Why did Cisco report a net loss in fiscal 2001 after several years of strong profitability?

The loss was driven largely by non-recurring and non-cash items. Cisco recorded a $2.77 billion inventory and purchase commitment provision as demand fell suddenly in the second half of fiscal 2001, $1.17 billion in restructuring and impairment charges, $855 million of in-process R&D from acquisitions, and $1.06 billion of goodwill and intangible amortization. Underlying demand weakness, including reduced telecom service provider and enterprise capital spending, also compressed revenue and margins.

How much of the excess inventory charge has been used, and what remains on the balance sheet?

Of the total inventory provision, $572 million had been used as of July 28, 2001, through scrapping, sales, utilization, and settlement of purchase commitments. The remaining excess inventory reserve was $1.68 billion. Management does not currently expect the excess inventory subject to this provision to be used later, based on its current demand forecast, which means the reserve is a key item to watch for future gross margin trends.

What is the outlook for cost savings and future profitability after the restructuring?

Management expects pretax operating expense savings of slightly more than $1 billion on an annualized basis from the April 2001 restructuring program, and expects to substantially complete the program in the first quarter of fiscal 2002. The filing does not provide a formal earnings forecast. Management also warned that economic conditions could worsen and that gross margins may face pressure from price competition, a shift toward lower-margin indirect channels, and product mix, particularly in optical and access products.

What legal and investment risks should shareholders be aware of?

Cisco faces a federal securities class action, filed beginning April 20, 2001, alleging false and misleading statements between August 10, 1999 and April 16, 2001, plus several shareholder derivative suits in state and federal courts. Cisco believes the claims are without merit and plans to defend them vigorously. Separately, the company's publicly traded equity holdings lost $5.76 billion in unrealized gains during the year, and it may record impairment charges if declines are considered other than temporary. The SEC is also reviewing in-process R&D valuation practices, which could lead to restatements of previously expensed amounts.

CSCO 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed September 24, 2001. Cited figures are marked; the original filing is the authoritative source.

Cisco's fiscal 2001 10-K (fiscal year ended July 28, 2001) shows a sharp downturn after a period of rapid growth.

Net sales rose 17.8% to $22.29 billion^a, but the company posted a net loss of $1.01 billion, or $(0.14) per share, compared with net income of $2.67 billion in fiscal 2000. The loss was driven by a $2.77 billion provision for excess inventory and purchase commitments (including a $2.25 billion third-quarter charge, partly offset by a $187 million fourth-quarter benefit), $1.17 billion in restructuring costs and special charges, $1.06 billion of goodwill and intangible amortization, and $855 million of in-process R&D. Gross margin fell to 49.7% from 64.4%, and the second half of the year saw a steep decline in demand, with quarterly sales falling from $6.75 billion in the second quarter to $4.30 billion in the fourth.

On a pro forma basis, which excludes these one-time and non-cash items, Cisco reported net income of $3.09 billion^b, or $0.41 per diluted share, though this non-GAAP measure is not a substitute for GAAP results. Management responded with an April 2001 restructuring program targeting about $1 billion in annualized pretax savings, the elimination of roughly 6,000 positions (about 4,700 terminated to date), and facility consolidation. Balance sheet strength remains significant: cash and investments totaled $18.52 billion, operating cash flow was $6.39 billion, and the company carries no debt drawn on its $500 million credit line.

Investors should weigh several risks. Cisco's publicly held equity investments lost $5.76 billion^c in unrealized gains during the year, the company has $1.68 billion of remaining excess inventory reserve, and management expects economic and capital spending weakness to persist.

Backlog fell to $2.03 billion^d from $3.40 billion a year earlier, and a securities class action and related derivative suits were filed in April 2001 alleging misleading statements between August 1999 and April 2001. The company also faces potential SEC scrutiny of in-process R&D valuations, and SFAS 142 will change goodwill accounting starting in fiscal 2002.

02—Key points

Key Highlights

Net sales grew 17.8% to $22.29 billion in fiscal 2001, but the company posted a GAAP net loss of $1.01 billion, or $(0.14) per share, versus net income of $2.67 billion ($0.36 diluted) in fiscal 2000.
Gross margin dropped to 49.7% from 64.4%, mainly due to a $2.77 billion inventory and purchase commitment provision that included a $2.25 billion excess inventory charge in Q3, partly reversed by a $187 million benefit in Q4.
Restructuring costs and special charges totaled $1.17 billion, covering a workforce reduction of about 6,000 employees, $484 million in facility consolidation charges, and $289 million of goodwill and intangible impairment; management expects over $1 billion in annualized pretax savings.
Pro forma net income, excluding one-time charges and amortization, was $3.09 billion, or $0.41 per diluted share, versus $3.91 billion in fiscal 2000; this non-GAAP measure is provided by management and is not a GAAP substitute.
Quarterly sales declined sharply through the second half, from $6.75 billion in Q2 to $4.73 billion in Q3 and $4.30 billion in Q4, and backlog fell to $2.03 billion from $3.40 billion a year earlier.
Cash and investments were $18.52 billion at year end, with operating cash flow of $6.39 billion, $2.27 billion in capital expenditures, and no borrowings under the $500 million credit line.
Unrealized gains on publicly traded equity investments fell by $5.76 billion during fiscal 2001, and the company faces possible other-than-temporary impairment charges, along with securities class action and shareholder derivative lawsuits filed in April 2001.

03—Questions

Frequently Asked Questions

Why did Cisco report a net loss in fiscal 2001 after several years of strong profitability?
The loss was driven largely by non-recurring and non-cash items. Cisco recorded a $2.77 billion inventory and purchase commitment provision as demand fell suddenly in the second half of fiscal 2001, $1.17 billion in restructuring and impairment charges, $855 million of in-process R&D from acquisitions, and $1.06 billion of goodwill and intangible amortization. Underlying demand weakness, including reduced telecom service provider and enterprise capital spending, also compressed revenue and margins.
How much of the excess inventory charge has been used, and what remains on the balance sheet?
Of the total inventory provision, $572 million had been used as of July 28, 2001, through scrapping, sales, utilization, and settlement of purchase commitments. The remaining excess inventory reserve was $1.68 billion. Management does not currently expect the excess inventory subject to this provision to be used later, based on its current demand forecast, which means the reserve is a key item to watch for future gross margin trends.
What is the outlook for cost savings and future profitability after the restructuring?
Management expects pretax operating expense savings of slightly more than $1 billion on an annualized basis from the April 2001 restructuring program, and expects to substantially complete the program in the first quarter of fiscal 2002. The filing does not provide a formal earnings forecast. Management also warned that economic conditions could worsen and that gross margins may face pressure from price competition, a shift toward lower-margin indirect channels, and product mix, particularly in optical and access products.
What legal and investment risks should shareholders be aware of?
Cisco faces a federal securities class action, filed beginning April 20, 2001, alleging false and misleading statements between August 10, 1999 and April 16, 2001, plus several shareholder derivative suits in state and federal courts. Cisco believes the claims are without merit and plans to defend them vigorously. Separately, the company's publicly traded equity holdings lost $5.76 billion in unrealized gains during the year, and it may record impairment charges if declines are considered other than temporary. The SEC is also reviewing in-process R&D valuation practices, which could lead to restatements of previously expensed amounts.

04—Continue

← View all 10-K filings