CISCO SYSTEMS, INC Analysis of Annual Report 2011

Introduction

CISCO SYSTEMS, INC., or more commonly known as Cisco, was incorporated in December 1984. Its headquarters is stationed in California with a mailing address of 170 West Tasman Drive, San Jose, California 95134-1706. The company can be reached at this location by telephone with the number (408) 526-4000. Currently John Chambers is Chairman and CEO (Chief Executive Officer) of the company. He has helped develop and expand the company from a worth of $70 million when he joined in January 1991 to $1.2 billion when he assumed the role of CEO. The current run rate of the company is $40 billion. In 2006, Chambers was named Chairman of the Board, in addition to his CEO role. The analysis of Ciscos 2011 Annual Report indicated that the fiscal year ending date was July 30, 2011. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the 2011 Annual Report. Cisco conducts its business globally and is managed geographically in four segments: United States and Canada, European Markets, Emerging Markets, and Asia Pacific Markets. The Emerging Markets segment consists of Eastern Europe, Latin America, the Middle East and Africa, and Russia and the Commonwealth of Independent States. The company designs, manufactures, and sells Internet Protocol (IP) - based networking and other products related to the communications and information technology (IT) industry. It provides services associated with these products and their

use. Cisco provides a broad line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Industry Situation and Company Plans Cisco is primarily focused on market transitions including those related to the increased role of virtualization and the cloud, video, collaboration, networked mobility technologies and the transition from Internet Protocol Version 4 to Internet Protocol Version 6. Cisco announced a plan in May 2011, which it began implementing in fiscal 2011 and expects to complete in fiscal 2012, to realign its sales, services and engineering organizations in order to simplify its operating model and focus on its five foundational priorities. These priorities include leadership in the core business (routing, switching, and associated services) which includes comprehensive security and mobility solutions, collaboration, data center virtualization and the cloud, video, and architectures for business transformation. Cisco believes that focusing on these priorities will best position it to continue to expand its share of its customers information technology spending. Financial Statements Cisco uses a multistep format for its income statement (consolidated statements of operations). From fiscal years 2010 to 2011, Ciscos gross margin increased by 3.48% with a growth from 25,643 million to 26,536 million. However, its income from operations actually decreased by 16.26% with a change from 9,164 million to 7,674 million due to increased operating expenses. A summary of the income statement for the two most recent fiscal years can be seen in the following figure: Information extracted from 2011 Cisco Annual Report (In millions) Years Ended 2011 2010 Net Sales $43,218 $40,040 Cost of Sales $16,682 $14,397 $26,536 $25,643 Gross Margin

Operating Expense Income from Operations Other Revenues and Expenses Income before Income Taxes Income Taxes Net Income

$18,862 $7,674 $151 $7,825 $1,335 $6,490

$16,479 $9,164 $251 $9,415 $1,648 $7,767

Based on the information provided in the annual reports, it is proven that assets are equal to the summation of liabilities and equity both in 2011 and in 2010. This is an essential part of proper accounting for any business or corporation. Ciscos balance sheet is summarized in the following chart: Information extracted from 2011 Cisco Annual Report (In millions) Years End 2011 2010 Assets $87,095 $81,130 Liabilities $39,836 $36,845 Equity $47,259 $44,285 Total Liabilities and Equity $87,095 $81,130 The annual reports also indicate that the companys net income is not equal to cash flows from operating activities. As summarized in the following table, this applies to both 2010 years end as well as 2011. Information extracted from 2011 Cisco Annual Report (In millions) Years End 2011 2010 Net Income $87,095 $81,130 $39,836 $36,845 Cash Flows from Operating Activities From following table we can see that cash flows from investing activities are negative both in 2010 and in 2011. This implies that Cisco was expanding in investing activities in the previous year. Information extracted from 2011 Cisco Annual Report (In millions) Years End 2011 2010 ($2,934) ($11,931) Net Cash Flows from Investing Activities Based on the information about the companys financing activities in last two years, we can see from following table that Ciscos most important financing source is debts with maturities greater than 90 days. Information extracted from 2011 Cisco Annual Report

Years End Issuances of common stock Repurchases of common stock Short-term borrowings, maturities less than 90days, net Issuances of debt, maturities greater than 90 days Repayments of debt, maturities greater than 90 days Excess tax benefits from share-based compensation Dividends paid Other Net Cash Flows from Financing Activities

(In millions) 2011 2010 $1,831 $3,278 ($6,896) ($7,864) $512 $41 $4,109 $4,944 ($3,113) $71 $211 ($658) $80 $11 ($4,064) $621

The report also indicated that Ciscos cash and cash equivalents increased from $4,581 million in 2010 to $7,662 million in 2011. Accounting Policies Ciscos criteria for revenue recognition are a mirror of the SEC guidelines. The company is diligent in maintaining compliance with the established financial accounting policies, which are consistent with requirements of Generally Accepted Accounting Principles (GAAP). The key

components are that revenue is earned and that proceeds are realized or realizable. For Cisco, earned means that delivery to and acceptance by the customer occurs, or that Cisco is available to perform service commitments, even if not called upon. As reported in the footnotes to its recent annual report, Cisco recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Contracts and customer purchase orders determine the existence of an arrangement while shipping documents and customer acceptance verify delivery. When a sale involves multiple elements, the entire fee from the arrangement is allocated to each element based on its relative fair value and recognized when revenue recognition criteria for each element are met. All Cisco employees must adhere to all internal financial and accounting policies. Financial policies which must be followed include the Global Bookings Policy which defines criteria that must be met before sales transactions can be recorded as booked. All employees in a special role such as

Cisco Finance Department worked are bound by the Financial Officer Code of Ethics to ensure honesty and integrity. Cisco classifies investments as short- term investments based on their nature and their availability for use in current operations. They believe that a strong cash and cash equivalents and investments position allows them to use their cash resources for strategic investments with access to new technologies for acquisitions, customer financing activities, working capital needs, and the repurchase of shares of common stock and dividends. Cisco has made very little change in terms of their property and equipment between the two latest fiscal years. Majority of Ciscos property and equipment resides in the United States, however the company does have operations, and thus property, internationally, Accounts receivables for Cisco has declined between fiscal years 2010 and 2011. During the fourth quarter of fiscal 2011 cash collections were strong and both product and services billings linearity improved, particularly with respect to the timing of product shipments. On the other hand, inventories have increased about 12% from the two latest fiscal years while the purchase commitments with contract manufacturers and suppliers were flat. Cisco believes current inventories are in line with current demand forecasts. Inventory and supply chain management remain areas of focus for Cisco as they balance the need to maintain supply to ensure competitive leads with the risk of inventory obsolescence due to rapidly changing technologies and customer requirements. Financial Analysis

In order to calculate the liabilities and profitability ratios, the following table summarizes the necessary figures. Information extracted from 2010 and 2011 Cisco Annual Report (In millions) Years Ended 2011 2010 Current Assets $57,231 $51,421

2009

Current Liabilities Net Sales Account Receivable Average Account Receivable Cost of Goods Sold Inventory Average Inventory Net Income Total Assets Average Total Assets Total Liabilities Total Equity Average Total Equity

$17,506 $43,218 $4,698 $4,814 $13,647 $1,486 $1,407 $6,490 $87,095 $84,113 $39,836 $47,259 $45,772

$19,233 $40,040 $4,929 $3,177 $4,053 $11,620 $1,327 $1,074 $1,201 $7,767 $81,130 $68,128 $74,629 $36,845 $29,451 $44,285 $38,677 $41,481

Using the previous table and figures, the liabilities and profitability ratios of Cisco are calculated as the following: Liquidity Ratios: Working Capital $39,725m $32,188m Current Ratio 3.27 2.67 Receivable Turnover 8.98 9.88 Days' Sales Uncollected 40.65 36.95 Inventory Turnover 9.70 9.68 Days' Inventory on Hand 37.62 37.71 Profitability Ratios: Profit Margin Asset Turnover Return on Assets Debt to Equity Ratio Return on Equity 15.02% 0.51 7.72% 84.29% 14.18% 19.40% 0.54 10.41% 83.20% 18.72%

Based on these ratios, insight is given on Ciscos operation and financial status for the past two years. For liquidity ratios, the increase in Ciscos working capital means Cisco either has more current assets or has fewer current liabilities. In either case, it indicates an improvement of Ciscos financial status. This is also consistent with the increase of the companys current ratio. Ciscos receivable turnover was lower in 2011 than in 2010 implying an improvement in the ability to collect receivables. This also impacted the Days Sales Uncollected positively. Furthermore, the companys inventory turnover, though only slightly, was higher in 2011 than in 2010 indicating that the company is selling its products faster than before, which is more good news for the company. For the profitability ratios, Ciscos profit margin was lower in 2011 than 2010, which means

Cisco was generating less profit in every dollar sales in the previous year than before. The companys asset turnover decreased from 0.54 to 0.51, which was caused by the companys increase in assets. Since both the net income is lower and the assets value is higher in 2011, return on asset is lower than that of 2010. Furthermore, as both the total liabilities and the total equity increased by around 3,000 million from 2010 to 2011, the companys debt to equity ratio was also increasing during the same period. Finally, since there was higher total equity and lower net income in 2011, this years return on equity is lower than that of 2010. Sources Cisco. (2011). Retrieved from http://www.cisco.com/en/US/hmpgs/index.html Cisco Systems, Inc. 2011 Annual Report. (2011). Retrieved from http://www.cisco.com/assets/cdc _content_elements/ docs/annualreports/media/2011-ar.pdf Cisco Systems, Inc. (CSC). Yahoo! Finance. (2011). Retrieved from http://finance.yahoo.com/q?s =CSCO