURCHASE OF COMMON STOCK AND DIVIDENDS PAID (In millions) Three Months Ended ----------------------------------------------------------- January 26, October 27, July 28, April 28, January 28, 2013 2012 2012 2012 2012 ----------- ----------- ----------- ----------- -----------Repurchase of common stock under the stock repurchase program $ 500 $ 253 $ 1,800 $ 550 $ 466Dividends paid 743 744 425 432 322 ----------- ----------- ----------- ----------- -----------Total $ 1,243 $ 997 $ 2,225 $ 982 $ 788 ----------- ----------- ----------- ----------- -----------
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