item 14 exhibits consolidated financial statement schedules reports form 8k financial statements financial statement schedules 1 financial statements consolidated balance sheets december 31 1999 1998 consolidated statements operations three years ended december 31 1999 consolidated statement stockholders equity three years ended december 31 1999 consolidated statements cash flows three years ended december 31 1999 notes consolidated financial statements report independent auditors 2 consolidated financial statement schedules following financial statement schedule juniper networks filed part report read conjunction financial statements juniper networks schedules listed omitted information required set forth therein applicable shown financial statements notes thereto b exhibits confidential treatment requested received certain portions c reports form 8k filed current report form 8k dated november 15 1999 report item 2 thereof acquisition layer 5 current report form 8k dated november 15 1999 also reported item 5 thereof announcement approval board directors threeforone split common stock signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day march 2000 juniper networks inc marcel gani marcel gani chief financial officer duly authorized officer principal financial accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints lisa c berry marcel gani individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities date indicated juniper networks inc schedule ii valuation qualifying accounts years ended december 31 1999 1998 1997 thousands exhibit index confidential treatment requested received certain portionsitem 14 exhibits consolidated financial statement schedules reports form 8k financial statements financial statement schedules 1 financial statements consolidated balance sheets december 31 2000 1999 consolidated statements operations three years ended december 31 2000 consolidated statement stockholders equity three years ended december 31 2000 consolidated statements cash flows three years ended december 31 2000 notes consolidated financial statements report independent auditors 2 consolidated financial statement schedules following financial statement schedule juniper networks filed part report read conjunction financial statements juniper networks schedules listed omitted information required set forth therein applicable shown financial statements notes thereto b exhibits c reports form 8k filed current report form 8k dated december 8 2000 report item 2 thereof acquisition micro magic inc following financial statements included filing micro magic inc financial statements december 31 1998 1999 audited juniper networks inc supplementary consolidated financial statements unaudited signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day march 2001 juniper networks inc marcel gani marcel gani chief financial officer duly authorized officer principal financial accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints lisa c berry marcel gani individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities date indicated juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2000 1999 1998 thousands exhibit indexitem 14 exhibits consolidated financial statement schedules reports form 8k financial statements financial statement schedules 1 financial statements consolidated balance sheets december 31 2001 2000 consolidated statements operations three years ended december 31 2001 consolidated statement stockholders equity three years ended december 31 2001 consolidated statements cash flows three years ended december 31 2001 notes consolidated financial statements report independent auditors 2 consolidated financial statement schedules following financial statement schedule juniper networks filed part report read conjunction financial statements juniper networks schedules listed omitted information required set forth therein applicable shown financial statements notes thereto b exhibits c reports form 8k none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day march 2002 juniper networks inc marcel gani marcel gani chief financial officer duly authorized officer principal financial accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints lisa c berry marcel gani individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons capacities date indicated juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2001 2000 1999 thousands exhibit indexitem 14 controls procedures evaluation disclosure controls procedures based evaluation date within 90 days filing date annual report form 10k company’s principal executive officer principal financial officer concluded company’s disclosure controls procedures defined rules 13a14c securities exchange act 1934 “exchange act” effective ensure information required disclosed company reports files submits exchange act recorded processed summarized reported within time periods specified securities exchange commission rules forms b changes internal controls significant changes company’s internal controls factors could significantly affect controls subsequent date evaluation significant deficiencies material weaknesses therefore corrective actions taken however design system controls based part upon certain assumptions likelihood future events certainty design succeed achieving stated goal potential future considerations regardless remote part iv item 15item 14 principal accountant fees services information required item incorporated herein reference company’s definitive proxy statement 2004 annual meeting stockholders part iv item 15item 14 principal accountant fees services information required item incorporated herein reference company’s definitive proxy statement 2005 annual meeting stockholders part iv item 15item 14 principal accountant fees services information required item incorporated herein reference company’s definitive proxy statement 2007 annual meeting stockholders part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services audit committee’s preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services audit committee’s preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services audit committee’s preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accountant fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures included proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures included proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures included proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures included proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement heading “principal accountant fees services” incorporated herein reference part iv item 15item 14 principal accountant fees services information required item incorporated herein reference company’s definitive proxy statement 2006 annual meeting stockholders part iv item 15item 14 principal accounting fees services information concerning principal accountant fees services audit committees preapproval policies procedures appearing proxy statement headings “principal accountant fees services” incorporated herein reference part iv item 15 item 7 managements discussion analysis financial conditions information required item see managements discussions analysis financial condition results operations 1999 annual report stockholders exhibit 131 hereto item 7aitem 7 managements discussion analysis financial conditions information required item see managements discussion analysis financial condition results operations 2000 annual report stockholders exhibit 131 hereto item 7aitem 7 managements discussion analysis financial conditions information required item see managements discussion analysis financial condition results operations 2001 annual report stockholders exhibit 131 hereto item 7aitem 7 management’s discussion analysis financial condition results operations following discussion based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangibles contract manufacturer exposures excess obsolete material litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions overview juniper networks inc “juniper networks” “we” founded 1996 develop sell products would able meet stringent demands service providers world’s leading network operators government agencies research education institutions information intensive enterprises rely upon us foundation uncompromising networks critical accounting policies preparation consolidated financial statements related disclosures conformity accounting principles generally accepted united states requires us establish accounting policies contain estimates assumptions affect amounts reported consolidated financial statements accompanying notes policies include • revenue recognition • allowance doubtful accounts impacts general administrative expenses • valuation exposures associated contract manufacturing operations estimating future warranty costs impact cost product revenues gross margins • initial continuing valuation certain longlived assets especially goodwill purchased intangible assets could result impairment would impact operating expenses equally important accounting policies practices however adopted policies either generally require us make significant estimates assumptions otherwise require implementation adopted policy judgment policy despite intention establish accurate estimates assumptions actual results could differ estimates revenue recognition recognize product revenue accordance staff accounting bulletin “sab” 101 “revenue recognition financial statements” specifically product revenue recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility reasonably assured unless future obligations things network interoperability customer acceptance case revenue related costs deferred obligations met cases recognize product revenue upon shipment customers including resellers policy ensure end user identified prior shipment ability recognize revenue future impacted conditions imposed customers assessment collectibility assess probability collection reviewing customers’ payment history financial condition credit report probability collection reasonably assured revenue deferred payment collected amount product revenue recognized given period also impacted judgments taken establishing reserve potential future product returns although arrangements include contractual rights return general policy accept returns unique circumstances may future accept product returns customers therefore provide reserve estimate future returns revenue period revenue recorded estimate future returns based factors historical return data current economic condition customer base addition get input sales support organizations respect specific customer issues amount revenue recognize going forward directly impacted estimates made establish reserve potential future product returns allowance doubtful accounts make ongoing assumptions relating collectibility accounts receivable determining amount allowance consider historical level credit losses also make judgments creditworthiness significant customers based ongoing credit evaluations assess current economic trends affecting customers might impact level credit losses future result different rates bad debts previously seen reserves historically adequate cover actual credit losses however since cannot predict future changes financial stability customers industries sell cannot guarantee current level reserves continue adequate actual credit losses significantly greater reserves established would increase general administrative expenses conversely actual credit losses significantly less reserves general administrative expenses would decrease contract manufacturer exposures outsource majority manufacturing repair operations supply chain management operations three independent contract manufacturers accordingly significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based build forecasts provide forecasts based estimates future demand products estimates future demand products based historical trends bottomsup analysis sales support organizations adjusted overall market conditions actual component usage product demand significantly lower forecast contractual liabilities exposures contract manufacturers carrying costs excess material exposures would adverse impact gross margins profitability majority factors affect component usage demand products outside control warranty reserves offer oneyear warranty hardware products well 90day warranty software embedded products warranty generally includes parts labor 24hour service center support specific terms conditions warranties may vary depending products sold locations sold estimate costs may incurred warranty obligations record liability charge cost product sales amount costs time revenue recognized factors affect warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimates anticipated rates warranty claims costs per claim primarily based historical information periodically assess adequacy recorded warranty liabilities adjust amounts necessary actual warranty claims significantly higher forecast actual costs incurred provide warranty greater forecast gross margins could adversely affected valuation goodwill purchased intangible assets goodwill purchased intangible assets carried cost less accumulated amortization adopted sfas 142 “goodwill intangible assets” january 1 2002 sfas 142 prohibits amortization goodwill intangible assets indefinite useful lives business combinations consummated july 1 2001 goodwill amortized december 31 2001 using straightline method estimated useful life three years goodwill amortized business combinations consummated june 30 2001 amortization purchased intangibles computed using straightline method related expected useful lives two six years valuing goodwill purchased intangible assets connection initial purchase price allocation ongoing evaluation impairment estimate future cash flows useful lives estimates include discounting present value free cash flows expected generated products technology identified intangibles associated periods time products demand perform goodwill impairment tests annually interim basis certain circumstances performed impairment analysis january 1 2002 november 2002 determined impairment goodwill either time addition review purchased intangible asset quarterly assess amortization period still appropriate changes key assumptions business prospects changes market conditions externalities could result impairment charge could material adverse effect results operations unisphere business combination july 2002 completed acquisition unisphere networks inc “unisphere” subsidiary siemens corporation subsidiary siemens ag “siemens” following acquisition remainder 2002 siemens local country affiliates one significant resellers unisphere developed manufactured sold data networking equipment optimized applications edge service provider networks accordance statement financial accounting standard “sfas” 141 “business combinations” included results operations 2002 results unisphere july 1 2002 unisphere acquisition resulted significant impacts revenue cost revenues operating expenses second half 2002 results 2003 include full year results combined companies results operations net revenues following table shows product service net revenues years ended december 31 2002 2001 2000 thousands product net revenues decreased 3632 million 2002 compared 2001 net product revenues 2002 derived sale products 2001 plus sale following new products • tseries core internet routers • jseries wireless router developed joint venture ericsson ab • eseries internet routers includes product acquired unisphere business combination • gseries cable routers cable modem termination system “cmts” products developed using technology acquired pacific broadband communications business combination decrease product net revenues 2002 compared 2001 due primarily decrease demand products resulted generally unfavorable economic conditions throughout 2002 decrease also due lower average selling prices result shift product mix 2002 one customer accounted 17 net product revenues compared 2001 three customers accounted 14 13 11 net product revenues product net revenues increased 1696 million 2001 compared 2000 three five product platforms available 2001 m160 m5 m10 introduced 2000 first full year shipments products occurring 2001 resulting increase net revenues 2001 compared 2000 increase product net revenues also result continuing increase market acceptance products especially early 2001 overall growth marketplace due growth data traffic internet increase number customers networks one customer accounted 18 net product revenues 2000 service net revenues increased 228 million 2002 compared 2001 service net revenues increased result larger installed base customers products vast majority service revenue customers previously purchased products enter service contract addition service contracts service revenue generated providing professional educational services service contracts typically oneyear periods revenue recognized ratably service period service net revenues increased 439 million 2001 compared 2000 increase service net revenues primarily result larger installed base customers products resulting continuing increase market acceptance products especially early 2001 overall growth marketplace due growth data traffic internet increase number customers networks following table shows net revenue percent total net revenues geographic region experienced shift net revenues percentage total net revenues americas region europe asia 2002 capital spending market united states declined cost revenues following table shows cost product service revenues related gross margin percentages years ended december 31 2002 2001 2000 thousands gross margins highly variable dependent many factors outside control outsourced majority manufacturing repair operations supply chain management operations accordingly significant portion cost revenues consists payments three independent contract manufacturers independent contract manufacturers manufacture products using quality assurance programs standards established controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities milpitas california neenah wisconsin toronto canada december 31 2002 two contract manufacturers retained title underlying components finished goods inventory customers take title assembled final product upon shipment contract manufacturer’s facility december 31 2002 third contract manufacturer retained title transferred customers upon shipment westford facility contract manufacturer performs final configuration assembly testing packaging january 31 2003 third contract manufacturer performs manufacturing final configuration assembly testing packaging facilities retains title underlying components finished goods inventory customers take title upon shipment contract manufacturer’s facility december 31 2002 inventory valued 14 million located westford facility included current assets cost product revenues decreased 1392 million 2002 compared 2001 decrease absolute dollars directly related decrease product revenue primarily result unfavorable economic conditions many customers experienced throughout 2002 well 2001 charge 399 million excess materials exposure contract manufacturers significant charges recorded 2002 materials exposure matters accordance purchase accounting rules sfas 141 recognize onetime charges 51 million 2002 relating unisphere acquisition charge 51 million included 36 million backlog orders 15 million inventory writeup adjustment product gross margins flat result operational costs cut demand products decreased utilize previously reserved inventory 2002 expect product gross margins slightly increase 2003 compared 2002 cost product revenues increased 1123 million 2001 compared 2000 increase absolute dollars primarily related increase product net revenues well head count increases manufacturing support organizations addition 2001 incurred charge 399 million relating excess materials exposure contract manufacturers decrease product gross margins primarily result costs manufacturing support organizations increasing product revenues originally intended increase size organization meet future demand however economy weakened 2001 expected demand materialize addition excess materials charge 399 million negatively impacted 2001 gross margin compared 2000 cost service revenues decreased 34 million 2002 compared 2001 decrease absolute dollars increase service gross margins primarily due realized savings service organization personnel related costs associated restructuring activities service revenue increased result larger installed base customers products increase gross margin reflects benefits increased service revenues appropriately sized service organization current level operations expect service gross margins increase 2003 compared 2002 cost service revenues increased 229 million 2001 compared 2000 increase absolute dollars primarily related increase service contracts necessitated headcount increases service organization increase gross margins primarily result service organization built 2000 meet anticipated future demand research development sales marketing general administrative expenses following table shows research development sales marketing general administrative expenses years ended december 31 2002 2001 2000 thousands 64 million increase research development expenses 2002 compared 2001 primarily result increase headcount related expenses use outside services certain overhead costs partially offset savings prototype equipment headcount related expenses overhead costs increased primarily due unisphere acquisition realized savings internally developed prototype equipment expense 2002 throughout 2001 preparing release highend series products well certain mseries jseries products developing testing application specific integrated circuits asics 677 million increase research development expenses 2001 compared 2000 primarily related increased salary related personnel costs increased headcount expand development efforts new products t320 t640 m40e j20 expense research development costs incurred several components research development effort require significant expenditures timing cause significant quarterly variability expenses example large number prototypes required build test products building testing process occurs short period time asic development requires payment nonrecurring engineering charges beginning process design develop asic expense charges immediately addition per unit costs payable purchase prototype asics several large asics architecture incur large nonrecurring engineering prototype expenses significant enhancement existing products new product development expect continue devote substantial resources development new products enhancement existing products believe research development critical strategic product development objectives leverage leading technology meet changing requirements customers need fund investments several development projects parallel although may experience significant quarterly variability research development expenses expect annual research development expenses flat slightly increase absolute dollars next year 136 million decrease sales marketing expenses 2002 compared 2001 result decreases employee partner events reduced use demonstration equipment expensed immediately consolidation excess facilities date incurred significant advertising expenses 514 million increase sales marketing expenses 2001 compared 2000 primarily attributable salaries commissions related expenses personnel engaged sales marketing customer engineering support functions increased headcount year addition costs associated promotional marketing activities product launches equipment demonstration competitive labs contributed increase 2001 intend continue focus expand sales marketing efforts across geographies markets serve order increase market awareness products better support existing customers worldwide believe continued investment sales marketing critical success expect expenses slightly increase absolute dollars next year initiate additional sales marketing programs support products general administrative expenses decreased 33 million 2002 compared 2001 general administrative expenses consist primarily salaries related expenses executive finance accounting human resources personnel well recruiting expenses professional fees bad debt provisions corporate expenses decrease due savings headcount related expenses decreases use outside services expect general administrative expenses slightly decrease 2003 compared 2002 general administrative expenses increased 164 million 2001 compared 2000 increase primarily attributable costs associated additional headcount support increased levels business activity well increases bad debt provision operating expenses following table shows operating expenses years ended december 31 2002 2001 2000 thousands july 2002 completed acquisition unisphere subsidiary siemens following acquisition remainder 2002 siemens one significant resellers acquisition resulted payment 3750 million cash issuance 365 million shares common stock fair value approximately 3599 million former stockholders unisphere accounted acquisition purchase method accounting accordance sfas 141 accordingly originally recorded goodwill 7699 million purchased intangible assets 740 million inprocess research development “iprd” 827 million deferred compensation unvested stock options 05 million accordance sfas 142 “sfas 142” “goodwill intangible assets” goodwill amortized rather required test goodwill impairment least annually interim periods necessary purchased intangible assets amortized estimated useful lives generally two six years deferred compensation amortized four years using gradedvesting method december 2002 adjusted originally recorded goodwill 7699 decreasing 28 million primarily related valuation certain assets awaiting information originally allocated purchase price purchase price allocation depicted preliminary subject change continue obtain additional information concerning fair values certain liabilities unisphere december 2001 2000 acquired pacific broadband communications “pacific broadband” micro magic inc “micro magic” respectively accounted acquisitions purchase method accounting accordingly recorded goodwill intangible assets 1375 million 1257 million respectively representing excess purchase price paid fair value net tangible assets acquired goodwill intangibles amortized respective useful lives determined two three years accordance sfas 142 goodwill amortization related pacific broadband acquisition 2001 beginning january 1 2002 longer amortized goodwill relating micro magic acquisition 2002 goodwill pacific broadband business combination increased result earnout provisions acquisition agreement decreased certain liabilities accrued time acquisition realized neither transactions impact results operations year ended december 31 2002 amortization goodwill 2002 accordance sfas 142 amortization goodwill increased 359 million 2001 compared 2000 increase result full year amortization goodwill micro magic inc acquisition amortization purchased intangibles deferred stock compensation decreased 625 million 2002 compared 2001 amortization purchased intangibles 139 million 27 million 2002 2001 respectively increase due acquisition unisphere contributed 73 million amortization purchased intangibles second half 2002 full year amortization 2002 pacific broadband acquisition amortization deferred stock compensation 04 million 741 million 2002 2001 respectively primary reason decrease reversal required apb 25 335 million previously recognized stock compensation expense reversal related difference expense previously recognized gradedvesting method former employees expense would recorded using straightline method finally decrease expense also result using graded vesting method expenses larger percent earlier months amortization purchased intangibles deferred stock compensation increased 636 million 2001 compared 2000 increase almost entirely due full year amortization purchased intangibles deferred stock compensation micro magic acquisition amortization purchased intangibles deferred stock compensation increase 2003 result full year amortization purchased intangible assets acquired unisphere may increase future make acquisitions companies technologies third quarter 2002 connection acquisition unisphere approved initiated plans restructure operations eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions consequently recorded restructuring expenses approximately 149 million net 26 million adjustment costs going incurred due change estimate associated primarily workforce related costs vacating duplicative facilities contract termination costs noninventory asset impairment charges associated costs accounted eitf issue 943 “eitf 943” “liability recognition certain employee termination benefits costs exit activity” included charge results operations year ended december 31 2002 also recognized charge approximately 53 million quarter ended september 30 2002 related land acquired january 2001 located sunnyvale california charge primarily costs exiting certain contractual obligations associated land currently plans continue developing land foreseeable future carrying value land increased 23 million 2002 primarily due certain development costs incurred first half 2002 june 2001 announced restructuring program effort better align business operations current market service provider industry conditions restructuring program included worldwide workforce reduction consolidation excess facilities restructuring certain business functions costs associated restructuring program totaled 123 million recorded three months ended june 30 2001 operating expenses restructuring costs increased 79 million 2002 compared 2001 increase result restructuring activities land charge third quarter 2002 total unisphere purchase price approximately 827 million allocated inprocess research development “iprd” expensed quarter ended september 30 2002 projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition unisphere multiple iprd efforts way certain current future product lines efforts included developing new cards modules different bandwidths various software developments utilized discounted cash flow “dcf” method value iprd using rates ranging 30 35 applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time acquisition estimated development efforts 55 complete would completed next six twelve months december 31 2002 development efforts 90 complete estimate completed next twelve months connection acquisition pacific broadband december 2001 allocated 42 million 1483 million purchase price iprd applications inprocess technology project integrated products efforts required complete acquired inprocess technology included completion planning designing testing activities necessary establish product produced meet design requirements including functions features technical performance requirements value acquired inprocess technology computed using discounted cash flow analysis rate 30 anticipated income stream related product revenues discounted cash flow analysis based management’s forecast future revenues cost revenues operating expenses related products technologies purchased pacific broadband calculation value adjusted reflect value creation efforts pacific broadband prior close acquisition time acquisition product approximately 75 complete majority costs complete project incurred fiscal 2002 material resultant value inprocess technology reduced estimated value core technology expensed period transaction consummated project complete december 31 2002 connection acquisition micro magic december 2000 allocated 100 million 2593 million purchase price iprd applications inprocess technology project integrated within engineering department efforts required complete acquired inprocess technology included completion planning designing testing activities necessary establish product produced meet design requirements including functions features technical performance requirements value acquired inprocess technology computed using discounted cash flow analysis rate 19 anticipated income stream related product revenues discounted cash flow analysis based management’s forecast future revenues cost revenues operating expenses related products technologies purchased micro magic calculation value adjusted reflect value creation efforts micro magic prior close acquisition time acquisition product approximately 88 complete project completed 2001 resultant value inprocess technology reduced estimated value core technology expensed period transaction consummated incurred integration expenses approximately 25 million quarter ended september 30 2002 resulting acquisition unisphere integration expenses onetime incremental costs directly related integration two companies go forward benefit consisted principally workforce related expenses individuals transitioning positions professional fees quarter ended september 30 2002 expect integration costs relating unisphere integration incurred additional integration costs future related unisphere charitable contributions 100 million 2000 connection common stock issued charitable foundation made similar contributions 2002 2001 currently expect make similar contributions foreseeable future income expenses following table shows income expenses years ended december 31 2002 2001 2000 thousands interest income decreased 383 million 2002 compared 2001 decrease result lower cash investment balances throughout 2002 spent 1460 million retire portion convertible subordinated notes 3750 million unisphere acquisition addition interest rates lower 2002 compared 2001 interest income increased 58 million 2001 compared 2000 increase result larger cash investment balances throughout 2001 partially offset decline interest rates interest expense decreased 58 million 2002 compared 2001 namely due less interest owed result retirement portion convertible subordinated notes quarter ended september 30 2002 interest expense increased 133 million 2001 compared 2000 increase due full year interest incurred 2001 convertible subordinated notes issued march 2000 equity net loss joint venture decreased 28 million 2002 compared 2001 quarter ended june 30 2001 entered joint venture agreement ericsson ab respective subsidiaries develop market products wireless internet infrastructure market accordingly began recording 40 share joint venture’s loss 2002 share joint venture’s loss totaled approximately 13 million date funded joint venture amount 54 million addition joint venture ericsson also one significant resellers representing greater 10 revenues 2002 2001 december 31 2002 obligations fund joint venture quarter ended september 30 2002 paid approximately 1460 million retire portion 475 convertible subordinated notes due march 15 2007 “notes” partial retirement resulted gain approximately 629 million difference carrying value notes including unamortized debt issuance costs time retirement amount paid extinguish notes currently evaluating plans retire additional notes future therefore consider gains associated repurchase extraordinary based guidance sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” provision income taxes provision income taxes decreased 45 million 2002 300 million 2001 effective tax rates 2002 2001 39 181 respectively tax rates 2002 2001 include effects writedowns equity investments acquisition related charges goodwill inprocess research development nondeductible provision income taxes decreased 300 million 2001 825 million 2000 recorded tax provisions 825 million resulting effective tax rate 36 irs currently auditing company’s federal income tax returns fiscal years 1999 2000 proposed adjustments received years management believes ultimate outcome irs audits material adverse impact company’s financial position results operations liquidity capital resources funded business selling common stock public market issuing convertible subordinated notes operating activities december 31 2002 cash equivalents 1944 million shortterm investments 3840 million longterm investments 5837 million regularly invest excess funds money market funds commercial paper government nongovernment debt securities maturities five years net cash provided operating activities 24 million 2928 million 2691 million 2002 2001 2000 respectively net cash provided operating activities 2002 due net loss 1197 million offset noncash charges depreciation amortization expense inprocess research development charges unisphere acquisition impairment minority equity investments increases accounts receivable gain retirement convertible subordinated notes decreases accrued liabilities net cash provided operating activities 2001 primarily attributed noncash charges amortization goodwill purchased intangibles deferred stock compensation writedown minority investments depreciation tax benefit employee stock option plans well decreases accounts receivable offset cash used operating activities 2001 consisting net decreases accounts payable accrued liabilities excluding impact acquisitions net loss decreases accrued warranty net cash provided operating activities 2000 primarily attributed net income increases accounts payable accrued liabilities tax benefit employee stock option plans noncash charges amortization goodwill purchased intangibles deferred stock compensation offset cash used operating activities 2000 consisting increases accounts receivable assets cash used investing activities 2955 million 3074 million 8942 million 2002 2001 2000 respectively cash used periods due purchase capital equipment availableforsale investments offset maturities availableforsale investments addition used cash 2002 unisphere acquisition 2001 increase fixed assets included purchase approximately 80 acres land sunnyvale california cash used financing activities 1194 million 2002 compared cash provided financing activities 2001 2000 585 million 103 billion respectively cash used financing activities 2002 consisted 1460 million spent retire portion notes offset 266 million received issuance common stock result employee stock option exercises employee stock purchase plan cash provided financing activities 2001 due proceeds issuance common stock namely employee option exercises cash provided financing activities 2000 due 11 billion received issuance notes 367 million issuance common stock namely employee option exercises cash provided financing activities 2000 offset expenditures 1300 million repurchase outstanding common stock december 31 2002 principal commitments consisted obligations outstanding operating leases firm purchase commitments independent contract manufacturers notes potential contractual liabilities exposures independent contract manufacturers carrying costs excess material exposures event procure components build products based build forecasts actual component usage product sales significantly lower forecast december 31 2002 accrued 278 million potential exposures contract manufacturers carrying costs excess material following table summarizes principal contractual obligations december 31 2002 effect obligations expected liquidity cash flow future periods thousands although believe existing cash balances sufficient fund operations least next 12 months assurance require additional financing within time frame additional funding needed available acceptable terms recent accounting pronouncements july 2002 financial accounting standards board “fasb” issued sfas 146 “accounting costs associated exit disposal activity” sfas 146 revises accounting exit disposal activities emerging issues task force “eitf” issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” spreading reporting expenses related restructuring activities commitment plan exit activity dispose longlived assets longer sufficient record onetime charge restructuring activities instead companies record exit disposal costs “incurred” measured fair value addition resultant liabilities subsequently adjusted changes estimated cash flows sfas 146 effective prospectively exit disposal activities initiated december 31 2002 companies may restate previously issued financial statements effect provisions sfas 146 liabilities company previously recorded eitf issue 943 grandfathered adopted sfas 146 january 1 2003 enter restructuring activities future adoption sfas 146 may affect timing recognizing future restructuring costs well amount recognized costs november 2002 fasb issued interpretation “fin” 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 requires certain guarantees recorded fair value different current practice liability recorded loss probable reasonably estimable addition fin 45 also requires guarantor make significant new disclosures even likelihood making payments guarantee remote another change current practice fin 45 applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements interim annual periods ending december 15 2002 adopted disclosure requirements fin 45 regarding warranties herein annual report see note 7 notes consolidated financial statements item 8 currently evaluating requirements fin 45 determined requirements fin 45 apply us revenues cost goods sold operating expenses could negatively affected december 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 amends sfas 123 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation sfas 148 also amends disclosure provisions sfas 123 apb 28 “interim financial reporting” require disclosure summary significant accounting policies effects entity’s accounting policy respect stockbased employee compensation reported net income earnings per share annual interim financial statements sfas 148 amend sfas 123 require companies account employee stock options using fair value method disclosure provisions sfas 148 applicable companies stockbased employee compensation regardless whether account compensation using fair value method sfas 123 intrinsic value method apb 25 since account stockbased compensation apb 25 current plans switching sfas 123 impact sfas 148 limited annual interim reporting effects net income earnings per share accounted stockbased compensation sfas 123 sfas 148 effective fiscal years ending december 15 2002 january 2003 fasb issued interpretation 46 “consolidation variable interest entities” “fin 46” interpretation accounting research bulletin arb 51 “consolidated financial statements” fin 46 establishes accounting guidance consolidation variable interest entity “vie” formerly referred special purpose entities fin 46 applies business enterprise public private controlling interest contractual relationship business relationship vie fin 46 provides guidance determining entity “primary beneficiary” consolidate another entity vie functions support activities primary beneficiary currently contractual relationship business relationship vie therefore adoption effect consolidated financial position results operations risk factors set forth elsewhere report documents file securities exchange commission risks uncertainties could cause actual results differ materially results contemplated forwardlooking statements contained report face intense competition could reduce market share competition network infrastructure market intense market historically dominated cisco companies nortel networks lucent technologies providing products smaller segment market addition number small public private companies announced plans new products address challenges products address unable compete successfully existing future competitors product offering standpoint potential price competition competitors could experience loss market share andor required reduce prices resulting reduced gross margins either could materially adversely affect business operating results financial condition current economic conditions combined financial condition customers limit visibility makes revenue forecasting difficult continuing economic downturn generally telecommunication industry specifically combined relatively limited operating history context continuing economic downturn makes difficult accurately forecast revenue experienced expect foreseeable future continue experience limited visibility customers’ spending plans capital budgets limited visibility complicates revenue forecasting process additionally many customers funded network infrastructure purchases variety debt similar instruments many customers carrying significant debt burden experiencing reduced cash flow carry cost debt corresponding interest charges reduces ability justify make future purchases telecommunications industry experienced consolidation rationalization participants expect trend continue adverse changes public private equity debt markets telecommunications industry participants affected ability obtain financing fund capital expenditures cases significant debt burden carried customers reduced ability pay purchases made date contributed expect continue contribute uncertainty amounts timing capital expenditures limiting visibility complicating forecasting process certain customers filed bankruptcy result debt burdens although customers generally expect emerge bankruptcy proceedings future bankruptcy proceeding slow cumbersome process limiting visibility complicating revenue forecasting process customers even emerge proceedings extent timing future purchases equipment uncertain uncertainty complicate revenue forecasting process addition operating expenses largely based anticipated revenue trends high percentage expenses continue fixed shortterm achieve expected revenues operating results expectations investors market analysts could cause price common stock decline failure increase revenues may prevent us profitable future periods large fixed expenses net revenues declined past year assurances net revenues grow profitable future periods although customer base increased substantially still limited number customers comprise significant portion revenues decrease revenue customers could adverse effect even though customer base increased substantially expect large portion net revenues continue depend sales limited number customers downturn business customers potential new customers could significantly decrease sales customers could adversely affect net revenues results operations rely distribution partners sell products disruptions channels could adversely affect ability generate revenues sale products believe future success dependent upon establishing successful relationships variety distribution partners entered agreements several value added resellers also sell products compete products cannot certain able retain attract resellers timely basis resellers devote adequate resources selling products highly technical contain undetected software hardware errors business could adversely impacted products highly technical designed deployed large complex networks certain products fully tested deployed networks generate high amounts data andor voice traffic result may experience errors connection product new products enhancements defects errors products discovered future could result loss delay revenue loss customers increased service warranty cost could adversely impact business results operations products interoperate customers’ networks installations delayed cancelled could result substantial product returns could harm business products designed interface customers’ existing networks different specifications utilize multiple protocol standards many customers’ networks contain multiple generations products added time networks grown evolved products must interoperate products within networks well future products order meet customers’ requirements find errors existing software used customers’ networks must modify software fix overcome errors products interoperate scale existing software hardware products interoperate customers’ networks installations could delayed orders products could cancelled products could returned would also damage reputation could seriously harm business prospects problems arising use products conjunction vendors’ products could disrupt business harm financial condition service providers typically use products conjunction products vendors result problems occur may difficult identify source problem problems may cause us incur significant warranty repair costs divert attention engineering personnel product development efforts cause significant customer relations problems traditional telecommunications companies generally require onerous terms conditions vendors seek sell products customers may required agree terms conditions may adverse impact business traditional telecommunications companies size generally greater purchasing power accordingly requested received favorable terms often translate onerous terms conditions vendors seek sell products class customer may required agree terms conditions may include terms impact ability recognize revenue adverse effect business financial condition addition many class customer purchased products vendors promised certain functionality failed deliver functionality andor products caused problems outages networks customers result class customer may request additional features us require substantial penalties failure deliver features may require substantial penalties network outages may caused products additional requests penalties required agree may impact ability recognize revenue sales may negatively impact business financial condition success depends ability anticipate market needs develop products product enhancements meet needs gain market acceptance cannot ensure able anticipate future market needs able develop new products product enhancements meet needs meet timely manner fail anticipate market requirements develop new products product enhancements meet needs failure could substantially decrease market acceptance sales present future products would significantly harm business financial results even able anticipate develop commercially introduce new products enhancements assurance new products enhancements achieve widespread market acceptance failure future products achieve market acceptance could adversely affect business financial results depend key personnel manage business effectively rapidly changing market unable retain hire key personnel ability develop market sell products could harmed future success depends upon continued services executive officers key engineering sales marketing support personnel none officers key employees bound employment agreement specific term loss services key employees inability attract retain qualified personnel future delays hiring required personnel particularly engineers could delay development introduction negatively impact ability develop market sell products addition although completed acquisition unisphere july 1 2002 integration products product roadmap operations continuing activity foreseeable future result activities may lose opportunities employees could disrupt business harm financial results fail accurately predict manufacturing requirements could incur additional costs experience manufacturing delays contract manufacturers obligated supply products specific period specific quantity specific price except may provided particular purchase order longterm supply contracts addition lead times required materials components vary significantly depend factors specific supplier contract terms demand component given time provide contract manufacturers demand forecast overestimate requirements contract manufacturers may assess charges could negatively impact gross margins case quarter ended september 30 2001 underestimate requirements contract manufacturers may inadequate inventory could interrupt manufacturing products result delays shipments revenues currently depend contract manufacturers longterm supply contracts changes relationships expected unexpected may result delays disruptions could cause us lose revenue damage customer relationships depend third party contract manufacturers third party manufacturer numerous companies manufacture products longterm supply contract manufacturers fail effectively manage contract manufacturer relationships one experience delays disruptions quality control problems manufacturing operations ability ship products customers could delayed could adversely affect business financial results connection acquisition unisphere added third contract manufacturer part integration activities consolidating contract manufacturing two three current contract manufacturers transition three two contract manufacturers may result disruptions quality control problems manufacturing operations delays ability ship products customers could adversely affect business financial results transition expected completed end first quarter 2003 however transition could delayed number factors including limited systems integration economic conditions process planning unisphere received semifinished goods contract manufacturer engaged final test assembly finished product facility westford massachusetts result unisphere carried inventory books part integration unisphere outsourcing activities consistent fulloutsource model fail effectively manage activities could experience disruptions quality control problems delays shipments customers could adversely impact business financial results long sales implementation cycles products well expectation customers sporadically place large orders short lead times may cause revenues operating results vary significantly quarter customer’s decision purchase products involves significant commitment resources lengthy evaluation product qualification process result sales cycle may lengthy throughout sales cycle often spend considerable time educating providing information prospective customers regarding use benefits products even making decision purchase customers tend deploy products slowly deliberately timing deployment vary widely depends skill set customer size network deployment complexity customer’s network environment degree hardware software configuration necessary deploy products customers large networks usually expand networks large increments periodic basis accordingly expect receive purchase orders significant dollar amounts irregular basis long cycles well expectation customers tend sporadically place large orders short lead times may cause revenues operating results vary significantly unexpectedly quarter face risks associated restructuring plans may adversely affect business operating results financial condition response industry market conditions restructured business reduced workforce assumptions underlying restructuring efforts assessed ongoing basis may prove inaccurate may restructure business future achieve certain cost savings strategically realign resources restructuring plan based certain assumptions regarding cost structure business nature severity duration current industry adjustment may prove accurate restructuring assessed continue assess whether reduce workforce well review recoverability tangible intangible assets including land purchased january 2001 decisions may result recording additional charges workforce reduction costs facilities reduction costs asset writedowns contractual settlements additionally estimates assumptions used asset valuations subject uncertainties accounting estimates respect useful life ultimate recoverability carrying basis assets including goodwill intangible assets result future market conditions may result charges write tangible intangible assets may able successfully implement initiatives undertaken restructuring business even successfully implemented initiatives may sufficient meet changes industry market conditions achieve future profitability furthermore workforce reductions may impair ability realize current future business objectives lastly costs actually incurred connection restructuring actions may higher estimated costs actions andor may lead anticipated cost savings result restructuring efforts may result return profitability could become subject litigation regarding intellectual property rights could seriously harm business recent years significant litigation united states involving patents intellectual property rights although involved intellectual property litigation may party litigation future protect intellectual property result alleged infringement others’ intellectual property claims alleged infringement resulting lawsuit successful could subject us significant liability damages invalidation proprietary rights may require us stop selling incorporating using products use challenged intellectual property lawsuits regardless success would likely timeconsuming expensive resolve would divert management time attention necessary licenses thirdparty technology may available us may expensive integrate thirdparty licensed technology certain products time may required license additional technology third parties develop new products product enhancements thirdparty licenses may available continue available us commercially reasonable terms inability maintain relicense third party licenses required current products inability obtain thirdparty licenses necessary develop new products product enhancements could require us obtain substitute technology lower quality performance standards greater cost could seriously harm business financial condition results operations business subject risks global operations conduct significant sales customer support operations countries outside united states also depend contract manufacturers’ manufacturing operations located within outside united states accordingly future results could materially adversely affected variety uncontrollable changing factors including among others political social unrest economic instability specific country region trade protection measures regulatory requirements may affect ability import export products various countries difficulties staffing managing international operations factors could adversely impact business financial results exposed fluctuations currency exchange rates significant portion business conducted outside united states face exposure adverse movements nonus currency exchange rates exposures may change time business practices evolve could material adverse impact financial results cash flows majority revenue expenses transacted us dollars also transactions denominated foreign currencies primarily japanese yen hong kong dollar british pound euro related sale service operations outside united states increase value us dollar could increase real cost customers products markets outside united states sell us dollars weakened dollar could increase cost local operating expenses procurement raw materials extent must purchase components foreign currencies currently hedge currency exposures associated certain assets liabilities denominated nonfunctional currencies periodically hedge anticipated foreign currency cash flows hedging activities undertaken us intended offset impact currency fluctuations certain nonfunctional currency assets liabilities attempts hedge risks may successful resulting adverse impact net income acquisition make could disrupt business harm financial condition made may continue make acquisitions investments order enhance business acquisitions involve numerous risks including problems combining purchased operations technologies products unanticipated costs diversion management’s attention core business adverse effects existing business relationships suppliers customers risks associated entering markets limited prior experience potential loss key employees assurance able successfully integrate businesses products technologies personnel might acquire intend make investments complementary companies products technologies event investments acquisitions could issue stock would dilute current stockholders’ percentage ownership incur debt assume liabilities incur amortization expenses related purchases intangible assets incur large immediate writeoffs party lawsuits determined adversely us could result imposition damages us could harm business financial condition certain former officers current former members board directors subject various lawsuits brought classes stockholders alleging among things violations federal state securities laws breach various fiduciary obligations assurance actions brought us resolved favor losses resulting claims could adversely affect profitability cash flow unpredictability quarterly results may adversely affect trading price common stock revenues operating results vary significantly quarter due number factors including many outside control may cause stock price fluctuate factors may impact unpredictability quarterly results include reduced visibility customers’ spending plans changing market conditions resulted customer potential customer bankruptcies change mix products sold higher priced core products lower priced edge products long sales implementation cycle result believe quartertoquarter comparisons operating results good indication future performance likely future quarters operating results may expectations public market analysts investors case price common stock may fall stock price volatile could decline substantially market price common stock fluctuated significantly past likely continue fluctuate future may decline among factors could affect stock price • variations quartertoquarter operating results • announcements us competitors significant contracts new enhanced products services acquisitions distribution partnerships joint ventures capital commitments • changes financial estimates investment recommendations securities analysts following business • sale common stock securities future • changes economic capital market conditions companies sector • changes market valuations earnings competitors • changes business regulatory conditions • trading volume common stock dependent sole source limited source suppliers several key components current demand electronic products component shortages possible predictability availability components may limited currently purchase several key components including asics single limited sources may able develop alternate second source timely manner could hurt ability deliver product customers unable buy components timely basis able deliver product customers would seriously impact present future sales would turn adversely affect business fail adequately evolve systems processes changing business environment ability manage business results operations may negatively impacted ability successfully offer products implement business plan rapidly evolving market requires effective planning management process expect need continue improve financial managerial control reporting systems procedures fail continue evolve systems processes ability manage business results operations may negatively impacted business substantially depends upon continued growth internet internetbased systems changes industry structure could lead product discontinuances substantial portion business revenue depends growth internet deployment product customers depend continued growth internet result economic slowdown reduction capital spending particularly affected telecommunications service providers spending internet infrastructure declined material adverse effect business extent economic slowdown reduction capital spending continue adversely affect spending internet infrastructure could continue experience material adverse effects business operating results financial condition face risks uncertainties regulation telecommunications industry well internet commerce internet telecommunications industry highly regulated business financial condition could adversely affected changes regulations relating telecommunications industry also laws regulations apply directly access commerce internet could adversely affected regulation internet commerce country operate regulations could include matters voice internet using internet protocol encryption technology access charges internet service providers adoption regulation internet commerce could decrease demand products time increase cost selling products could material adverse effect business operating result financial condition item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results company based current expectations estimates forecasts projections industry company operates beliefs assumptions management company words ’expects’ ‘anticipates’ ‘targets’ ‘goals’ ‘projects’ ‘intends’ ‘plans’ ’believes’ ‘seeks’ ‘estimates’ variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” elsewhere reports company files securities exchange commission “sec” specifically recent reports form 10q may amended time company undertakes obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions overview business juniper networks inc “juniper networks” “we” founded 1996 develop sell products would able meet stringent demands service providers today leading provider network infrastructure solutions transform business networking products enable customers improve business models providing differentiation value end users well increased reliability security thereby making network valuable asset sell market products direct sales organization valueadded resellers overview results operations aid understanding operating results years ended december 31 2003 2002 2001 believe overview significant events occurred years discussion nature expenses helpful significant events result economic slowdown beginning 2001 going 2003 many telecommunication service providers cut back capital expenditure discretionary spending budgets cut backs contributed decrease revenues beginning late 2001 2002 help combat financial impact reduction revenue undertook series initiatives first initiative restructuring 2001 better align operations current market service provider industry conditions restructuring initiative included worldwide workforce reduction consolidation excess facilities restructuring certain business functions july 2002 completed acquisition unisphere networks inc “unisphere” subsidiary siemens corporation subsidiary siemens ag “siemens” unisphere developed manufactured sold data networking equipment optimized applications edge service provider networks acquisition enabled us expand customer base add complementary product existing product line without need reorganize modify existing organizational cost structure accordance statement financial accounting standard “sfas” 141 “business combinations” included results operations 2002 results unisphere july 1 2002 unisphere acquisition impacted revenue cost revenues operating expenses second half 2002 results 2003 include full year results combined companies connection acquisition unisphere initiated plans eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions 2003 announced longer developing gseries cmts products recorded onetime charge comprised workforce reduction costs noninventory asset impairment costs associated vacating facilities terminating contracts related costs expect action facilitate focus core competencies reduce cost structure second calendar quarter 2003 issued 4000 million zero coupon convertible senior notes due june 15 2008 also 2003 paid 7920 million retire portion 475 convertible subordinated notes due march 15 2007 transactions effect cash equivalents investments interest income interest expense nature expenses manufacturing repair supply chain management operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers independent contract manufacturers manufacture products using quality assurance programs standards establish controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities neenah wisconsin toronto canada generally contract manufacturers retain title underlying components finished goods inventory customers take title assembled final product upon shipment contract manufacturer’s facility realized savings carrying obsolete material charges 2001 2002 2003 contract manufacturers procure components based build forecasts actual component usage significantly lower forecasts may past liable carrying obsolete material charges 2001 large expense related carrying obsolete material due change global economy sudden decrease product revenues first half 2002 global economy continued adverse effect revenues however began improve second half addition part unisphere acquisition consolidated outsourced contract manufacturing operations three two incurred additional carrying obsolete material charges carrying obsolete charges decreased 2003 global economy product revenue continued improve primary component operating expenses historically employee related costs includes items wages commissions bonuses vacation benefits travel addition facility information technology departmental costs allocated departments based headcount following descriptions unique expense items operating expense class expense research development costs incurred research development expenses include costs developing products components prototypes finished products outside services certifications new products equipment used testing patent related costs several components research development effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses sales marketing expenses include costs promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives addition employee related expenses general administrative expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting corporate strategic services critical accounting policies preparation consolidated financial statements related disclosures conformity accounting principles generally accepted united states requires us establish accounting policies contain estimates assumptions affect amounts reported consolidated financial statements accompanying notes policies include • revenue recognition • allowance doubtful accounts impacts general administrative expenses • valuation exposures associated contract manufacturing operations estimating future warranty costs impact cost product revenues gross margins • provision income taxes would impact income tax expense important accounting policies practices however adopted policies either generally require us make significant estimates assumptions otherwise require implementation adopted policy judgment policy base estimates historical experience also assumptions believe standard reasonable despite intention establish accurate estimates assumptions actual results could differ estimates revenue recognition recognize product revenue persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility reasonably assured unless future obligations things network interoperability customer acceptance case revenue related costs deferred obligations met cases recognize product revenue upon shipment customers including resellers policy ensure end user identified prior shipment service revenue recognized services completed ratably service period beginning july 1 2003 recognized revenue arrangements products services bundled accordance eitf 0021 “revenue arrangements multiple deliverables” applying concepts eitf 0021 must determine whether deliverables separable multiple units accounting allocate total fee arrangements individual deliverables either based relative fair values using residual method circumstances dictate recognize revenue deliverable accordance policies product service revenue recognition application eitf 0021 includes judgments whether delivered item value customer standalone basis whether established objective reliable evidence fair value undelivered items ability recognize revenue future may affected actual selling prices significantly less fair values addition ability recognize revenue future impacted conditions imposed customers assessment collectibility assess probability collection reviewing customers’ payment history financial condition credit report probability collection reasonably assured revenue deferred payment collected amount product revenue recognized given period also impacted judgments made establishing reserve potential future product returns although arrangements include contractual rights return general policy accept returns unique circumstances may future accept product returns customers therefore provide reserve estimate future returns revenue period revenue recorded estimate future returns based factors historical return data current economic condition customer base addition get input sales support organizations potential product returns relating specific customer issues amount revenue recognize directly impacted estimates made establish reserve potential future product returns allowance doubtful accounts make ongoing assumptions relating collectibility accounts receivable calculation allowance doubtful accounts determining amount allowance make judgments creditworthiness customers based ongoing credit evaluations assess current economic trends affecting customers might impact level credit losses future result different rates bad debts previously seen also consider historical level credit losses reserves historically adequate cover actual credit losses actual credit losses significantly greater reserves established general administrative expenses would increase conversely actual credit losses significantly less reserves general administrative expenses would decrease contract manufacturer exposures outsource manufacturing repair supply chain management operations independent contract manufacturers accordingly significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based build forecasts based estimates future demand products estimates based historical trends analysis sales marketing organizations adjusted overall market conditions actual component usage product demand significantly lower forecast contractual liabilities exposures independent contract manufacturers carrying costs obsolete material exposures would adverse impact gross margins profitability demand products component usage largely affected factors outside control warranty reserves generally offer oneyear warranty hardware products well 90day warranty media contains software embedded products warranty generally includes parts labor 24hour service center support occasion specific terms conditions warranties vary record liability based estimates costs may incurred warranty obligations charge cost product sales amount costs time revenue recognized factors affect warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimates anticipated rates warranty claims costs per claim primarily based historical information future forecasts periodically assess adequacy recorded warranty liabilities adjust amounts necessary actual warranty claims significantly higher forecast actual costs incurred provide warranty greater forecast gross margins could adversely affected provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 “accounting income taxes” record valuation allowance reduce deferred tax assets amount believe likely realizable accordingly valuation allowance amount equal net deferred tax assets established reflect uncertainty regarding future realization assets part due potential impact future stock option deductions addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result results operations net revenues following table shows product service net revenues absolute dollars percentage total net revenues years ended december 31 2003 2002 2001 thousands net revenues last three years primarily changed result changes global economy caused fluctuations customers’ capital expenditure budgets beginning mid2001 overall global economy deteriorated customers reduced capital expenditure budgets began see factors improve 2003 evidenced change chassis revenue units ports shipped summarized table platforms essentially modular chassis serving base platform chassis certain number slots available populated components refer modules interfaces modules components router receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period chassis revenue units ports shipped tracked analyze customer trends used indicators potential network growth increase product net revenues 2003 compared 2002 due primarily increase demand products resulting customers expanding networks new applications users partially offset shift product mix less expensive products experience unusual pricing pressure 2003 compared 2002 decrease product net revenues 2002 compared 2001 due primarily decrease demand products resulted generally unfavorable economic conditions throughout 2002 shift product mix less expensive products service net revenues increased last two years result larger installed base customers products majority service revenue customers previously purchased products enter service contract addition service contracts service revenue generated providing professional educational services service contracts typically oneyear renewable periods revenue recognized ratably service period two customers individually accounted 15 13 total net revenues 2003 2002 one customer accounted 17 net product revenues compared 2001 one customer accounted 14 second customer accounted 13 third customer accounted 11 net product revenues management began including service revenue calculation significant customers second half 2002 following table shows net revenue geographic region thousands experienced shift net revenues percentage total net revenues americas region europe asia last two years capital spending market united states declined greater rate international market expect split among americas international regions remain relatively consistent 2004 cost revenues following table shows cost product service revenues related gross margin “gm” percentages years ended december 31 2003 2002 2001 thousands increase product gross margins 2002 2003 primarily due savings outsourced manufacturing costs result improved efficiencies cost cutting initiatives contract manufacturers increase product gross margins also due 62 decrease carrying obsolete material charges 2002 2003 addition 2002 included onetime charge 51 million related unisphere acquisition backlog orders inventory writeup adjustment product gross margins flat 62 2002 2001 result operational costs cut demand products decreased decrease absolute dollars cost product revenue 2001 2002 directly related decrease product revenue primarily result unfavorable economic conditions many customers experienced throughout 2002 well 37 decrease carrying obsolete material charges service gross margins increased 2002 2003 result 25 increase service revenue compared 13 increase cost service revenues able grow service revenue faster rate cost service revenues due improved efficiencies economies scale direct result larger install base thus leveraged service organization increased leverage evidenced fact total employee related expenses decreased percentage service revenue 29 2002 27 2003 however absolute dollars employee related expenses increased slightly addition absolute dollars costs associated spare parts increased 39 year service gross margins increased 2001 2002 primarily due larger installed base customers products combined realized savings service organization personnel related costs associated restructuring activities research development sales marketing general administrative expenses following table shows research development sales marketing general administrative expenses absolute dollars percentage total net revenues years ended december 31 2003 2002 2001 thousands research development expenses increased 142 million 2003 compared 2002 decreased percent total net revenues increase absolute dollars primarily due 16 increase employee related expenses result full year operations acquisition unisphere addition stopped paying bonuses 2002 part overall corporate cost cutting initiatives however started accrue employee bonuses second half 2003 financial results improved offsetting increase employee related expenses 35 decrease consulting contractor services due overall corporate cost cutting initiatives 28 decrease prototype expenses prototype expenses closely tied product launches testing certification needed product offered public amounts vary depending product developed research development expenses increased 64 million percent total net revenues 2002 compared 2001 increases primarily result 50 increase headcount related expenses 48 increase use consulting contractor services partially offset 63 savings prototype equipment headcount related expenses consulting contractor services increased primarily due unisphere acquisition prototype equipment expenses higher 2001 preparing release highend series products well certain mseries jseries products developing testing new family application specific integrated circuits asics expect continue devote resources development new products enhancement existing products believe research development critical strategic product development objectives leverage leading technology meet changing requirements customers need fund investments several development projects parallel sales marketing expenses increased 190 million 2003 compared 2002 decreased percent total net revenues majority increase absolute dollars 32 increase employee related expenses sales organization result additional headcount commissions resulting increase revenue addition customer facing expenses marketing events customer programs increased 40 offsetting increases decrease 41 demonstration equipment expensed immediately closely tied product launches date incurred significant advertising expenses sales marketing expenses decreased 136 million 2002 compared 2001 increased percent net revenues decrease absolute dollars result 63 decrease costs related employee partner events 23 reduction use demonstration equipment consolidation excess facilities attributable cost cutting initiatives intend continue focus expand sales marketing efforts across geographies markets serve order increase market awareness products better support existing customers worldwide believe continued investment sales marketing critical success general administrative expenses decreased 58 million percent total net revenues 2003 compared 2002 majority decrease due 91 reduction bad debt expense 2003 compared 2002 reduction result greater expected collection efforts absence significant customer bankruptcies decrease bad debt expense partially offset 22 increase professional services related certain strategic consulting activities general administrative expenses decreased 33 million 2002 compared 2001 increased percent total net revenues decrease due 15 savings employee related expenses 12 decrease use outside services attributable cost cutting initiatives operating expenses following table shows operating expenses absolute dollars years ended december 31 2003 2002 2001 thousands restructuring third quarter 2003 announced longer developing gseries cmts products recorded onetime charge approximately 140 million comprised workforce reduction costs noninventory asset impairment vacating facilities costs associated termination contracts related costs board directors approved restructuring charge expects plan facilitate focus core competencies reduce cost structure following table shows breakdown restructuring charge liability remaining december 31 2003 thousands workforce reduction related primarily termination 76 employees mainly located americas europe regions expect pay remaining balance severance accrual end first quarter 2004 noninventory asset impairment primarily longlived assets longer needed result decision cease development product line facility charges consist primarily cost vacating facilities dedicated development gseries cmts products impairment cost certain leasehold improvements net present value facility charge calculated using riskadjusted borrowing rate amounts related net facility charge paid respective lease term july 2008 difference actual future rent payments net present value recorded operating expenses incurred contractual commitments charges consist primarily 09 million carrying obsolete material charges contract manufacturers suppliers onhand onorder material related gseries cmts products 09 million costs satisfy endoflife commitments certain customer contracts costs included charge results operations quarter ended september 30 2003 changes estimates executing currently approved plans restructuring reflected results operations third quarter 2002 connection acquisition unisphere recorded restructuring expenses approximately 149 million associated primarily workforce related costs vacating duplicative facilities contract termination costs noninventory asset impairment charges associated costs net 26 million adjustment due change estimate december 31 2003 31 million remaining paid entirely related facility costs paid april 2009 also recognized charge approximately 53 million quarter ended september 30 2002 related land acquired january 2001 located sunnyvale california charge primarily costs exiting certain contractual obligations associated land currently plans continue developing land foreseeable future june 2001 announced restructuring program included worldwide workforce reduction consolidation excess facilities restructuring certain business functions december 31 2003 02 million remaining paid entirely related facility costs paid august 2006 amortization purchased intangibles deferred stock compensation amortize purchased intangible assets deferred stock compensation estimated lives following table shows breakdown amortization expenses thousands amortization expense intangible assets increased 68 million 2003 compared 2002 due intangible assets purchased unisphere acquisition july 2002 amortization expense intangible assets increased 112 million 2002 compared 2001 due intangible assets purchased unisphere acquisition july 2002 full year amortization intangible assets purchased pacific broadband communications “pacific broadband” acquisition december 2001 amortization expense deferred stock compensation 20 million 2003 included credit required apb opinion 25 “accounting stock issue employees” “apb 25” approximately 56 million due employees forfeited options compensation expense recognized graded vesting method unvested date employment terminated majority employees part restructuring plan 2003 amortization expense deferred stock compensation 04 million 741 million 2002 2001 respectively primary reason decrease reversal required apb 25 335 million previously recognized stock compensation expense reversal related difference expense previously recognized gradedvesting method former employees expense would recorded using straightline method finally decrease expense also result using graded vesting method expenses larger percent earlier months inprocess research development july 2002 completed acquisition unisphere subsidiary siemens following acquisition remainder 2002 siemens one significant resellers acquisition resulted payment 3750 million cash issuance 365 million shares common stock fair value approximately 3599 million former stockholders unisphere recorded goodwill 7699 million purchased intangible assets 740 million inprocess research development “iprd” 827 million deferred compensation unvested stock options 05 million intangibles assets goodwill amortized respective useful lives determined two six years december 2001 acquired pacific broadband accounted acquisition purchase method accounting allocated 42 million 1483 million purchase price inprocess research development also originally recorded goodwill 1273 million intangible assets 102 million intangibles assets completely amortized december 31 2003 integration incurred integration expenses approximately 25 million quarter ended september 30 2002 resulting acquisition unisphere integration expenses onetime incremental costs directly related integration two companies go forward benefit integration expenses consisted principally workforce related expenses individuals transitioning positions professional fees amortization goodwill amortization goodwill 2003 2002 accordance sfas 142 amortization goodwill 466 million 2001 micro magic inc acquisition occurred 2000 income expenses following table shows income expenses years ended december 31 2003 2002 2001 thousands interest income decreased 230 million 2003 compared 2002 decrease result lower cash investment balances throughout 2003 spent 7920 million retire portion 475 convertible subordinated notes due march 15 2007 “subordinated notes” partially offset 3928 million net proceeds received issuance zero coupon convertible senior notes due june 15 2008 “senior notes” addition interest rates lower 2003 compared 2002 interest income decreased 383 million 2002 compared 2001 decrease result lower cash investment balances throughout 2002 spent 1460 million retire portion subordinated notes 3758 million unisphere acquisition addition interest rates lower 2002 compared 2001 interest expenses decreased 165 million 2003 compared 2002 58 million 2002 compared 2001 almost entirely due interest saved partial retirement subordinated notes last two years 2003 paid 7920 million retire redeem portion subordinated notes subordinated notes cost basis 8000 million retirement resulted gain 141 million redemption resulted loss 152 million difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish notes quarter ended september 30 2002 paid approximately 1460 million retire portion subordinated notes partial retirement resulted gain approximately 629 million difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish notes first second quarters 2003 sold marketable equity securities classified availableforsale cost basis 43 million recognized gains 87 million certain minority equity investments privately held companies carried cost adjusted impairment less 20 voting equity ability exercise significant influence companies wrotedown investments 505 million 536 million 2002 2001 respectively changes market value believed temporary writedowns 2003 equity net loss joint venture decreased 28 million 2002 compared 2001 quarter ended june 30 2001 entered joint venture agreement ericsson ab respective subsidiaries develop market products wireless internet infrastructure market addition joint venture ericsson also one significant resellers representing greater 10 revenues 2003 2002 2001 december 31 2002 obligations fund joint venture provision income taxes provision income taxes increased 198 million 2003 45 million 2002 2003 effective rate 336 reflects taxes payable certain foreign jurisdictions benefit research credits capital loss carryforwards inability benefit certain charges losses provision income taxes decreased 45 million 2002 300 million 2001 effective tax rates 2002 2001 39 181 respectively tax rates 2002 2001 include effects writedowns equity investments acquisition related charges goodwill inprocess research development nondeductible irs currently auditing company’s federal income tax returns fiscal years 1999 2000 proposed adjustments received years management believes ultimate outcome irs audits material adverse impact company’s financial position results operations liquidity capital resources overview funded business issuing securities operating activities following table shows capital resources thousands working capital decreased 2002 2003 primarily due partial retirement subordinated notes offset cash provided operations issuance common stock employee stock option exercises stock purchase plans significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities deferred revenue based past performance current expectations believe cash equivalents shortterm investments cash generated operations satisfy working capital needs capital expenditures commitments liquidity requirements associated existing operations least next 12 months addition transactions arrangements relationships unconsolidated entities persons reasonably likely materially affect liquidity availability requirements capital resources cash requirements contractual obligations following table summarizes principal contractual obligations december 31 2003 effect obligations expected liquidity cash flow future periods thousands december 31 2003 principal commitments consisted obligations outstanding operating leases subordinated notes senior notes contractual obligations operating leases primarily facilities interest paid semiannually march 15 september 15 subordinated notes annual rate 475 anytime retire portion subordinated notes interest accrued portion due senior notes issued june 2003 senior unsecured obligations rank parity right payment existing future senior unsecured debt rank senior existing future debt expressly provides subordinated notes including subordinated notes senior notes bear interest convertible shares common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances firm purchase commitments contract manufacturers order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders based build forecasts december 31 2003 ncnr orders valued 625 million take ownership components ncnr orders represent firm purchase commitments per agreements contract manufacturers components used build products based purchase orders received customers liability products built contract manufacturer recorded fulfill customer’s order ships components go unused may carrying charges obsolete charges assessed december 31 2003 accrued 146 million potential exposures contract manufacturers carrying obsolete material charges operating activities net cash provided operating activities 1786 million 24 million 2928 million years ended december 31 2003 2002 2001 respectively cash provided operating activities periods due net income 2003 net losses 2002 2001 adjusted ongoing noncash charges • depreciation expense • amortization expenses intangible assets deferred compensation debt costs • normal fluctuations accounts receivable prepaid current assets longterm assets accounts payables accrued liabilities deferred revenue unusual significant adjustments net income 2003 included • noncash charge 36 million associated impairment assets included part restructuring 2003 • net loss 11 million retirement subordinated notes • noncash tax benefit 108 million related exercise employee stock options • gain 87 million sale investments unusual significant adjustments net losses 2002 2001 include investing activities net cash provided investing activities 3001 million year ended december 31 2003 net cash used investing activities 2955 million 3074 million years ended december 31 2002 2001 respectively recurring investing activities included capital expenditures 194 million 361 million 2411 million respectively reduced capital expenditures past two years part overall corporate cost cutting initiatives also made investments securities classified availableforsale sold investments fund ongoing operations partial retirement subordinated notes unisphere acquisition also made minority equity investments 09 million 12 million 82 million respectively privately held companies unusual investing activities include increase 308 million restricted cash establishment trust secure indemnification obligations certain directors officers purchase letters credit secure certain facility leases ii 3758 million paid 2002 related unisphere acquisition financing activities net cash used financing activities 3075 million 1194 million years ended december 31 2003 2002 respectively net cash provided financing activities 585 million year ended december 31 2001 received proceeds three years issuance common stock related employee option exercises stock purchase plans also received 3928 million net proceeds issuance senior notes 2003 paid 7920 million 1460 million 2003 2002 respectively retire portion subordinated notes recent accounting pronouncements december 2003 financial accounting standards board fasb issued revision interpretation 46 “consolidation variable interest entities interpretation arb 51” “fin 46r” fin 46r clarifies application arb 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support provided parties including equity holders fin 46r requires consolidation entities known variable interest entities “vies” primary beneficiary entity primary beneficiary entity absorb majority entity’s expected losses receive majority entity’s expected residual returns among changes revisions fin 46r clarified requirements original fin 46 issued january 2003 b eased implementation problems c added new scope exceptions fin 46r deferred effective date interpretation public companies end first reporting period ending march 15 2004 except public companies must minimum apply unmodified provisions interpretation entities previously considered “specialpurpose entities” practice fasb literature prior issuance fin 46r end first reporting period ending december 15 2003 among scope exceptions companies required apply fin 46r entity meets criteria considered “business” defined interpretation unless one four named conditions exist fin 46r applies immediately vie created acquired january 31 2003 interests vies factors may affect future results face intense competition could reduce market share adversely affect ability generate revenues competition network infrastructure market intense market historically dominated cisco companies nortel networks alcatel providing products smaller segment market addition number small public private companies announced plans new products address challenges products address unable compete successfully existing future competitors product offering standpoint potential price competition competitors could experience loss market share andor required reduce prices resulting reduced gross margins either could materially adversely affect business operating results financial condition fluctuating economic conditions combined financial condition customers make difficult predict revenues particular period shortfall revenues may harm operating results recent economic downturn generally telecommunication industry specifically combined relatively limited operating history context downturn makes difficult accurately forecast revenue experienced expect foreseeable future continue experience limited visibility customers’ spending plans capital budgets limited visibility complicates revenue forecasting process additionally many customers funded network infrastructure purchases variety debt similar instruments many customers carrying significant debt burden experiencing reduced cash flow carry cost debt corresponding interest charges reduces ability justify make future purchases telecommunications industry experienced consolidation rationalization participants expect trend continue adverse changes public private equity debt markets telecommunications industry participants affected ability obtain financing fund capital expenditures cases significant debt burden carried customers reduced ability pay purchases made date contributed expect continue contribute uncertainty amounts timing capital expenditures limiting visibility complicating forecasting process certain customers filed bankruptcy result debt burdens although customers generally expect emerge bankruptcy proceedings future bankruptcy proceeding slow cumbersome process limiting visibility complicating revenue forecasting process customers even emerge proceedings extent timing future purchases equipment uncertain uncertainty complicate revenue forecasting process addition operating expenses largely based anticipated revenue trends high percentage expenses continue fixed shortterm achieve expected revenues operating results expectations investors market analysts could cause price common stock decline limited numbers customers comprise significant portion revenues decrease revenue customers could adverse effect us even though customer base increased substantially expect large portion net revenues continue depend sales limited number customers 2003 ericsson siemens accounted greater 10 net revenues ericsson customer accounted greater 10 net revenues 2002 downturn business customers potential new customers could significantly decrease sales customers could adversely affect net revenues results operations rely distribution partners sell products disruptions channels could adversely affect ability generate revenues sale products believe future success dependent upon establishing maintaining successful relationships variety distribution partners entered agreements several value added resellers also sell products compete products cannot certain able retain attract resellers timely basis resellers devote adequate resources selling products acquisition make could disrupt business harm financial condition able successfully integrate acquired businesses technologies expected benefits combination materialize made may continue make acquisitions investments order enhance business example recently entered agreement acquire netscreen technologies inc stockforstock acquisition valued approximately 4 billion signing transaction consummated dilute existing stockholders’ percentage ownership addition results negatively impacted due certain purchase accounting rules result writedown netscreen’s deferred revenue purchase accounting adjustments failure effectively manage acquisition integration netscreen could disrupt business harm financial results acquisitions involve numerous risks including problems combining purchased operations technologies products unanticipated costs diversion management’s attention core business adverse effects existing business relationships suppliers customers risks associated entering markets limited prior experience potential loss key employees assurance able successfully integrate businesses products technologies personnel might acquire integration businesses acquired business continue complex time consuming expensive process failure operate combined organization utilizing common information communication system operating procedures financial controls human resources practices could adversely impact success business combination example although completed acquisition unisphere networks july 1 2002 integration products product roadmap operations continuing activity foreseeable future result activities may lose opportunities employees could disrupt business harm financial results also intend make investments complementary companies products technologies event investments acquisitions could issue stock would dilute current stockholders’ percentage ownership incur debt assume liabilities incur amortization expenses related purchases intangible assets incur large immediate writeoffs products highly technical contain undetected software hardware errors business could adversely impacted products highly technical designed deployed large complex networks certain products fully tested deployed networks generate high amounts ip traffic result may experience errors connection products new products enhancements defects errors products discovered future could result loss delay revenue loss customers increased service warranty cost could adversely impact business results operations products interoperate customers’ networks installations delayed cancelled could harm business products designed interface customers’ existing networks different specifications utilize multiple protocol standards products vendors many customers’ networks contain multiple generations products added time networks grown evolved products must interoperate products within networks well future products order meet customers’ requirements find errors existing software used customers’ networks must modify software fix overcome errors products interoperate scale existing software hardware products interoperate customers’ networks installations could delayed orders products could cancelled products could returned would also damage reputation could seriously harm business prospects traditional telecommunications companies generally require onerous terms conditions vendors seek sell products customers may required agree terms conditions may adverse effect business traditional telecommunications companies size generally greater purchasing power accordingly requested received favorable terms often translate onerous terms conditions vendors seek sell products class customer may required agree terms conditions may include terms effect ability recognize revenue adverse effect business financial condition addition many class customer purchased products vendors promised certain functionality failed deliver functionality andor products caused problems outages networks customers result class customer may request additional features us require substantial penalties failure deliver features may require substantial penalties network outages may caused products additional requests penalties required agree may affect ability recognize revenue sales may negatively affect business financial condition successfully anticipate market needs develop products product enhancements meet needs products gain market acceptance may able compete effectively ability generate revenues suffer cannot ensure able anticipate future market needs able develop new products product enhancements meet needs meet timely manner fail anticipate market requirements develop new products product enhancements meet needs failure could substantially decrease market acceptance sales present future products would significantly harm business financial results even able anticipate develop commercially introduce new products enhancements assurance new products enhancements achieve widespread market acceptance failure future products achieve market acceptance could adversely affect business financial results ability develop market sell products could harmed unable retain hire key personnel future success depends upon continued services executive officers key engineering sales marketing support personnel none officers key employees bound employment agreement specific term loss services key employees inability attract retain qualified personnel future delays hiring required personnel particularly engineers could delay development introduction negatively impact ability develop market sell support products fail accurately predict manufacturing requirements could incur additional costs would harm results operations experience manufacturing delays would harm business contract manufacturers obligated supply products specific period specific quantity specific price except may provided particular purchase order longterm supply contracts addition lead times required materials components vary significantly depend factors specific supplier contract terms demand component given time provide contract manufacturers demand forecast overestimate requirements contract manufacturers may assess charges could negatively impact gross margins example quarter ended september 30 2001 recorded charge approximately 399 million associated contractual liabilities carrying charges excess material contract manufacturers underestimate requirements contract manufacturers may inadequate inventory could interrupt manufacturing products result delays shipments revenues dependent sole source limited source suppliers several key components make us susceptible shortages price fluctuations current demand electronic products component shortages possible predictability availability components may limited currently purchase several key components including asics single limited sources example ibm asic supplier may able develop alternate second source timely manner could hurt ability deliver product customers unable buy components timely basis able deliver product customers would seriously impact present future sales would turn adversely affect business currently depend contract manufacturers longterm supply contracts changes relationships expected unexpected may result delays disruptions could cause us lose revenue damage customer relationships depend independent contract manufacturers third party manufacturer numerous companies manufacture products longterm supply contract manufacturers fail effectively manage contract manufacturer relationships one experience delays disruptions quality control problems manufacturing operations ability ship products customers could delayed could adversely affect business financial results litigation regarding intellectual property rights may time consuming require significant amount resources prosecute defend therefore may expend substantial amount resources make products noninfringing may pay substantial amount money damages third parties may future assert claims initiate litigation related exclusive patent copyright trademark intellectual property rights technologies related standards relevant us example 2003 toshiba corporation filed suit us alleging products infringe certain toshiba patents asserted claims andor initiated litigation include claims us manufacturers suppliers customers alleging infringement proprietary rights respect products regardless merit claims timeconsuming result costly litigation require us develop noninfringing technologies enter license agreements furthermore potential high court awards necessarily predictable even arguably unmeritorious claims may settled significant funds infringement intellectual property claim made us third party successful fail develop noninfringing technology license proprietary rights commercially reasonable terms conditions business operating results financial condition could materially adversely affected party lawsuits determined adversely us could require us pay damages could harm business financial condition certain former officers current former members board directors subject various lawsuits assurance actions brought us resolved favor regardless whether favor lawsuits future lawsuits may become party future likely expensive time consuming defend resolve losses resulting claims could adversely affect profitability cash flow long sales implementation cycles products well expectation customers sporadically place large orders short lead times may cause revenues operating results vary significantly quarter customer’s decision purchase products involves significant commitment resources lengthy evaluation product qualification process result sales cycle may lengthy throughout sales cycle often spend considerable time educating providing information prospective customers regarding use benefits products even making decision purchase customers tend deploy products slowly deliberately timing deployment vary widely depends skill set customer size network deployment complexity customer’s network environment degree hardware software configuration necessary deploy products customers large networks usually expand networks large increments periodic basis accordingly expect receive purchase orders significant dollar amounts irregular basis long cycles well expectation customers tend sporadically place large orders short lead times may cause revenues operating results vary significantly unexpectedly quarter products incorporate rely upon licensed thirdparty technology licenses thirdparty technology continue available us become expensive revenues ability develop introduce new products could adversely affected integrate licensed thirdparty technology certain products time may required license additional technology third parties develop new products product enhancements thirdparty licenses may available continue available us commercially reasonable terms inability maintain relicense third party licenses required current products inability obtain thirdparty licenses necessary develop new products product enhancements could require us obtain substitute technology lower quality performance standards greater cost could harm business financial condition results operations due global nature operations economic social conditions changes particular country region could adversely affect sales increase costs expenses would material adverse impact financial condition conduct significant sales customer support operations directly indirectly resellers countries outside united states also depend operations contract manufacturers located outside united states years ended december 31 2003 2002 derived approximately 58 45 revenues respectively sales outside north america accordingly future results could materially adversely affected variety uncontrollable changing factors including among others political social unrest economic instability specific country region trade protection measures regulatory requirements may affect ability import export products various countries service provider government spending patterns affected political considerations difficulties staffing managing international operations factors could material adverse impact revenue costs expenses financial condition restructuring initiatives sufficient meet industry market conditions achieve future profitability may undertake restructuring initiatives may adversely affect business operating results financial condition response industry market conditions restructured business reduced workforce assumptions underlying restructuring efforts assessed ongoing basis may prove inaccurate may restructure business future achieve certain cost savings strategically realign resources restructuring assessed continue assess whether reduce workforce facilities well review recoverability tangible intangible assets including land purchased january 2001 decisions may result recording additional charges workforce reduction costs facilities reduction costs asset writedowns contractual settlements additionally estimates assumptions used asset valuations subject uncertainties accounting estimates respect useful life ultimate recoverability carrying basis assets including goodwill intangible assets result future market conditions may result charges write tangible intangible assets may able successfully implement initiatives undertaken restructuring business even successfully implemented initiatives may sufficient meet changes industry market conditions achieve future profitability furthermore workforce reductions may impair ability realize current future business objectives lastly costs actually incurred connection restructuring actions may higher estimated costs actions andor may lead anticipated cost savings exposed fluctuations currency exchange rates could negatively affect financial results cash flows significant portion business conducted outside united states face exposure adverse movements nonus currency exchange rates exposures may change time business practices evolve could material adverse impact financial results cash flows majority revenue expenses transacted us dollars also transactions denominated foreign currencies primarily japanese yen hong kong dollar british pound euro related sale service operations outside united states increase value us dollar could increase real cost customers products markets outside united states sell us dollars weakened dollar could increase cost local operating expenses procurement raw materials extent must purchase components foreign currencies currently hedge currency exposures associated certain assets liabilities denominated nonfunctional currencies periodically hedge anticipated foreign currency cash flows hedging activities undertaken us intended offset impact currency fluctuations certain nonfunctional currency assets liabilities attempts hedge risks may successful resulting adverse impact net income quarterly results inherently unpredictable subject substantial fluctuations result may fail meet expectations securities analysts investors could adversely affect trading price common stock revenues operating results booktobill ratio financial indicators vary significantly quarter due number factors including many outside control may cause stock price fluctuate factors may impact unpredictability quarterly results include reduced visibility customers’ spending plans changing market conditions resulted customer potential customer bankruptcies change mix products sold higher priced core products lower priced edge products long sales implementation cycle result believe quartertoquarter comparisons operating results good indication future performance likely future quarters operating results may expectations securities analysts investors case price common stock may fall fail adequately evolve financial managerial control reporting systems processes ability manage grow business negatively impacted ability successfully offer products implement business plan rapidly evolving market requires effective planning management process expect need continue improve financial managerial control reporting systems procedures order manage business effectively future fail continue implement improved systems processes ability manage business results operations may negatively impacted sell products customers use products build networks ip infrastructure networks ip infrastructure continue grow business operating results financial condition adversely affected substantial portion business revenue depends growth ip infrastructure deployment products customers depend continued growth ip services result changes economy capital spending past particularly affected telecommunications service providers spending ip infrastructure vary significant reduction spending would adversely affect business regulation telecommunications industry could harm operating results future prospects telecommunications industry highly regulated business financial condition could adversely affected changes regulations relating telecommunications industry currently laws regulations apply directly access commerce data networks could adversely affected regulation networks commerce occurring country operate regulations could include matters voice internet using internet protocol encryption technology access charges service providers adoption regulations could decrease demand products time increase cost selling products could material adverse effect business operating results financial condition item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results company based current expectations estimates forecasts projections industry company operates beliefs assumptions management company words ‘expects’ ‘anticipates’ ‘targets’ ‘goals’ ‘projects’ ‘intends’ ‘plans’ ‘believes’ ‘seeks’ ‘estimates’ variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “factors may affect future results” elsewhere reports company files securities exchange commission “sec” specifically recent reports form 10q joint proxyprospectus included registration statement form s4 filed sec declared effective march 11 2004 company undertakes obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions overview results operations aid understanding operating results years ended december 31 2004 2003 2002 believe overview significant events affected periods discussion nature operating expenses helpful significant events april 2004 completed acquisition netscreen technologies inc “netscreen” order expand customer base portfolio products netscreen developed marketed sold broad array integrated network security solutions enterprises carriers government entities included results operations results netscreen beginning april 16 2004 therefore revenues cost revenues operating expenses significantly greater 2004 compared 2003 2002 result netscreen acquisition expanded customer base portfolio products resulted two categories networking products infrastructure products consist predominately original juniper networks products security products consist predominately former netscreen products july 2002 completed acquisition unisphere subsidiary siemens corporation subsidiary siemens ag “siemens” since acquisition siemens one significant resellers unisphere developed manufactured sold data networking equipment optimized applications edge service provider networks acquisition enabled us expand 16 customer base add complementary product existing infrastructure product line without need reorganize modify existing organizational cost structure included results operations 2002 results unisphere july 1 2002 unisphere acquisition impacted revenue cost revenues operating expenses second half 2002 results 2003 include full year results combined companies implemented several restructuring plans last four years result economic slowdown began 2001 acquisitions unisphere netscreen connection acquisitions unisphere netscreen initiated plans eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions three months ended september 30 2003 announced would longer develop gseries cmts products recorded charge comprised workforce reduction costs noninventory asset impairment costs associated vacating facilities terminating contracts related costs 2004 adjusted restructuring reserves changes estimates primarily related changes lease sublease assumptions needs changed result netscreen acquisition real estate markets changed three months ended june 30 2003 issued 4000 million zero coupon convertible senior notes due june 15 2008 “senior notes” january 1 2003 december 31 2004 paid 9370 million retire remaining 475 convertible subordinated notes due march 15 2007 “subordinated notes” transactions affected cash equivalents investments interest income interest expense nature expenses netscreen significant distribution channel place time acquisition using channel target new customers increase sales plan increase volume sales go distribution channel 2005 compared prior years shift selling products distribution channel may impact gross margins manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs independent contract manufacturers produce products using design specifications quality assurance programs standards establish controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities primarily wisconsin canada malaysia generally contract manufacturers retain title underlying components finished goods inventory customers take title assembled final product upon shipment contract manufacturer’s facility contract manufacturers procure components based build forecasts actual component usage lower forecasts may past liable carrying obsolete material charges carrying obsolete charges decreased past two years global economy product revenue improved employee related costs historically primary driver operating expenses expect trend continue employee related costs include items wages commissions bonuses vacation benefits travel added 900 employees across functions result netscreen acquisition added approximately 400 employees unisphere acquisition july 2002 2948 1553 1542 employees december 31 2004 2003 2002 respectively facility information technology departmental costs allocated departments based headcount departmental costs increased last two years due increases headcount facility leases resulting acquisitions additional infrastructure systems support company’s growth expect costs continue increase 2005 headcount increases 17 research development expenses include • costs developing products components prototypes finished products • outside services certifications new products • equipment used testing • patent related costs several components research development effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses expense research development costs incurred plan increase investment research development 2005 compared prior years advance competitive advantage sales marketing expenses include costs promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives plan develop distribution channel increase sales marketing costs effort expand grow presence new markets serving private public networks full portfolio networking security products general administrative expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting certain corporate strategic services critical accounting policies estimates preparation consolidated financial statements related disclosures conformity accounting principles generally accepted united states requires us establish accounting policies contain estimates assumptions affect amounts reported consolidated financial statements accompanying notes policies include • revenue recognition • estimating future warranty costs valuation exposures associated contract manufacturing operations impact cost product revenues gross margins • provision income taxes impacts income tax expense tax related accruals • allowance doubtful accounts impacts general administrative expenses • initial continuing valuation goodwill purchased intangible assets impairment would impact operating expenses important accounting policies practices however adopted policies either generally require us make significant estimates assumptions otherwise require implementation adopted policy judgment policy base estimates historical experience also assumptions believe standard reasonable despite intention establish accurate estimates assumptions actual results could differ estimates various reasons including described “factors may affect future results” 18 revenue recognition recognize product revenue persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility reasonably assured unless future obligations things customer acceptance case revenue related costs deferred obligations met cases recognize product revenue upon shipment customers including valueadded resellers “var” practice identify end user prior shipment var defer revenues sales distributors information indicating distributor sold products customers recognize revenue service contracts services completed ratably period obligation majority service revenue earned customers purchase products enter service contracts service contracts typically oneyear renewable periods services 24hour customer support nonspecified updates hardware repairs addition service contracts also provide professional educational services arrangements products services bundled determine whether deliverables separable multiple units accounting allocate total fee arrangements individual deliverables either based relative fair values using residual method circumstances dictate recognize revenue deliverable accordance policies product service revenue recognition process requires us make judgments whether delivered item value customer standalone basis whether established objective reliable evidence fair value undelivered items ability recognize revenue future may affected actual selling prices significantly less fair values addition ability recognize revenue future impacted conditions imposed customers assessment collectibility assess probability collection reviewing customers’ payment history financial condition credit report probability collection reasonably assured revenue deferred payment collected amount product revenue recognized given period also impacted judgments made establishing reserve potential future product returns although arrangements endusers vars generally include contractual rights return general policy accept returns certain circumstances accepted may future accept product returns customers therefore provide reserve estimate future returns revenue period revenue recorded estimate future returns based factors historical return data current economic condition customer base addition get input sales support organizations potential product returns relating specific customer issues amount revenue recognize directly impacted estimates made establish reserve potential future product returns addition agreements distributors provide limited stock rotation price protection rights stock rotation rights provide distributors right exchange unsold inventory alternate products equal greater value price protection rights grant distributors right credit certain purchases event decreases prices products accrue credits based estimates expected stock rotation price protection obligations reserves require us exercise judgment determining historical experience applies new products new distributors estimate returns exchanges low additional charges incurred future periods additional charges could material adverse effect financial position results operations resellers distributors participate various cooperative marketing programs maintain estimated accruals allowances programs actual amounts paid resellers distributors programs deviate significantly estimates based inputs channel marketing department historical experience revenue could adversely affected 19 warranty reserves generally offer oneyear warranty hardware products 90day warranty media contains software embedded products warranty generally includes parts labor obtained 24hour service center occasion specific terms conditions warranties vary accrue warranty costs based estimates costs may incurred warranty obligations including material costs technical support labor costs associated overhead warranty accrual included cost revenues recorded time revenue recognized factors affect warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimated support labor costs associated overhead estimates anticipated rates warranty claims costs per claim primarily based historical information future forecasts periodically assess adequacy recorded warranty liabilities adjust amounts necessary actual warranty claims significantly higher forecast actual costs incurred provide warranty greater forecast gross margins could adversely affected contract manufacturer exposures outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based build forecasts based estimates future demand products turn based historical trends analysis sales marketing organizations adjusted overall market conditions actual component usage product demand significantly lower forecast may caused factors outside control contractual liabilities exposures independent contract manufacturers carrying costs obsolete material exposures would adverse impact gross margins profitability provision income taxes tax related accruals estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 accounting income taxes record valuation allowance reduce deferred tax assets amount believe likely realizable accordingly valuation allowance amount equal us domestic net deferred tax assets established reflect uncertainty regarding future realization assets part due potential impact future stock option deductions addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result allowance doubtful accounts make ongoing assumptions relating collectibility accounts receivable calculation allowance doubtful accounts determining amount allowance make judgments creditworthiness customers based ongoing credit evaluations assess current economic trends affecting customers might impact level credit losses future result different rates bad debts previously seen also consider historical level credit losses reserves historically adequate cover actual credit losses actual credit losses significantly greater reserves established general administrative expenses would increase conversely actual credit losses significantly less reserves general administrative expenses would decrease 20 valuation goodwill purchased intangible assets purchased intangible assets carried cost less accumulated amortization purchased intangibles computed using straightline method related expected useful lives four seven years goodwill carried fair value perform goodwill impairment tests annually interim basis certain circumstances performed impairment analysis november 2004 determined impairment goodwill time addition quarterly basis assess impairment indictors past quarter could impacted carrying value goodwill purchased intangible assets valuing goodwill purchased intangible assets connection initial purchase price allocation ongoing evaluation impairment estimate • assets liabilities two reporting units infrastructure security • market value reporting unit • future cash flows applicable reporting unit • useful lives estimates include using revenue earnings multiples test date discounting present value free cash flows expected generated reporting units periods time products demand changes key assumptions business reporting units prospects changes market conditions externalities could result impairment charge could material adverse effect results operations results operations net revenues following table shows product service net revenues absolute dollars percentage total net revenues years ended december 31 2004 2003 2002 thousands net revenues last three years increased primarily result improving global economy resulted increases customers’ capital expenditures products beginning mid2001 overall global economy deteriorated customers reduced capital expenditure budgets began see factors improve 2003 evidenced increases infrastructure chassis revenue units ports shipped following table shows infrastructure revenue units ports shipped last three years infrastructure products contributed 9757 million product net revenues 2004 track infrastructure revenue units ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms essentially modular chassis serving base platform chassis certain number slots available populated components refer modules interfaces modules components router receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period 21 security products contributed 1872 million product net revenues 2004 based approximately 81000 units acquisition enabled us cross sell infrastructure security products customer bases expanded market share entered markets 2004 begun experience increased price competition price competition limited date evidenced increase revenue dollars product gross margins compared yearago period expect see increasing price competition downward pressure product gross margins future service net revenues increased last two years result larger installed base customers products majority service revenue earned customers purchase products enter service contracts siemens accounted greater 10 net revenues 2004 2003 ericsson ab “ericsson” accounted greater 10 net revenues 2003 2002 following table shows net revenue geographic region thousands experienced shift net revenues percentage total net revenues americas region europe asia 2002 2003 customers’ spending americas region declined however customers’ spending improved 2003 2004 americas region grew percentage total net revenues given current environment expect split among americas international regions remain relatively consistent 2004 2005 cost revenues following table shows cost product service revenues related gross margin “gm” percentages years ended december 31 2004 2003 2002 thousands sixpoint increase product gross margins 2003 2004 primarily due costcutting initiatives resulted standard costs manufacturing support costs increasing lesser rate product net revenues terms absolute dollars periods addition standard margins security products favorable standard margins infrastructure products improvement gross margins also result 160 million reduction carrying obsolescence charges 2003 2004 historical charges paid contract manufacturers decreased increase gross margins partially offset acquisition charges related netscreen acquisition increased cost product revenues 55 million inventory writeup adjustment amortization order backlog intangible asset 22 fivepoint increase product gross margins 2002 2003 primarily due savings outsourced manufacturing costs result improved efficiencies cost cutting initiatives contract manufacturers increase product gross margins also due 191 million decrease carrying obsolete material charges 2002 2003 addition 2002 included charge 51 million related unisphere acquisition backlog orders inventory writeup adjustment service gross margins increased three points 2003 2004 seven points 2002 2003 result improved efficiencies economies scale direct result larger installed base thus leveraged service organization increased leverage evidenced fact total employee related expenses decreased percentage service revenue last two years 26 2004 27 2003 29 2002 however absolute dollars employee related expenses increased 185 million 2003 2004 39 million 2002 2003 increases absolute dollars due netscreen unisphere acquisitions addition absolute dollars outside services costs increased 93 million 2003 2004 primarily due netscreen acquisition finally costs associated spare parts decreased percent service revenue 2003 2004 remained approximately terms absolute dollars however costs spare parts increased percent service revenue 2002 2003 costs increased 26 million terms absolute dollars research development sales marketing general administrative expenses following table shows research development sales marketing general administrative expenses absolute dollars percentage total net revenues years ended december 31 2004 2003 2002 thousands research development expenses increased 623 million 2004 compared 2003 decreased percent total net revenues increase absolute dollars primarily due employee related expenses increasing 424 million yearoveryear result netscreen acquisition increase research development expenses also result 65 million increase expensed equipment primarily used test activities 56 million increase prototype expense increase expensed equipment due additional research development requirements resulting netscreen acquisition prototype expenses closely tied product launches testing certification needed product offered public amounts reported given period vary depending product developed timing release research development expenses increased 142 million 2003 compared 2002 decreased percent total net revenues increase absolute dollars primarily due 132 million increase employee related expenses result full year operations acquisition unisphere addition stopped paying bonuses 2002 part overall corporate cost cutting initiatives however started accrue employee bonuses second half 2003 financial results improved offsetting increase employee related expenses 25 million decrease consulting contractor services due overall corporate cost cutting initiatives 25 million decrease prototype expenses sales marketing expenses increased 1566 million 2004 compared 2003 increased percent total net revenues increase absolute dollars primarily due employee related expenses increasing 1047 million yearoveryear result netscreen acquisition increase revenue marketing related expenses increased 223 million due netscreen acquisition branding combined companies development distribution channel 23 channel sales outside services increased 70 million due professional services related marketing activities addition demonstration equipment increased 64 million due netscreen acquisition related purchase security demonstration products direct sales force resellers demonstration equipment expensed immediately closely tied product launches date incurred significant advertising expenses sales marketing expenses increased 190 million 2003 compared 2002 decreased percent total net revenues majority increase absolute dollars 214 million increase employee related expenses sales organization addition customer facing expenses marketing events customer programs increased 20 million offsetting increases decrease 28 million demonstration equipment general administrative expenses increased 248 million 2004 compared 2003 remained 4 total net revenues increase absolute dollars driven 136 million increase professional services 93 million increase employee related expenses general administrative expenses decreased 58 million percent total net revenues 2003 compared 2002 majority decrease due 71 million reduction bad debt expense 2003 compared 2002 reduction result successful expected collection efforts absence significant customer bankruptcies decrease bad debt expense partially offset 14 million increase professional services related certain strategic consulting activities operating expenses following table shows operating expenses years ended december 31 2004 2003 2002 thousands amortization purchased intangibles deferred stock compensation amortization expense intangible assets increased 361 million 2004 compared 2003 due intangible assets purchased netscreen acquisition amortization expense intangible assets increased 68 million 2003 compared 2002 due intangible assets purchased unisphere acquisition see note 3 item 8 information purchased intangible assets amortization expense deferred stock compensation increased 419 million 2004 compared 2003 due netscreen acquisition amortization expense deferred stock compensation 20 million 04 million 2003 2002 respectively see note 3 item 8 information deferred stock compensation restructuring implemented several restructuring plans last four years result economic slowdown began 2001 began improve 2003 acquisitions unisphere netscreen 2004 reduced previously established restructuring reserves 24 55 million changes estimates primarily related changes lease sublease assumptions found needs changed result netscreen acquisition real estate markets changed reduction offset restructuring charge 04 million three months ended june 30 2004 primarily related netscreen acquisition restructuring charge recorded 2004 completely paid remaining restructuring charges prior years primarily facility leases following summary restructuring plans related charges remaining obligations • time netscreen acquisition accrued restructuring charges 213 million primarily related professional services severance facility charges recorded part acquisition impact statement operations approximately 126 million remaining paid primarily facility leases extend 2008 • third quarter 2003 announced longer developing gseries cmts products recorded charge approximately 140 million comprised workforce reduction costs noninventory asset impairment vacating facilities costs associated termination contracts related costs approximately 24 million remaining paid primarily facility lease extends july 2008 • third quarter 2002 connection acquisition unisphere recorded restructuring expenses approximately 149 million associated primarily workforce related costs vacating duplicative facilities contract termination costs noninventory asset impairment charges associated costs approximately 12 million remaining paid primarily facility leases extend april 2009 • time unisphere acquisition accrued restructuring charges 148 million primarily related professional services severance facility charges recorded part acquisition impact statement operations approximately 14 million remaining paid primarily facility leases extend march 2011 • recognized charge approximately 53 million third quarter 2002 related land acquired january 2001 located sunnyvale california charge primarily costs exiting certain contractual obligations associated land currently plans develop land foreseeable future see note 5 item 8 complete description restructuring charges amounts remaining paid inprocess research development allocation netscreen purchase price included 275 million inprocess research development “iprd” expensed second quarter 2004 projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition netscreen multiple iprd efforts way certain current future product lines efforts included developing integrating secure routers embedded encryption chips well functions features next generation internet protocol “ip” wireless digital subscriber line connectivity voice ip capability time netscreen acquisition estimated development efforts would completed next eighteen months estimated cost approximately 25 million december 31 2004 estimated development efforts would completed next nine months estimated cost approximately 105 million unisphere acquisition included 827 million iprd development efforts completed december 31 2003 25 integration incurred integration expenses approximately 51 million related netscreen acquisition 25 million related unisphere acquisition integration expenses incremental costs directly related integration two companies integration expenses consisted principally workforce related expenses individuals transitioning positions professional fees income expenses following table shows income expenses years ended december 31 2004 2003 2002 thousands interest income decreased 52 million 2003 2004 230 million 2002 2003 decreases result lower rates return realized investments less realized gains partially offset gain 35 million 2004 nonrecurring engineering contract interest expense decreased 337 million 2003 2004 165 million 2002 2003 almost entirely due interest saved retirement subordinated notes certain minority equity investments privately held companies carried cost adjusted impairment controlling interest ability exercise significant influence companies wrotedown investments 29 million 505 million 2004 2002 respectively changes market value believed temporary spent 1450 million 7920 million 1460 million 2004 2003 2002 respectively retire subordinated notes recognized net losses 41 million 11 million 2004 2003 respectively recognized gain 629 million 2002 losses gains result difference carrying value subordinated notes time retirement including unamortized debt costs amount paid extinguish notes first second quarters 2003 sold marketable equity securities classified availableforsale cost basis 43 million recognized gains 87 million second quarter 2001 entered joint venture agreement ericsson develop market products wireless internet infrastructure market recognized portion net loss joint venture ericsson amount 13 million 2002 december 31 2002 capital funding obligations joint venture 26 provision income taxes provision income taxes increased 833 million 2004 198 million 2003 due increase income taxes effective rates approximately 38 34 years ended december 31 2004 2003 respectively increase primarily due inprocess research development expenses related acquisition deductible tax purposes 2004 effective tax rate reflects taxes payable certain foreign jurisdictions benefit tax credits inability benefit certain charges losses 2003 effective rate reflects taxes payable certain foreign jurisdictions benefit research credits capital loss carryforwards inability benefit certain charges losses internal revenue service irs concluded audit federal income tax returns fiscal years 1999 2000 2004 received notice proposed adjustment nopa irs final resolution issues raised nopa uncertain believe made adequate provisions accompanying consolidated financial statements adjustments irs proposed respect tax returns conjunction irs income tax audit certain us payroll tax returns currently examination fiscal years 1999 2001 received second nopa amount 117 million employment tax assessments primarily related timing tax deposits related employee stock option exercises intend dispute assessment irs resolve issue appeals level currently believe probable final assessment sustained believe liability reasonably estimated time event issue resolved unfavorably exists possibility material adverse impact results operations period unfavorable outcome becomes probable reasonably estimable liquidity capital resources overview funded business issuing securities operating activities following table shows capital resources thousands certain amounts reclassified conform current period presentation see note 2 item 8 information working capital increased 4855 million 2003 2004 primarily due cash provided operations 4394 million significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities deferred revenue based past performance current expectations believe cash equivalents shortterm investments cash generated operations satisfy working capital needs capital expenditures commitments liquidity requirements associated existing operations least next 12 months addition transactions arrangements relationships unconsolidated entities persons reasonably likely materially affect liquidity availability requirements capital resources 27 cash requirements contractual obligations following table summarizes principal contractual obligations december 31 2004 effect obligations expected liquidity cash flow future periods thousands occupy approximately 13 million square feet world wide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires may 2014 b principal commitment december 31 2004 outstanding zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes issued june 2003 senior unsecured obligations rank parity right payment existing future senior unsecured debt rank senior existing future debt expressly provides subordinated notes senior notes bear interest convertible shares common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances c contractual obligations consist primarily agreement purchase portfolio patents 120 million paid january 2005 patents amortized useful lives average 121 years firm purchase commitments contract manufacturers order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders valued 699 million december 31 2004 based build forecasts take ownership components ncnr orders represent firm purchase commitments pursuant agreements contract manufacturers components used contract manufacturers build products based purchase orders received customers incur liability products built contract manufacturer fulfills customer’s order ships however components go unused may assessed carrying charges obsolete charges december 31 2004 accrued 190 million based estimate charges operating activities net cash provided operating activities 4394 million 1786 million 24 million years ended december 31 2004 2003 2002 respectively cash provided operating activities period due net income loss adjusted 28 investing activities net cash used investing activities 585 million year ended december 31 2004 net cash provided investing activities 3001 million year ended december 31 2003 net cash used investing activities 2955 million year ended december 31 2002 investing activities included capital expenditures purchases maturities availableforsale securities capital expenditures increased 2003 2004 due business growing netscreen acquisition capital expenditures decreased 2002 2003 part overall corporate cost cutting initiatives investing activities include financing activities net cash used financing activities 334 million 3075 million 1194 million years ended december 31 2004 2003 2002 respectively cash provided periods issuance common stock related employee option exercises stock purchase plans spent 1450 million 7920 million 1460 million 2004 2003 2002 respectively retire subordinated notes spent 636 million 2004 retire 29 million shares common stock second quarter 2003 received net proceeds 3928 million issuance senior notes recent accounting pronouncements december 2004 fasb revised sfas 123 “fas 123r” sharebased payment requires companies expense estimated fair value employee stock options similar awards accounting provisions fas 123r effective us beginning third quarter fiscal 2005 adopt provisions fas 123r using modified prospective application modified prospective application fas 123r provides certain changes method valuing stockbased compensation among changes apply new awards outstanding effective date subsequently modified cancelled compensation expense outstanding awards requisite service rendered effective date recognized remaining service period using compensation cost calculated pro forma disclosure purposes fas 123 see note 2 notes consolidated financial statements process determining new method valuing stockbased compensation prescribed fas 123r applied valuing stockbased awards granted effective date impact recognition compensation expense related awards financial statements emerging issues task force issued eitf issue 048 effect contingently convertible debt diluted earnings per share “eitf 048” september 2004 eitf 048 states issued securities embedded conversion features contingently exercisable upon occurrence marketprice condition included calculation diluted eps regardless whether market price trigger met eitf 048 consensus must applied retroactive restatement based terms effect amounts outstanding last day fiscal period 29 consensus becomes effective eitf 048 effective us beginning fourth quarter 2004 eitf 048 applied senior notes issued june 2003 application eitf 048 reduced 2003 diluted earnings per share one cent restated diluted shares earnings per share year ended december 31 2003 factors may affect future results investments equity securities publicly traded companies involve significant risks market price stock reflects higher multiple expected future earning many companies accordingly even small changes investor expectations future growth earnings whether result actual financial results acquisitions industry changes factors could trigger significant fluctuations market price common stock investors securities carefully consider relevant factors including limited following factors could affect stock price face intense competition could reduce revenues adversely affect financial results competition intense markets address ip infrastructure market historically dominated cisco systems inc companies alcatel sa nortel networks corporation huawei technologies providing products smaller segment market addition number small public private companies products announced plans new products address challenges products address security products market face intense competition broader group companies including appliance vendors cisco systems inc sonicwall inc watchguard technologies software vendors checkpoint software technologies symantec corporation also compete various emerging private companies lowcost network hardware suppliers may position products replacements unable compete successfully existing future competitors basis product offerings price could experience loss market share revenues andor required reduce prices could reduce gross margins could materially adversely affect business operating results financial condition rely valueadded resellers distribution partners sell products disruptions failure effectively develop manage distribution channel processes procedures support could adversely affect ability generate revenues sale products future success highly dependent upon establishing maintaining successful relationships variety valueadded reseller distribution partners majority revenues derived valueadded resellers distributors also sell competitors’ products revenues depend part performance distributors valueadded resellers loss reduction sales valueadded resellers distributors could materially reduce revenues competitors may cases effective incentivizing resellers potential resellers favor products prevent reduce sales products fail maintain relationships distribution partners fail develop new relationships valueadded resellers distributors new markets expand number resellers existing markets fail manage train incent existing valueadded resellers distributors effectively partners successful sales efforts sales products may decrease operating results would suffer addition recognize substantial portion revenue based sellthrough model using information provided distributors provide us inaccurate untimely information amount timing revenues could adversely impacted 30 order develop expand distribution channel must continue scale improve processes procedures support processes procedures may become increasingly complex inherently difficult manage failure successfully manage develop distribution channel processes procedures support could adversely affect ability generate revenues sale products integration past acquisitions future acquisitions could disrupt business harm financial condition stock price may dilute ownership stockholders made may continue make acquisitions order enhance business acquisitions involve numerous risks including problems combining purchased operations technologies products unanticipated costs diversion management’s attention core businesses adverse effects existing business relationships suppliers customers risks associated entering markets limited prior experience potential loss key employees assurance able successfully integrate businesses products technologies personnel might acquire integration businesses acquired continue complex time consuming expensive process example although completed acquisition netscreen april 2004 integration products product roadmap operations personnel continuing activity foreseeable future acquisitions may also require us issue common stock dilutes ownership current stockholders assume liabilities record goodwill nonamortizable intangible assets subject impairment testing regular basis potential periodic impairment charges incur amortization expenses related certain intangible assets incur large immediate writeoffs restructuring related expenses could harm operating results financial condition addition fail integration efforts unable efficiently operate combined organization utilizing common information communication systems operating procedures financial controls human resources practices business financial condition may adversely affected limited number customers comprise significant portion revenues decrease revenue customers could adverse effect net revenues operating results substantial majority net revenues depend sales limited number customers distribution partners siemens accounted greater 10 net revenues 2004 2003 ericsson ab accounted greater 10 net revenues 2003 2002 downturn business customers potential new customers could significantly decrease sales customers could adversely affect net revenues results operations addition continues consolidation telecommunications industry example recently announced planned acquisitions att mci sbc verizon respectively consolidation may cause customers involved acquisitions suspend indefinitely reduce purchases products unforeseen consequences expect gross margin vary time recent level product gross margin may sustainable recent level product gross margins may sustainable may adversely affected future numerous factors including product mix shifts increased price competition one markets compete increases material labor costs excess inventory obsolescence charges contract manufacturers increased costs due changes component pricing charges incurred due inventory holding periods forecasts accurately anticipate product demand introduction new products entry new markets different pricing cost structures 31 dependent sole source limited source suppliers several key components makes us susceptible shortages price fluctuations supply chain may face increased challenges supply chain management future current demand electronic products component shortages possible predictability availability components may limited growth business economy likely create greater pressures us suppliers accurately project overall component demand establish optimal component levels shortages delays persist price components may increase components may available may able secure enough components reasonable prices acceptable quality build new products timely manner revenues gross margins could suffer sources developed currently purchase numerous key components including applicationspecific integrated circuits asics single limited sources development alternate sources components time consuming difficult costly example ibm sole asic supplier infrastructure products toshiba america electronic components inc sole asic supplier security products addition lead times associated certain components lengthy preclude rapid changes quantities delivery schedules event component shortage supply interruption suppliers may able develop alternate second sources timely manner result unable buy components quantities sufficient meet requirements timely basis able deliver product customers would seriously impact present future sales would turn adversely affect business addition development licensing acquisition new products future may increase complexity supply chain management failure effectively manage supply key components products would adversely affect business fail accurately predict manufacturing requirements could incur additional costs experience manufacturing delays would harm business provide demand forecasts contract manufacturers overestimate requirements contract manufacturers may assess charges may liabilities excess inventory could negatively affect gross margins conversely lead times required materials components vary significantly depend factors specific supplier contract terms demand component given time underestimate requirements contract manufacturers may inadequate materials components required produce products could interrupt manufacturing products result delays shipments deferral loss revenues dependent contract manufacturers longterm supply contracts changes relationships expected unexpected may result delays disruptions could cause us lose revenue damage customer relationships depend independent contract manufacturers third party manufacturer numerous companies manufacture products although contracts contract manufacturers contracts require manufacture products longterm basis specific quantity specific price addition time consuming costly qualify implement additional contract manufacturer relationships therefore fail effectively manage contract manufacturer relationships one experience delays disruptions quality control problems manufacturing operations change add additional contract manufacturers ability ship products customers could delayed also addition manufacturing locations contract manufacturers would increase complexity supply chain management example one contract manufacturers recently begun manufacturing malaysia factors could adversely affect business financial results fluctuating economic conditions make difficult predict revenues particular period shortfall revenues may harm operating results revenues depend significantly general economic conditions demand products markets compete economic weakness customer financial difficulties constrained spending 32 network expansion previously resulted example 2001 2002 may future result decreased revenues earnings could also negatively impact ability forecast manage contract manufacturer relationships economic downturns may also lead restructuring initiatives associated expenses impairment investments addition operating expenses largely based anticipated revenue trends high percentage expenses continue fixed shortterm uncertainty future economic conditions makes difficult forecast operating results make decisions future investments future economic weakness customer financial difficulties reductions spending network expansion could material adverse effect demand products consequently results operations stock price products highly technical contain undetected software hardware errors business could adversely affected might defend lawsuits pay damages connection alleged actual failure products services products highly technical complex critical operation many networks case security products provide monitor network security may protect valuable information products contained may contain one undetected errors defects security vulnerabilities errors products may discovered product installed used end customers errors security vulnerabilities discovered products commercial release could result loss revenues delay revenue recognition loss customers increased service warranty cost could adversely affect business results operations addition could face claims product liability tort breach warranty defending lawsuit regardless merit costly may divert management’s attention addition business liability insurance coverage inadequate future coverage unavailable acceptable terms financial condition could harmed products interoperate customers’ networks installations delayed cancelled could harm business products designed interface customers’ existing networks different specifications utilize multiple protocol standards products vendors many customers’ networks contain multiple generations products added time networks grown evolved products required interoperate many products within networks well future products order meet customers’ requirements find errors existing software defects hardware used customers’ networks may modify software hardware fix overcome errors products interoperate scale existing software hardware could costly negatively impact operating results addition products interoperate customers’ networks orders products could cancelled products could returned could hurt operating results damage reputation seriously harm business prospects traditional telecommunications companies large companies generally require onerous terms conditions vendors seek sell products customers may required agree terms conditions may adverse effect business traditional telecommunications companies large companies size generally greater purchasing power accordingly requested received favorable terms often translate onerous terms conditions vendors seek sell products class customer may required agree terms conditions may include terms affect ability recognize revenue adverse effect business financial condition example many customers class purchased products vendors promised certain functionality failed deliver functionality andor products caused problems outages networks customers result class customers may 33 request additional features us require substantial penalties failure deliver features may require substantial penalties network outages may caused products additional requests penalties required agree may affect ability recognize revenues sales may negatively affect business financial condition successfully anticipate market needs develop products product enhancements meet needs products gain market acceptance may able compete effectively ability generate revenues suffer cannot guarantee able anticipate future market needs able develop new products product enhancements meet needs meet timely manner fail anticipate market requirements develop new products product enhancements meet needs failure could substantially decrease market acceptance sales present future products would significantly harm business financial results even able anticipate develop commercially introduce new products enhancements assurance new products enhancements achieve widespread market acceptance failure products achieve market acceptance could adversely affect business financial results ability develop market sell products could harmed unable retain hire key personnel future success depends upon ability recruit retain services key executive engineering sales marketing support personnel supply highly qualified individuals particular engineers specialized technical areas limited competition individuals intense none officers key employees bound employment agreement specific term loss services key employees inability attract retain key personnel future delays hiring required personnel particularly engineers could delay development introduction new products negatively impact ability market sell support products recent rulemaking financial accounting standards board require us expense equity compensation given employees significantly harm operating results may reduce ability effectively utilize equity compensation attract retain employees historically used stock options significant component employee compensation program order align employees’ interests stockholders encourage employee retention provide competitive compensation packages financial accounting standards board adopted changes require companies record charge earnings employee stock option grants equity incentives beginning july 1 2005 causing us incur significantly increased compensation costs accounting changes reduce reported earnings require us reduce availability amount equity incentives provided employees may make difficult us attract retain motivate key personnel results could materially adversely affect business litigation regarding intellectual property rights may time consuming expensive require significant amount resources prosecute defend make products noninfringing third parties asserted may future assert claims initiate litigation related exclusive patent copyright trademark intellectual property rights technologies related standards relevant products example 2003 toshiba corporation filed lawsuit us alleging products infringe certain toshiba patents asserted claims andor initiated litigation may include claims us manufacturers suppliers customers alleging infringement proprietary rights respect products regardless merit claims timeconsuming result costly litigation may require us develop noninfringing technologies enter license agreements furthermore potential high awards damages necessarily predictable even arguably unmeritorious claims may settled significant amounts money infringement intellectual property claim made 34 us third party successful required settle litigation significant amounts money fail develop noninfringing technology license required proprietary rights commercially reasonable terms conditions business operating results financial condition could materially adversely affected party lawsuits determined adversely us could require us pay damages could harm business financial condition certain current former officers current former members board directors subject various lawsuits assurance actions brought us may brought us resolved favor regardless whether favor lawsuits future lawsuits may become party likely expensive time consuming defend resolve costs defense losses resulting claims could adversely affect profitability cash flow long sales implementation cycles products well expectation customers sporadically place large orders short lead times may cause revenues operating results vary significantly quarter customer’s decision purchase certain products involves significant commitment resources lengthy evaluation product qualification process result sales cycle may lengthy throughout sales cycle may spend considerable time educating providing information prospective customers regarding use benefits products even making decision purchase customers may deploy products slowly deliberately timing deployment vary widely depends skill set customer size network deployment complexity customer’s network environment degree hardware software configuration necessary deploy products customers large networks usually expand networks large increments periodic basis accordingly may receive purchase orders significant dollar amounts irregular basis long cycles well expectation customers tend sporadically place large orders short lead times may cause revenues operating results vary significantly unexpectedly quarter products incorporate rely upon licensed thirdparty technology licenses thirdparty technology continue available us become expensive revenues ability develop introduce new products could adversely affected integrate licensed thirdparty technology certain products time may required license additional technology third parties develop new products product enhancements thirdparty licenses may available continue available us commercially reasonable terms inability maintain relicense thirdparty licenses required products inability obtain thirdparty licenses necessary develop new products product enhancements could require us obtain substitute technology lower quality performance standards greater cost could harm business financial condition results operations breach network security could harm public perception security products could cause us lose revenues actual perceived breach network security occurs network customer security products regardless whether breach attributable products market perception effectiveness products could harmed could cause us lose current potential end customers cause us lose current potential valueadded resellers distributors techniques used computer hackers access sabotage networks change frequently generally recognized launched target may unable anticipate techniques 35 due global nature operations economic social conditions changes particular country region could adversely affect sales increase costs expenses would material adverse impact financial condition conduct significant sales customer support operations directly indirectly distributors valueadded resellers countries outside united states also depend operations contract manufacturers suppliers located outside united states accordingly future results could materially adversely affected variety uncontrollable changing factors including among others political social unrest economic instability specific country region trade protection measures regulatory requirements may affect ability import export products various countries service provider government spending patterns affected political considerations difficulties staffing managing international operations factors could material adverse impact revenue costs expenses financial condition success depends upon ability effectively plan manage resources restructure business rapidly fluctuating economic market conditions past restructuring efforts may prove inadequate may impair ability realize current future business objectives ability successfully offer products services rapidly evolving market requires effective planning management process enable us effectively scale business adjust business response fluctuating market opportunities conditions periods market expansion increased investment business example increasing headcount increasing investment research development parts business conversely 2001 2002 response downward trending industry market conditions restructured business reduced workforce addition expect change facilities certain locations may face difficulties significant expenses identifying moving suitable office space subleasing assigning surplus space changes similar actions taken respond fluctuating market economic conditions placed anticipated future operations continue place significant demands management resources may increase potential likelihood risks business may suffer fail effectively manage changes size scope operations may able successfully implement initiatives undertaken restructuring business past even successfully implemented initiatives may sufficient meet changes industry market conditions furthermore workforce reductions may impair ability realize current future business objectives lastly costs actually incurred connection restructuring actions may higher estimated costs actions andor may lead anticipated cost savings could harm results operations financial condition exposed fluctuations currency exchange rates could negatively affect financial results cash flows majority business conducted outside united states face exposure adverse movements nonus currency exchange rates exposures may change time business practices evolve could material adverse impact financial results cash flows majority revenues expenses transacted us dollars also transactions denominated foreign currencies primarily japanese yen hong kong dollar british pound euro related sales service operations outside united states increase value us dollar could increase real cost customers products markets outside united states sell us dollars weakened dollar could increase cost local operating expenses procurement raw materials extent must purchase components foreign currencies 36 currently hedge currency exposures associated certain assets liabilities denominated nonfunctional currencies periodically hedge anticipated foreign currency cash flows hedging activities undertaken us intended offset impact currency fluctuations certain nonfunctional currency assets liabilities attempts hedge risks successful net income could adversely impacted quarterly results inherently unpredictable subject substantial fluctuations result may fail meet expectations securities analysts investors could adversely affect trading price common stock revenues operating results may vary significantly quarter due number factors many outside control may cause stock price fluctuate factors may affect unpredictability quarterly results include limited visibility customer spending plans changing market conditions including customer potential customer bankruptcies changes mix products sold long sales implementation cycles regional economic political conditions seasonality example many companies experience seasonal fluctuations customer spending patterns particularly 1st 3rd quarters result believe quartertoquarter comparisons operating results necessarily good indication future performance likely future quarters operating results may one expectations securities analysts investors case price common stock may decline could occur occurred past even met publicly stated revenue andor earnings guidance fail adequately evolve financial managerial control reporting systems processes ability manage grow business negatively affected ability successfully offer products implement business plan rapidly evolving market depends upon effective planning management process need continue improve financial managerial control reporting systems procedures order manage business effectively future fail continue implement improved systems processes ability manage business results operations may negatively affected sell products customers use products build networks ip infrastructure network ip systems continue grow business operating results financial condition adversely affected substantial portion business revenue depends growth ip infrastructure deployment products customers depend continued growth ip services result changes economy capital spending past particularly affected telecommunications service providers spending ip infrastructure vary could material adverse effect business financial results governmental regulations affecting import export products could negatively affect revenues united states various foreign governments imposed controls export license requirements restrictions import export technologies especially encryption technology addition time governmental agencies proposed additional regulation encryption technology requiring escrow governmental recovery private encryption keys governmental regulation encryption technology regulation imports exports failure obtain required export approval encryption technologies could harm international domestic sales adversely affect revenues 37 believe currently adequate internal controls financial reporting exposed risks recent legislation requiring companies evaluate internal controls section 404 sarbanesoxley act 2004 requires management report independent auditors attest effectiveness internal control structure procedures financial reporting ongoing program perform system process evaluation testing necessary comply requirements expect incur significant expenses management resources section 404 compliance ongoing basis event chief executive officer chief financial officer independent registered public accounting firm determine future internal controls financial reporting effective defined section 404 investor perceptions may adversely affected could cause decline market price stock subject risks arising international operations derive majority revenues international operations plan continue expanding business international markets future result international operations affected economic regulatory political conditions foreign countries including changes spending generally imposition government controls changes limitations trade protection laws unfavorable changes tax treaties laws natural disasters labor unrest earnings expatriation restrictions misappropriation intellectual property acts terrorism continued unrest many regions factors could material impact international revenues operations particular countries may experience reduced intellectual property protection moreover local laws customs many countries differ significantly united states many foreign countries particularly developing economies common others engage business practices prohibited internal policies procedures united states regulations applicable us although implement policies procedures designed ensure compliance laws policies assurance employees contractors agents take actions violations laws key control policies employees contractors agents could result financial reporting problems fines penalties prohibition importation exportation products could material adverse effect business regulation telecommunications industry could harm operating results future prospects telecommunications industry highly regulated business financial condition could adversely affected changes regulations relating telecommunications industry currently laws regulations apply directly access commerce ip networks could adversely affected regulation ip networks commerce country operate regulations could include matters voice internet using internet protocol encryption technology access charges service providers adoption regulations could decrease demand products time increase cost selling products could material adverse effect business operating result financial condition changes effective tax rates adverse outcomes resulting examination income tax returns could adversely affect results future effective tax rates could adversely affected earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates changes valuation deferred tax assets liabilities changes tax laws interpretations thereof addition subject continuous examination income tax returns internal revenue service tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition 38 item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results company based current expectations estimates forecasts projections industry operate beliefs assumptions management words ‘expects’ ‘anticipates’ ‘targets’ ‘goals’ ‘projects’ ‘intends’ ‘plans’ ‘believes’ ‘seeks’ ‘estimates’ variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file securities exchange commission “sec” specifically recent reports form 10q undertake obligation revise update publicly forwardlooking statements reason information adjusted reflect restatement financial results fully described “explanatory note” immediately preceding part item 1 note 2 “restatement consolidated financial statements” notes consolidated financial statements form 10k following discussion based upon consolidated financial statements included elsewhere report prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation stockbased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions overview results operations aid understanding operating results three years period ended december 31 2006 believe overview significant events affected periods discussion nature operating expenses helpful significant events business market environment year 2006 marked 10th anniversary year considerable progress culminated record revenue results year fourth quarter addition standard poor’s “sp” added company sp 500 index close trading june 1 2006 continues consolidation telecommunications industry example acquisitions att inc mci inc bellsouth corporation consolidation among large vendors telecommunications equipment services combination alcatel sa lucent technologies inc acquisition redback networks inc ericsson believe innovation market momentum also allowed us build partnerships market leaders announced 2006 including avaya inc microsoft corporation nec symantec corporation total installed base products grown approximately 86 billion across 100 countries worldwide numbers result 400000 units shipped 20000 customers thanks help 9000 partners since inception 2006 major next generation network “ngn” wins service provider marketplace helping us achieve overall installed base 2500 units tseries north america emea selected countries asia saw significant success carriers selecting equipment core networks designed provide multiple types services voice data video called “multiplay” strategic focus us important growth opportunity future also seen increased level interest slt portfolio growing number service providers using slt products managed service offerings outsourced solutions customers fact number service providers buying slt products increased 50 2005 2006 successfully delivered products planned deliver 2006 despite risks associated long length product development testing acceptance cycles involved products markets made good progress 2006 building product portfolio market solid demand ip infrastructure restatement previously issued financial statements form 10k year ended december 31 2006 “2006 form 10k” restating consolidated balance sheet december 31 2005 related consolidated statements operations shareholders’ equity cash flows fiscal years ended december 31 2005 2004 result independent stock option investigation commenced board directors audit committee restatement fully described note 2 “restatement consolidated financial statements” consolidated financial statements item 7 “management’s discussion analysis financial condition results operations” 2006 form 10k also reflect restatement “selected consolidated financial data” item 6 fiscal years ended december 31 2005 2004 2003 2002 addition restating unaudited quarterly financial information financial statements interim periods 2005 unaudited condensed financial statements three months ended march 31 2006 financial information included reports form 10k form 10q form 8k filed us prior august 10 2006 related opinions independent registered public accounting firm earnings press releases similar communications issued us prior august 10 2006 relied upon superseded entirety report reports form 10q form 8k filed us sec august 10 2006 stock option investigation may 22 2006 issued press release form 8k announcing received request information relating stock option granting practices us attorney’s office eastern district new york press release form 8k announced board directors “board” directed board’s audit committee comprised outside directors conduct review stock option granting practices may 24 2006 received letter sec indicating sec conducting inquiry regarding juniper networks investigation conducted assistance independent counsel forensic accountants collectively “investigative team” investigation focused stock option grants made employees officers directors consultants period following initial public offering “ipo” june 24 1999 may 23 2006 “relevant period” addition audit committee investigation involved testing analyses hiring termination leave absence grant notification exercise practices regarding stock options certain issues regarding grants made ipo scope investigation include review options granted companies acquired us companies acquired us one exception privately held companies none acquisitions accounted pooling interests acquisitions accounted purchase method provided statement financial standards 141 business combinations predecessor accounting principles board opinion 16 business combinations connection investigation 785000 physical electronic documents reviewed 35 current former directors officers employees agents interviewed december 20 2006 announced key findings audit committee key findings audit committee • numerous instances grant dates chosen benefit hindsight price stock give favorable exercise prices regard audit committee identified serious concerns regarding actions certain former management connection stock option granting process • formal documentation stock option grants often lagged referenced grant date • grants made persons committees proper authority make grants question • management failed exercise sufficient responsibility stock option granting process • ceo scott kriens received two stock option awards whose measurement dates financial accounting purposes differ recorded grant dates awards however options exchanged cancelled unexercised 2001 part companywide option repricing program mr kriens exercised stock options since 1998 approximately nine months ipo • substantial changes granting procedures june 9 2003 2005 grants subsequent 2004 required new measurement dates • improper conduct compensation committee board directors regarding granting stock options bodies • audit committee expressed continuing confidence scott kriens current management company consistent accounting literature recent guidance sec organized grants relevant period categories based grant type process grant finalized analyzed evidence audit committee’s investigation related category including limited physical documents electronic documents underlying electronic data documents witness interviews based relevant facts circumstances applied appropriate accounting standards determine every grant within category proper measurement date measurement date originally assigned grant date accounting adjustments made required resulting stockbased compensation expense related tax effects grants made board directors compensation committee officers directors concluded measurement dates several grants executive officers “reporting persons” term defined section 16 securities exchange act 1934 amended “officers” members board directors made june 1999 june 2003 incorrect general relevant period board compensation committee board made grants officers directors grants sometimes approved meetings bodies action unanimous written consent several instances grants officers directors given grant dates corresponding exercise prices prior date formal corporate action making grant taken general appears done make grant date coincide either specific event appointment reelection director purported date options granted nonofficers cases determined correct measurement date board compensation committee took action approve grant also identified instances grants officers granted effective upon future event commencement employment closing acquisition cases determined date future event correct measurement date grants also identified instances grants officers made body authorized board make grants officers subsequently ratified board instances determined correct measurement date ratification occurred connection application measurement principles accounting forfeitures adjusted measurement compensation cost options covering 56 million shares common stock resulting incremental stockbased compensation expense 803 million pretax basis respective awards’ vesting terms addition one grant officer approval grant reflected minutes meeting action unanimous written consent board directors compensation committee grant measurement date determined based terms officer’s offer letter date employment commenced respect grant adjusted measurement compensation cost options covering 15 million shares common stock resulting incremental stockbased compensation expense 65 million pretax basis award’s vesting terms accounting forfeitures grants nonofficers concluded measurement dates large number grants nonofficers period june 1999 december 2004 incorrect practice grant stock options except prohibited nearly fulltime employees connection joining us facilitate granting options rapidly growing workforce board directors established stock option committee grant options nonofficer employees june 1999 june 2003 dates large number grants made stock option committee chosen benefit hindsight price stock give favorable exercise prices moreover stock option committee’s process finalizing documenting grants often completed originally assigned grant date beginning grants dated june 20 2003 implemented number new procedures policies regarding granting options nonofficer employees concluded pattern consciously looking back favorable dates employees ceased however documentation written approvals grant dates still generally trailed recorded grant dates based available facts circumstances originally recorded measurement dates grants made stock option committee period july 1999 december 2004 relied upon isolation correct measurement dates 2005 made additional changes procedures grants 2005 2006 required new measurement dates apb 25 defines measurement date determining stockbased compensation expense first date 1 number shares individual employee entitled receive 2 option purchase price known throughout relevant period company’s stock administration department entered option grant information grants made stock option committee equity edge stock administration system used monitor administer stock option program data equity edge sent regular basis designated brokers allowing grantees view options information accounts via internet grants made stock option committee june 1999 december 2004 reliable objective evidence pointing earlier single specific date number shares individuals entitled receive price become final determined equity edge entry date reliable measurement date calculating additional stockbased compensation expense apb 25 using measurement date accounting forfeitures adjusted measurement compensation cost options covering 742 million shares common stock resulting incremental stockbased compensation expense 6367 million pretax basis respective awards’ vesting terms many cases equity edge entry date used measurement date formal stock option committee granting documentation consisting unanimous written consents minutes related lists recipients amounts types awards created completed later date awards listed formal granting documentation differ grants entered equity edge notice awards made available employees prior creation completion granting documents completion documentation treated perfunctory determined equity edge entry date proper measurement date apb 25 rather date stock option committee granting documentation completed number cases reliable objective evidence pointing single specific date number shares individuals entitled receive price become final evidence primarily consisted electronic data indicating granting instrument schedule created prior equity edge entry date also relied evidence emails written agreements determine date certain options became final evidence used determine measurement dates options adjusted measurement compensation cost options covering 279 million shares common stock resulting incremental stockbased compensation expense 1412 million pretax basis respective awards’ vesting terms also concluded instances clerical errors omissions regarding persons receive award number options granted corrected date award case additions made correct omissions corrections reflected grant documentation time applicable grant date documentation existing time grant determined new measurement date established considered whether certain changes additions give rise variable accounting treatment concluded treatment appropriate grants represented independent decisions events rather continuation modification grants believe correct measurement date grants date stock administration entered correction addition equity edge except objective evidence identifies earlier date correction approved accounting forfeitures adjusted measurement compensation cost options covering 13 million shares common stock resulting incremental stockbased compensation 119 million pretax basis respective awards’ vesting terms stock option grant modifications connected terminations leaves absences matters compensation expense also recognized result modifications made certain employee option grant awards connection certain employees’ terminations leaves absence typically modifications related extensions time employees could exercise options following termination employment enabled employee vest additional shares relation leave absence example connection reductions work force 2001 2002 increased period affected employees exercise options 30 days 90 days incremental stockbased compensation expense associated terminations leaves absence 200 million pretax basis period modification compensation expense 02 million pretax basis also recognized result nonemployee grants consultants exchange services matters judgment light significant judgment used establishing revised measurement dates alternate approaches used us could resulted different compensation expense charges recorded us restatement considered various alternative approaches example cases formal documentation grant completed date grant entered equity edge alternative measurement date using equity edge entry date could creation date documentation changing measurement dates grants made stock option committee equity edge entry date later electronic data creation date unanimous written consent related schedule grants would cause pretax compensation charges 6367 million discussed increase approximately 106 million conversely established new measurement date prior equity edge entry date grants made stock option committee nonofficers based evidence electronic data indicating initial creation date granting instrument schedule alternative measurement date could equity edge entry date changing measurement dates grants stock option committee date prior equity edge entry date equity edge entry would increase 1412 million pretax compensation charges discussed approximately 377 million believe approaches used appropriate circumstances summary stockbased compensation adjustments adjusted measurement dates options covering total 1105 million 76 1460 million shares common stock covered options granted relevant period impact consolidated statement operations recognizing stockbased compensation expense december 31 2006 resulting investigation summarized follows millions addition 8947 million recognized fiscal 2005 21 million unamortized deferred compensation remained december 31 2005 bringing total incremental impact investigation approximately 8968 million required sfas 123r adopted january 1 2006 unamortized deferred compensation 21 million reclassified additional paidin capital along unamortized deferred compensation stock options assumed past acquisitions consolidated balance sheet beginning 2006 incremental amortization resulting investigation included stockbased compensation expense provisions statement financial accounting standards 123 revised 2004 “sharebased payment” “sfas 123r” incremental stockbased compensation expense restatement employee stock options 06 million pretax basis year ended december 31 2006 matters considering available evidence primarily current 2005 operating projections future income remain appropriate concluded previously recorded valuation allowance related tax benefit stock options deductions reversed fourth quarter 2005 accordingly decreased valuation allowance december 31 2005 1580 million corresponding credit additional paid capital remaining valuation allowance balance 406 million relates capital losses carry forward offset future capital gains additionally misclassified tax benefit deductions stock options assumed acquisitions accordingly reduced additional paidin capital years ended december 31 2005 2004 60 million 185 million respectively corresponding decrease goodwill total reduction additional paidin capital goodwill december 31 2005 245 million virtually holders options issued us involved aware incorrect pricing taken intend take actions deal certain adverse tax consequences may incurred holders certain incorrectly priced options primary adverse tax consequence incorrectly priced stock options vesting december 31 2004 may subject option holder penalty tax irc section 409a applicable similar penalty taxes california state tax laws recorded 101 million charges operating expense 2006 relation items tax related items expect incur future charges resolve adverse tax consequences incorrectly priced options misclassified gains losses retirement treasury shares fiscal 2004 accordingly reduced retained earnings accumulated deficit december 31 2004 2005 636 million corresponding increase additional paidin capital impact recognizing additional stock compensation adjustments component stockholders’ equity end year summarized follows millions nasdaq listing status august 2006 received nasdaq staff determination letter stating result delayed filing quarterly report form 10q quarter ended june 30 2006 “second quarter form 10q” compliance filing requirements continued listing set forth marketplace rule 4310c14 therefore subject delisting nasdaq global select market november 2006 received additional letter nasdaq similar substance related form 10q quarter ended september 30 2006 “third quarter form 10q” december 2006 nasdaq listing qualifications panel granted request continued listing provided file written summary audit committee’s findings nasdaq well second quarter form 10q third quarter form 10q required restatements sec february 12 2007 january 2007 received notice nasdaq listing hearings review council advised us delisting determination nasdaq listing qualifications panel stayed pending review council given march 30 2007 submit additional information assist review council assessment listing status february 20 2007 filed written summary audit committee’s findings nasdaq addition march 9 2007 filed second quarter form 10q third quarter form 10q sec consider filing materials remedied noncompliance marketplace rule 4310c14 subject nasdaq’s affirmative completion compliance protocols notification us accordingly however nasdaq disagrees position sec disagrees manner accounted reported financial impact past stock option grants could delays filing subsequent sec reports actions might result delisting common stock nasdaq global select market impairment goodwill intangible assets recorded 12800 million noncash goodwill impairment charge consolidated statements operations within slt segment adjust estimated carrying value goodwill three six months ended june 30 2006 impairment goodwill primarily attributable decline company’s market capitalization occurred period approximately six months prior impairment review lesser extent decrease forecasted future cash flows used income approach future impairment indicators including declines market capitalization decrease revenue profitability levels could require additional impairment charges recorded evaluate longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds undiscounted future net cash flow asset expected generate asset considered impaired impairment charge recognized measured amount carrying amount asset exceeds estimated fair value assess recoverability longlived intangible assets determining whether unamortized balances recovered undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows 2006 2005 recorded impairment charges 34 million 59 million respectively related certain kagoor purchased intangibles result significant reduction forecasted revenue associated session border control products stockbased compensation adopted fair value recognition provisions sfas 123r effective january 1 2006 using modified prospective transition method therefore revised prior periods’ results 2006 issued stock options members board “outside directors” stock options restricted stock units “rsus” shares common stock pursuant equity incentive plans prior adoption sfas 123r board directors approved acceleration vesting certain unvested “outofthemoney” stock options exercise price per share equal greater 2200 previously granted stock option plans outstanding december 16 2005 options accelerated excluded options previously granted certain employees including executive officers board directors juniper networks sfas 123r recorded pretax stockbased compensation expense 876 million 2006 compared 223 million 2005 recognized stockbased compensation expense intrinsic value recognition provisions apb opinion 25 accounting stock issued employees “apb 25” beginning may 2006 adopted 2006 equity incentive plan “2006 plan” provides maximum term seven years grant date nonstatutory stock options incentive stock options except maximum term five years grant date incentive stock options granted holder 10 company’s stock 2006 plan also provides defined option granting schedule outside directors details 2006 plan described note 6 “stockholders’ equity” notes consolidated financial statements form 10k stock repurchase activities july 2004 board directors authorized stock repurchase program authorized repurchases 2500 million common stock first quarter 2006 repurchased retired 10071100 shares common stock average price 1851 per share part common stock repurchase program shares repurchased three months ended march 31 2006 december 31 2006 total 12939700 common shares repurchased retired since inception program equating approximately 2500 million average price 1932 per share july 2006 board authorized new stock repurchase program authorized repurchase 10 billion company’s common stock february 2007 board approved increase 10 billion new share repurchase program coupled original 10 billion approved july 2006 authorized repurchase 20 billion common stock purchases plan subject review circumstances place time acquisitions share repurchase program made time permitted securities laws legal requirements program may discontinued time business acquisitions year ended december 31 2006 completed total six acquisitions years ended december 31 2005 2004 main purposes acquisitions expand product portfolio customer base results following acquisitions included consolidated statements operations beginning respective acquisition dates following summary acquisitions 2004 2005 • funk software inc “funk” acquired december 1 2005 developed sold products designed protect integrity network verifying users devices meet organization’s security policies granting network access • acorn packet solutions inc “acorn” acquired october 20 2005 developed sold products enable migration circuit based networks flexible costeffective ip networks • peribit networks inc “peribit” acquired july 1 2005 developed sold products enhance widearea network “wan” optimization application delivery • redline networks inc “redline” acquired may 2 2005 developed sold application front end platforms enterprise data centers public web sites • kagoor networks inc “kagoor” acquired may 1 2005 developed sold session border control products enhance voiceoverinternet protocol networking communication carriers • netscreen technologies inc “netscreen” acquired april 16 2004 developed sold broad array integrated network security solutions enterprises service providers government entities acquisition related liabilities connection acquisitions recorded liabilities associated severance future lease obligations initial liabilities recorded part acquisitions impact consolidated statements operations following summary liabilities restructuring related charges restructuring reserves initiated restructuring plans eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions following summary restructuring plans charged operating expenses consolidated statements operations • 2006 implemented restructuring plan provided reduction 33 employees within infrastructure segment second third quarters 2006 total accrual 21 million consisting primarily severance purchase commitment charges recognized restructuring charges operating expense cost product revenues 2006 december 31 2006 related restructuring reserves 01 million recorded shortterm liabilities consolidated balance sheet • 2004 implemented restructuring plan time acquisition netscreen initially recorded charge approximately 04 million primarily related workforce reduction costs completely paid december 31 2006 • 2003 implemented restructuring plan announced would longer develop gseries cmts products recorded charge comprised workforce reduction costs noninventory asset impairment costs associated vacating facilities terminating contracts related costs initially recorded charge approximately 140 million comprised workforce reduction costs noninventory asset impairment vacating facilities costs associated termination contracts related costs december 31 2006 approximately 10 million remained unpaid primarily facility lease extends july 2008 adjusted restructuring reserves primarily due changes lease sublease assumptions needs changed result recent acquisitions real estate markets changed see note 5 item 8 complete description restructuring charges amounts remained paid tax repatriation repatriated 2250 million american jobs creation act “jobs act” 2005 recorded net tax benefit 2005 197 million related repatriation dividend net tax benefit consists federal state tax provision net federal benefit 97 million offset tax benefit 294 million related adjustment deferred tax liabilities unrepatriated earnings nature expenses extensive distribution channel place use target new customers increase sales made substantial investments distribution channel 2006 2005 2004 manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs independent contract manufacturers produce products using design specifications quality assurance programs standards establish controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities primarily canada china malaysia united states generally components title products transfers contract manufacturers us immediately customers upon shipment contract manufacturers procure components based build forecasts actual component usage lower forecasts may past liable carrying obsolete material charges employee related costs historically primary driver operating expenses expect trend continue employee related costs include items wages commissions bonuses vacation benefits travel added 688 employees 2006 primarily engineering customer service functions result increased investment customer service operations support investment enterprise market 2005 added 420 employees across functions primarily result acquisitions 4833 4145 2948 employees december 31 2006 2005 2004 respectively facility information technology departmental costs allocated departments based headcount departmental costs increased last two years due increases headcount facility leases resulting acquisitions additional infrastructure systems support growth expect invest internal information technology infrastructure 2007 research development expenses include • costs developing products components prototypes finished products • outside services certifications new products • expenditures associated equipment used testing several components research development effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses expense research development costs incurred plan increase investment research development 2007 compared 2006 advance competitive advantage sales marketing expenses include costs promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives plan continue investment sales marketing activities direct channel sales expand new markets particularly emerging markets continue expand service provider enterprise focus also develop distribution channel 2007 effort expand grow presence new markets serving private public networks full portfolio networking products general administrative expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting certain corporate strategic services critical accounting policies estimates preparation financial statements accordance us generally accepted accounting principles requires us make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts net revenue expenses reporting period regularly evaluate estimates assumptions base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results experienced us may differ materially adversely management’s estimates extent material differences estimates actual results future results operations affected believe following critical accounting policies require us make significant judgments estimates preparation consolidated financial statements • revenue recognition products integrated software essential functionality equipment additionally provide unspecified upgrades enhancements related integrated software maintenance contracts products accordingly accounts revenue accordance statement position 972 software revenue recognition related interpretations recognize revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectibility reasonably assured evidence arrangement generally consists customer purchase orders certain instances sales contracts agreements shipping terms related documents written evidence customer acceptance applicable used verify delivery performance assess whether sales price fixed determinable based payment terms whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit checks customer’s payment history us arrangements multiple elements allocate revenue element using residual method based vendor specific objective evidence fair value undelivered items vendor specific objective evidence fair value based price charged element sold separately recognize revenue deliverable accordance policies product service revenue recognition ability recognize revenue future may affected actual selling prices significantly less fair value addition ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers recognize product revenue upon transfer title risk loss generally upon shipment endusers valueadded resellers significant obligations future performance rights return pricing credits portion sales made distributors agreements allowing pricing credits andor rights return recognize product revenue sales made distributors upon sellthrough reported us distributors recognize service revenue services completed ratably period obligation record reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time additional reductions revenue would result actual product returns pricing adjustments exceed estimates • allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments financial condition customers deteriorate resulting impairment ability make payments additional allowances could required • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based demand forecasts based estimates future demand products turn based historical trends analysis sales marketing organizations adjusted overall market conditions establish reserves carrying charges obsolete material charges excess components purchased based historical trends actual component usage product demand significantly lower forecasted may caused factors outside control contractual liabilities exposures independent contract manufacturers carrying costs obsolete material exposures would adverse impact gross margins profitability • warranty reserve generally offer oneyear warranty hardware products 90day warranty media contains software embedded products establish reserves estimated product warranty costs time revenue recognized although engage extensive product quality programs processes warranty obligation affected product failure rates use materials technical labor costs associated overhead incurred correcting product failure actual product failure rates use materials service delivery costs differ estimates additional warranty reserves could required could reduce gross margins • goodwill purchased intangible assets goodwill recorded difference aggregate consideration paid acquisition fair value net tangible intangible assets acquired amounts useful lives assigned intangible assets impact amount timing future amortization amount assigned inprocess research development expensed immediately value intangible assets including goodwill could impacted future adverse changes future declines operating results ii decline valuation technology company stocks including valuation common stock iii significant slowdown worldwide economy networking industry iv failure meet performance projections included forecasts future operating results evaluate assets annual basis november 1 frequently believe indicators impairment exist process annual impairment review use market approach well income approach methodology valuation includes discounted cash flow method determine fair value intangible assets significant management judgment required forecasts future operating results used discounted cash flow method valuation estimates used consistent plans estimates use manage business possible however plans estimates used may incorrect actual results plans estimates used future impairment analyses lower original estimates used assess recoverability assets could incur additional impairment charges • stockbased compensation account stockbased compensation accordance sfas 123r provisions sfas 123r stockbased compensation cost estimated grant date based award’s fair value calculated blackscholesmerton “bsm” optionpricing model recognized expense ratably requisite service period bsm model requires various highly subjective assumptions including volatility forfeiture rates expected option life assumptions used bsm model change significantly stockbased compensation expense may differ materially future recorded current period conjunction adoption sfas 123r also adopted singleapproach method valuing stockbased awards well straightline method amortizing related stockbased compensation expense connection restatement consolidated financial statements applied judgment choosing whether revise measurement dates revised measurement date select prior option grants information regarding restatement including ranges possible additional stockbased compensation expense measurement dates selected certain grants set forth “restatement previously issued financial statements” note 2 “restatement consolidated financial statements” notes consolidated financial statements form 10k • income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 “accounting income taxes” record valuation allowance reduce deferred tax assets amount believe likely realizable believe likely forecasted income together tax effects deferred tax liabilities sufficient fully recover remaining deferred tax assets event part net deferred tax assets determined realizable future adjustment valuation allowance would charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result • litigation settlement costs time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation cannot assure actions third party claims us resolved without costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely impact gross margins future periods events occur business financial condition results operations cash flows could materially adversely affected record charge equal least minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated however actual liability litigation may materially different estimates could result need record additional expenses • loss contingencies subject possibility various loss contingencies arising ordinary course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required results operations following table illustrates certain statement operations data expressed percentage net revenues 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements increases revenues cost expenses operating expenses 2006 compared 2005 attributable continued growth primarily driven increased sales resulting consolidation large service providers market increased success enterprise market key areas like us federal government particular experienced sales growth emerging markets eastern europe middle east asia well significant growth sales top 10 worldwide service providers service revenue grew substantially result increased equipment base increased attach rates rate purchases equipment accompanied purchases related services new sales new professional services cost revenues operating expenses increases directly attributable revenue growth investments research development efforts addition recognized impairment charges 2006 net revenues following table shows total net product service revenues net product service revenues percentage total net revenues millions except percentages total net revenues increased 2396 million 12 23036 million 2006 total net revenues increased 7280 million 54 20640 million 2005 net product revenues 1223 million 7 increase product net revenue 2005 2006 result increased activity service provider enterprise markets particular success selling products customers adopting next generation networks “ngn” ip networks designed reduce total operating costs able offer multiple services single network addition number new product releases 2006 expanded new emerging markets 2006 2005 recognized 42 million 327 million respectively product net revenue shipments made endusers valueadded resellers deferred end prior year infrastructure products accounted 14134 million 75 total net product revenues 2006 13716 million 77 total net product revenues 2005 infrastructure product net revenue grew 418 million 3 2005 2006 primarily due continued success significant year growth 2005 strengthened position supplier largest service providers world particularly united states emea success partially offset pause build ngns associated purchase decisions particularly japan major carriers prepare next stage bandwidth services expansion large product revenue deferral products shipped verizon expected recognized 2007 infrastructure product net revenue increased 406 2004 2005 primarily due increase revenues service providers enterprises result significant success selling broadband core networks service providers across world recognition market place juniper networks’ worldclass service provider solutions slt products accounted 4799 million 25 total product revenue 2006 3994 million 23 total net product revenues 2005 slt product net revenue increased 805 million 20 2005 2006 due growing demand brand recognition security products large enterprises us federal government addition new products announced 2006 added portfolio various acquisitions 2005 contributed increase addition experienced good success selling slt products service providers infrastructure resale slt product revenue increase 2005 primarily driven increased demands security products enterprise market additionally acquisitions completed 2005 enabled us cross sell infrastructure security application acceleration products existing customer bases analysis change revenue infrastructure slt segments change units found section titled “segment information” net service revenues net service revenues increased 1173 million 40 2005 2006 primarily due increase customer installed base servicing well increased attach rates new product sales improved enterprise service infrastructure allowing rapid implementation services addition new professional service offerings professional service revenue also increased lesser extent 2006 compared 2005 due primarily maintenancerelated onsite engineering services well additional consulting projects 2006 net service revenues increased 1199 million 69 2004 2005 primarily due growth support services lesser degree growth professional services majority service revenue earned customers purchase products enter service contracts typically oneyear renewable periods increases support service revenue primarily due additional technical support service contract initiations associated higher product sales resulted increased renewal larger installed base equipment serviced contracts typically services 24hour customer support nonspecified updates hardware repairs recognize revenue service contracts services completed ratably period obligation addition support services professional services also provide educational services total net revenues following table shows net revenue geographic region millions except percentages continue experience varying distribution revenue among three geographic theaters expect trend continue net revenue united states increased 740 million 2006 2005 due continued success enterprise customers us federal government well major service providers united states increase also due part sales major internet content providers cable providers success partially offset significant product revenue deferral product shipped verizon net revenue united states percentage total net revenue decreased two percentage points 2006 compared 2005 result strong growth emea total 2006 revenue recorded americas region grew 985 million 2005 level remained 45 worldwide revenue compared 2005 due significant success main service providers canada various south american countries including brazil argentina revenue emea region grew 2026 million five percentage points 2006 due significant success ngn deployments across region particular sweden netherlands france germany well sales growth emerging regions including russia eastern europe middle east revenue asia pacific region declined 615 million 12 primarily due impact certain ngn project decision delays japan driving revenue year partially offset increased demands china net revenue united states percentage total net revenue increased 2004 2005 primarily due growth driven increased demand within service provider enterprise markets net revenue emea percentage total net revenue increased 2005 compared 2004 primarily due strength across region including germany united kingdom net revenue asia pacific countries percentage total net revenue remained fairly consistent prior years siemens accounted greater 10 net product service revenues years ended december 31 2006 2005 2004 expect largest customers well key strategic partners continue account substantial portion net revenue 2007 foreseeable future particularly due consolidation continues impact customers partners cost revenues following table shows cost product service revenues related gross margin “gm” percentages millions except percentages 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements cost product revenues cost product revenues increased 488 million 10 2006 compared 2005 increase primarily attributable increased product revenue enterprise service provider markets net product gross margin 71 2006 fell less one percentage point compared 2005 despite increased competitive pressure due impact mix products mix territories reduced manufacturing costs expect see increasing price competition downward pressure product gross margins future increase stock compensation expense cost product revenue 2005 2006 09 million primarily due impact adopting sfas 123r 2006 two percentage point decrease product gross margins 2004 2005 primarily due increasing competition certain products become mature product cycles expanded market share entered markets since 2004 experienced increasing price competition nevertheless higher product revenue volume contributed increased gross margin 4206 million 50 2005 compared 2004 cost service revenues cost service revenues increased 520 million 2006 compared 2005 increase direct result larger installed base products covered service contracts however service gross margin increased one percentage point 2005 2006 result improved efficiencies economies scale result better leveraged service organization total employee salary related expenses percentage service revenue 20 2006 20 2005 26 2004 however absolute dollars employee salary related expenses increased 223 million 2005 2006 primarily due investment new customer service personnel particularly support enterprise customers stock compensation expense cost service revenue also increased 41 million 2005 2006 primarily due impact adopting sfas 123r 2006 addition personnel expenses outside services costs increased 71 million 2005 2006 primarily due contracting engineers provide professional services revenue particularly middle east emerging markets spares shipping expenses increased 73 million 56 million respectively 2005 2006 due significant investment spares around world support increase customer contracts particularly enterprise market finally costs associated facilities depreciation expenses increased 49 million cost service revenue 2005 2006 due increases revenue investment infrastructure support growing business service gross margins increased six percentage points 2004 2005 increase primarily attributable larger revenue increase compared increase cost headcount outside services spares purchases needed support growing installed base total employee related expenses percentage service revenue 2005 decreased 20 compared 26 2004 nevertheless absolute dollars total service related costs increased 509 million 2004 2005 employee related expenses increased 202 million outside service expenses increased 175 million result increased headcount 2005 addition expense associated spares increased 71 million research development sales marketing general administrative expenses following table shows research development sales marketing general administrative expenses amounts percentage total net revenues millions except percentages 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements research development expenses research development expenses increased 1229 million four percentage points net revenue 2006 2005 result focus development broader portfolio networking products increase absolute dollars primarily due increases personnel related expenses 617 million depreciation 124 million facility related expenses 105 million engineering testing expenses 83 million outside service expenses 35 million equipment related expenses 21 million increases personnel related expenses 2006 primarily due additional hires engineering organization across infrastructure slt segments headcount increased 19 1736 individuals 2070 individuals 2006 headcount increase attributable product innovation efforts areas including routers security integration order capture potential future ngn infrastructure growth opportunities enterprise service provider markets lesser extent increases personnel expenses attributable meritbased salary increases beginning april 2006 facility engineering testing expense increased 2006 support product innovation efforts outside service expenses increased 2006 primarily due additional consulting projects developing future product roadmaps increase stock compensation expense research development expenses 2005 2006 240 million primarily due impact adopting sfas 123r 2006 continue invest standalone well integrated products order satisfy customer needs investment expansion global research development efforts primarily china india research development expenses increased 929 million 2005 compared 2004 decreased 3 total net revenues increase absolute dollars primarily due increases personnel related expenses 664 million facility related expenses 141 million engineering testing expenses 126 million equipment related expenses 85 million depreciation 51 million increases personnel related expenses 2005 primarily due additional hires engineering organization including five acquisitions increase partially offset decrease research development related stock compensation expense 143 million compared 2004 result forfeitures unvested options 2005 additional compensation expense recorded result restatement discussed note 2 “restatement consolidated financial statements” addition invested expanded global research development efforts specifically china india sales marketing expenses sales marketing expenses increased 1164 million 2006 compared 2005 increased percent total net revenues increase absolute dollars primarily due increases personnel related expenses 589 million increases facility related expense 120 million increases travel expenses 103 million increases marketing related activities 66 million increases equipment related expenses 26 million personnel related expenses increased 2006 primarily due additional hires support expansion distribution channels customer base well support larger portfolio products particular expanded enterprise sales force targeted key growth areas china middle east india added 171 individuals sales marketing function 2006 travel expense increased 2006 due primarily increased headcount activity emerging markets marketing related activities increased primarily result specific activities designed expand improve brand recognition support distribution channels introduction new products targeted solution value propositions increase awareness existing products broader range customers equipment related expenses increased 2006 due introduction new products increase stock compensation expense sales marketing 2005 2006 245 million primarily due impact adopting sfas 123r 2006 sales marketing expenses increased 1173 million 2005 compared 2004 decreased percent total net revenues increase absolute dollars primarily due increases personnel related expenses 973 million increases marketing related activities 109 million increases equipment related expenses 26 million personnel related expenses increased 2005 primarily due additional hires including acquisitions support expansion distribution channels customer base well support larger portfolio products marketing related activities increased primarily result specific activities designed expand improve distribution channels introduction new products increase awareness existing products broader range customers stockbased compensation pertaining sales marketing functions 68 million 220 million 2005 2004 respectively general administrative expenses general administrative expenses increased 221 million 2006 compared 2005 remained 4 total net revenues increase absolute dollars driven increases personnel related expenses 56 million related expense general administrative worldwide headcount increased 11 24 individuals 2006 support overall growth business net change bad debt expense reversal increased 23 million due primarily bad debt expense reversal 2005 facility related expense increased 12 million result personnel growth development systems infrastructure increase general administrative related stock compensation expense 2005 2006 118 million primarily due impact adopting sfas 123r 2006 general administrative expenses increased 195 million 2005 compared 2004 remained 4 total net revenues increase absolute dollars driven increases personnel related expenses 106 million 100 million patent related expense 100 million patent expense pertained agreement entered thirdparty avoid future disputes stockbased compensation pertaining general administrative function 12 million 22 million 2005 2004 respectively operating expenses following table shows operating expenses millions amortization purchased intangible assets amortization purchased intangible assets increased 66 million 2006 compared 2005 result recognizing full year amortization associated five acquisitions completed 2005 amortization purchased intangible assets increased 284 million 2005 compared 2004 primarily due additional intangible assets five acquisitions completed 2005 see note 3 item 8 information purchased intangible assets impairment goodwill purchased intangible assets impairment charges increased 12834 million 2006 result impairment goodwill purchased intangible assets 2006 due primarily decline company’s market capitalization occurred period approximately six months prior impairment review lesser extent decrease forecasted future cash flows used income approach evaluated carrying value goodwill reduced goodwill within slt segment 12800 million addition recorded 34 million impairment expense pertaining writedown intangible assets result decrease forecasted revenue sbc standalone products second quarter 2006 2005 wrote 59 million purchased intangible assets acquired kagoor inprocess research development charges related inprocess research development incurred 2006 2005 total 110 million charged iprd expense connection three five acquisitions year total funk purchase price 53 million allocated inprocess research development “iprd” total peribit purchase price 38 million allocated iprd total kagoor purchase price 19 million allocated iprd none acorn redline purchase prices allocated iprd 2004 275 million allocated iprd netscreen acquisition expensed year projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition funk peribit kagoor netscreen multiple iprd efforts way certain current future product lines funk efforts included development new versions steelbelted radius “sbr” sbr high availability “ha” mobile ip module “mim” ii products related radius product offering iprd acquisition date also included development new versions endpoint assurance proxy remote control odyssey product families time funk acquisition estimated development efforts completed next four months estimated cost approximately 09 million peribit efforts included development next versions software sequence reducer “sr” family sequence mirror “sm” family central management system “cms” products well hardware program sr sm families time peribit acquisition estimated development efforts would completed next twelve months estimated cost approximately 23 million kagoor efforts included variety signaling protocols next generation products operating systems time kagoor acquisition estimated development efforts would completed next eight months estimated cost approximately 08 million netscreen efforts included integrating secure routers embedded encryption chips well functions features next generation internet protocol “ip” wireless digital subscriber line connectivity voice ip capability utilized discounted cash flow “dcf” method value iprd using rates ranging 20 25 depending estimated useful life technology applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time netscreen acquisition estimated development efforts would completed next eighteen months estimated cost approximately 250 million december 31 2006 estimated costs complete research development efforts immaterial charges net charges summarized follows § restructuring acquisition related reserves recorded net restructuring acquisition related bonus expenses 59 million 2006 56 million pertained bonus accruals associated funk acorn acquisitions 03 million pertained net restructuring related charges 2006 accrued 07 million restructuring charges due initiation restructuring plan focused product development costs reductions discontinuation sbc product 65 million credit restructuring acquisition related expenses 2005 primarily consisted 69 million adjustments related restructuring accrual reoccupied portion former netscreen facility previously included acquisition related restructuring reserve partially offset 03 million bonus earnout accrual related funk acorn acquisitions 2004 also recorded net adjustments 51 million previously established restructuring reserves primarily changes estimates related changes lease sublease assumptions § integration costs significant costs either 2006 2005 related integration acquired product lines business units years recognized 51 million integration costs netscreen acquisition 2004 integration expenses incremental costs directly related integration two companies integration expenses consisted principally facility related expenses workforce related expenses professional fees estimate majority integration costs related 2005 2004 acquisitions incurred immaterial amount additional integration costs acquisitions foreseeable future § stock option investigation costs recorded expenses 205 million 2006 relating professional fees costs necessary conduct independent stock option investigation § tax related charges recorded 101 million operating expense 2006 relation certain taxes associated stock option grants employees income expenses following table shows income expenses millions interest income increased 452 million 2005 2006 309 million 2004 2005 result higher cash equivalents investment balances increase rates return realized investments interest expense decreased 03 million 2005 2006 primarily due lower portfolio management fees interest expenses decreased 15 million 2004 2005 primarily due retirement subordinated notes 2004 resulting savings 25 million partially offset foreign exchange related losses balance sheet revaluation bank fees certain minority equity investments privately held companies carried cost adjusted impairment controlling interest ability exercise significant influence companies 2006 permanent changes market value holdings therefore made change valuation assets 2005 2004 wrotedown investments 04 million 29 million respectively changes market value believed temporary 2005 recorded gain 17 million connection business combination transaction privately held company investment portfolio cost basis equity investment 10 million provision income taxes provision income taxes decreased 1044 million 2006 1468 million 2005 2006 effective rate 116 differs federal statutory rate 35 primarily due inability benefit substantial portion goodwill impairment charge recorded 2006 provision income taxes increased 1468 million 2005 799 million 2004 2005 effective rate 295 differs federal statutory rate 35 due primarily benefit tax credits income foreign jurisdictions taxed lower rates reduction deferred tax liabilities related repatriation 2005 2250 million american jobs creation act 2004 provision income taxes presented 2005 2004 reduced approximately 14 million 34 million respectively due tax effect restatement stock compensation charges see note 2 additional details segment information description products services segment found note 12 consolidated financial statements began track financial information three operating segments 2006 2005 management structure responsibilities began measure business based management operating income included segment financial data three years period ended december 31 2006 comparative purposes financial information operating segment used management make financial decisions allocate resources follows millions 1 stockbased compensation expense 2005 2004 periods restated result stock option investigation addition prior period amounts reclassified reflect reorganization certain research development activities changes allocation methodologies 2 amount includes amortization expense purchased intangible assets operating expenses costs revenues 3 expense 2006 includes charges restructuring acquisition related charges stock option investigation costs tax related charges well certain restructuring costs included cost revenues expense 2005 includes charges restructuring acquisition related charges patent related charges infrastructure operating segment infrastructure segment net revenues increased 2005 2006 primarily due increases revenue higherend infrastructure chassis products increased penetration core edge router portfolio result service providers acquiring products ngns multiplay service offerings addition believe increased demand products due adoption expansion ip networks result peer interaction increased broadband usage video iptv increasing reliance network mission critical business tool strategies ip customers enterprise customers infrastructure segment net revenues increased 2004 2005 due adoption expansion ip networks customers order reduce total operating costs able offer multiple services single network track infrastructure revenue units recognized ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms essentially modular chassis serving base platform chassis certain number slots available populated components refer modules interfaces modules components router receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period following table shows infrastructure revenue units recognized ports shipped chassis revenue units increased 2005 2006 due primarily sales higherend tseries mseries products inclusion chassis units related 2005 acquisition partially offset decreases sales lowerend eseries mseries products sales higherend chassis units increased customers continued adopt expand ip networks order reduce total operating costs able offer multiple services single network port shipment units increased 2005 2006 primarily due increase port demands driven larger expansion capacity higherend chassis revenue units shipped 2006 partially offset lower port capacity ctpseries chassis revenue units chassis revenue units increased 2004 2005 due primarily investment new broadband service provider networks time port shipment units increased 2004 2005 primarily due growth subscribers services utilizing networks infrastructure management operating income decreased 2005 2006 primarily due higher personnel related costs associated investments product innovation next generation core edge infrastructure products well increased operating expenses associated marketing related efforts improvements internal infrastructure partially offset savings sales expense 2006 increasingly leveraged existing distribution channel infrastructure management operating income increased 2004 2005 primarily due increases revenue evident increase chassis revenue units productivity leverage increase created increase partially offset higher personnel related costs primarily related support product innovation expansion sales channels slt operating segment slt operating segment consists security products application acceleration products following table shows slt revenue units recognized slt net revenue increased 2005 2006 primarily attributable sales increases across various slt product families including firewallsvpn idp jseries dx sslvpn full year inclusion dx application acceleration products acquisitions completed 2005 also contributed slt revenue increases 2006 another part increase driven cross selling slt products service providers internal use managed services part increase due successfully selling much larger enterprise customers increased footprint complexity slt net revenues increased 2004 2005 primarily due netscreen acquisition 2004 lesser extent funk peribit redline kagoor acquisitions increases sales firewallvpn products 2005 slt segment incurred management operating loss 2006 compared management operating income 2005 due primarily higher product personnel related costs despite higher slt net revenues gross margin increases personnel related costs primarily related headcount growth order support product innovation new products sales larger customer base made strategic decision invest enterprise slt markets drive increased revenues slt productivity future slt management operating income increased 2004 2005 primarily due increases net revenue partially offset increased expenses primarily related product innovation expansion sales channels additionally purchase accounting adjustments related netscreen acquisition negatively impacted revenue management operating results 2004 service operating segment net service revenues increased 2005 2006 mainly due growth support services lesser extent growth professional services growth support services largely due increased technical support service contracts associated higher product sales resulted growing installed base equipment serviced growth professional services mainly due resident engineering professional services consulting projects 2006 service gross margin percentages well service management operating income increased 2005 2006 due primarily improved economies scale achieved faster revenue growth infrastructure products slt products relative increases operating costs absolute dollars employee related expenses increased 2006 result increased service related headcount 476 611 individuals expenses associated spare components also increased 2006 support increased demands driven additional service contracts result growing installed base net service revenues increased 2005 compared 2004 primarily due growth support services lesser degree growth professional services growth support services largely due improved renewal rates growing installed base service management operating income increased result revenue growth experienced infrastructure segment slt segment partially offset increases operating costs primarily due personnel related costs absolute dollars employee related expenses increased result increased headcount expenses associated spares also increased result revenue growth key performance measures addition financial metrics included consolidated financial statements use following key performance measure assess operating results days sales outstanding dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days liquidity capital resources overview funded business issuing securities operating activities following table shows capital resources millions working capital increased 4978 million 2005 2006 mainly due cash provided operating activities investing activities partially offset cash used financing activities significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities deferred revenue based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations exercise employee stock options purchase common stock employee stock purchase plan satisfy working capital needs capital expenditures commitments repurchases common stock liquidity requirements associated existing operations least next 12 months however possible may need raise additional funds finance activities beyond next 12 months consummate acquisitions businesses assets products technologies could raise funds selling equity debt securities public selected investors borrowing money financial institutions addition even though may need additional funds may still elect sell additional equity debt securities obtain credit facilities reasons transactions arrangements relationships unconsolidated entities persons reasonably likely materially affect liquidity availability requirements capital resources except 20 billion stock repurchase program approved board directors described purchase 20 billion common stock would significantly reduce working capital may elect obtain additional debt credit facilities fund repurchases future capital requirements may vary materially planned depending many factors including • overall levels sales products gross profit margins • business product capital expenditure research development plans • market acceptance products • repurchase common stock • issuance repayment debt • litigation expenses settlements judgments • volume price discounts customer rebates • levels accounts receivable maintain • acquisitions businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors’ responses products • relationships suppliers customers • expenses related future restructuring plans • legal professional service fees associated stock option investigation activities • tax expense associated stockbased awards • issuance stockbased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases employee stock purchase plan • general economic conditions specific conditions industry markets including effects recent international conflicts related uncertainties cash requirements july 2006 board authorized new stock repurchase program authorized repurchase 10 billion company’s common stock february 2007 board approved increase 10 billion new share repurchase program coupled original 10 billion approved july 2006 authorized repurchase 20 billion common stock purchases plan subject review circumstances place time acquisitions share repurchase program made time permitted securities laws legal requirements program may discontinued time may 2006 audit committee commenced independent review stock option practices related accounting audit committee assisted independent legal counsel accounting experts recognized 205 million expense legal professional services associated stock option review december 31 2006 addition incurred tax related charges 101 million 2006 expect incur additional fees costs 2007 contractual obligations following table summarizes principal contractual obligations december 31 2006 effect obligations expected liquidity cash flow future periods millions payment existing future senior unsecured debt rank senior existing future debt expressly provides subordinated notes senior notes bear interest convertible shares common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances carrying value senior notes december 31 2006 3999 million c firm purchase commitments contract manufacturers order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders valued 1205 million december 31 2006 based build forecasts take ownership components ncnr orders represent firm purchase commitments pursuant agreements contract manufacturers components used contract manufacturers build products based purchase orders received customers incur liability products built contract manufacturer fulfills customer’s order ships however components go unused may assessed carrying charges obsolete charges december 31 2006 accrued 224 million based estimate charges contractual obligations consist following • escrow amount 128 million related funk acquisition secure certain indemnity obligations onehalf escrow expired january 2007 remaining onehalf expire june 2007 also included contingent bonus payable based certain milestones 50 million earned one year period ending 2006 • escrow amount 16 million related acorn acquisition secure certain indemnity obligations escrow period expire may 2007 also included contingent earnout payable former acorn stockholders based certain milestones 22 million contingent bonus payable employees related continued employment 05 million earnout bonus amounts paid extent earned 2007 2008 • escrow amount related redline kagoor acquisitions 07 million 51 million respectively secure certain indemnity obligations 08 million shares company’s common stock fair value 176 million established acquisition date held escrow secure certain indemnity obligations peribit acquisition almost escrow shares distributed february 2007 current market value 1915 per share aggregate fair value 141 million summary cash flows operating activities net cash provided operating activities 7556 million 6429 million 4394 million years ended december 31 2006 2005 2004 respectively cash provided operating activities period due net income loss adjusted investing activities net cash provided investing activities 119 million year ended december 31 2006 net cash used investing activities 5837 million 585 million years ended december 31 2005 2004 respectively investing activities included capital expenditures purchases sale maturities availableforsale securities purchase sale equity investments acquisitions businesses capital expenditures increased 39 million 1021 million 2006 increased 350 million 982 million 2005 mainly due new product developments overseas expansions business acquisitions positive net cash flows 1159 million generated sales purchases availableforsale securities 2006 primarily due higher shortterm interest rates purchases sales availableforsale securities used 1310 million 347 million 2005 2004 respectively investing activities include financing activities net cash used financing activities 896 million year ended december 31 2006 net cash provided financing activities 1460 million year ended december 31 2005 net cash used financing activities 334 million year ended december 31 2004 cash provided periods issuance common stock related employee option exercises stock purchase plans 2006 repurchased 10071000 shares common stock average price 1851 per share total 1864 million common stock issued relation employee stock option exercises employee stock purchase plan generated total cash proceeds 871 million 2006 period beginning 2006 sfas 123r requires excess tax benefits relating exercises employee options included financing activities 2006 total tax benefits 97 million tax deductions excess expense recognized employee stock options presented financing cash flows due adoption sfas 123r beginning january 1 2006 tax deductions excess expense recognized employee stock options previously included operating cash flows prior 2006 2005 common stock issued relation employee option exercises employee stock purchase plan generated total cash proceeds 1460 million 2004 common stock issued relation employee option exercises employee stock purchase plan generated total cash proceeds 1752 million 2004 spent 1450 million retire subordinated notes 636 million retire 29 million shares common stock repurchase common stock material impact liquidity recent accounting pronouncements july 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxes “fin 48” fin 48 applies tax positions related income taxes subject fasb statement 109 accounting income taxes including uncertain tax positions fin 48 company recognize benefit tax position morelikelythannot position would sustained upon audit based solely technical merits tax position fin 48 clarifies company would measure income tax benefits tax positions recognized provides guidance timing derecognition previously recognized tax benefits describes methods classifying disclosing liabilities within financial statements unrecognized tax benefits fin 48 also addresses company record interest penalties related tax positions interest penalties may classified within income statement presented balance sheet differences amounts recognized statements financial position prior adoption fin 48 would accounted cumulativeeffect adjustment beginning balance retained earnings required adopt fin 48 january 1 2007 upon adoption possibility cumulative effect would result adjustment beginning balance retained earnings addition application fin 48 may increase future effective tax rates future intraperiod effective tax rate volatility currently evaluating effect adoption fin 48 consolidated financial statements yet position determine effects september 2006 fasb issued fasb statement “sfas” 157 fair value measurement “sfas 157” sfas 157 provides enhanced guidance using fair value measure assets liabilities guidance clarifies principle assessing fair value based assumptions market participants would use pricing asset liability support principle guidance establishes fair value hierarchy prioritizes information used develop assumptions fair value hierarchy gives highest priority quoted prices active markets lowest priority unobservable data companies’ data guidance fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years currently evaluating sfas 157 expect adopt guidance beginning january 1 2008 item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results company based current expectations estimates forecasts projections industry operate beliefs assumptions management words ‘expects’ ‘anticipates’ ‘targets’ ‘goals’ ‘projects’ ‘intends’ ‘plans’ ‘believes’ ‘seeks’ ‘estimates’ variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file securities exchange commission “sec” specifically recent reports form 10q undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements included elsewhere report prepared accordance accounting principles generally accepted united states preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation stockbased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions aid understanding operating results periods covered report provided executive overview summary significant events affected recent fiscal year discussion nature operating expenses sections read conjunction detailed discussion analysis financial condition results operations item 7 “risk factors” section included item 1a part audited consolidated financial statements notes included item 8 part ii report executive overview 2007 performance result combination strong market demand networking security products well focused execution market share gains addition began shipment several new products contributed revenue growth year 2007 also implemented series operational excellence initiatives intended strengthen management systems processes throughout organization support growth nm meaningful • net revenues net revenue increased 5325 million 23 28361 million 2007 compared 2006 experienced growth product service revenues represented 820 180 total net revenue 2007 product revenue increased 4337 million 23 23270 million 2007 compared yearago period service revenue increased 988 million 24 5091 million 2007 compared 2006 infrastructure product slt product service revenues represented 618 202 180 total net revenues respectively 2007 revenue performance share gains driven infrastructure product slt product sales infrastructure product revenue increased 3398 million 24 2007 compared 2006 primarily attributable revenue growth tseries routers well recently introduced mxseries routers slt product revenue increased 2007 compared 2006 primarily attributable increased sales firewall virtual private network “firewall” products including recently introduced ssg320m ssg350m firewall appliances lesser extent increases secure socket layer virtual private network “ssl” jseries wan optimization products service revenue increased 2007 prior year primarily due increase installed base equipment service contracts lesser extent growth professional service revenue new infrastructure products shipped 2007 include t1600 router mxseries product family t1600 product highcapacity energyefficient core router mxseries family ethernet service routers enables service providers deliver advance services including iptv videoondemand scale mxseries includes mx960 large capacity highdensity carrier ethernet platform mx480 began shipping fourth quarter 2007 new slt products introduced 2007 include ssg320m ssg350m products purposebuilt appliances deliver high performance secure connectivity regional branch office also introduced new products within jseries service router family j2320 j2350 designed enable enterprises accelerate secure delivery business critical applications across networks additionally continued make enhancements design updates slt product families 2007 geographical perspective net revenues grew across americas europe middle east africa “emea” asia pacific “apac” regions • operating margin operating income increased 14049 million 4071 million 2007 compared operating loss 9978 million 2006 operating margin 144 2007 compared 433 2006 increase operating margin primarily attributable decreases operating expenses percentage net revenue decreases largely due goodwill intangible impairment charges 12834 million 2006 absence charges 2007 additionally lesser extent operating margin improved due decrease sales marketing expenses percentage net revenue well decreases charges associated internal stock option investigation partially offset increases research development expenses 2007 compared 2006 • net income net income per share net income 3608 million 062 per share diluted basis 2007 compared net loss 10014 million 176 per share diluted basis 2006 increases 2007 primarily attributable goodwill intangible impairment charges 12834 million 2006 absent 2007 well revenue growth increase operating margin discussed • financial highlights used 16232 million repurchase 694 million shares common stock 2007 cash used stock repurchases offset cash flows operating activities investing activities common stock issued employees connection equity incentive plans 7865 million 5718 million 3550 million respectively 2007 significant events business market environment 2007 benefited continued progress service provider customers buildout next generation networks “ngn” designed support fast costeffective deployment multiple types services “multiplay services” voice data video enable customers develop new sources revenue profitability maintained strong position infrastructure product business gained share key market segments also experienced increased interest slt portfolio due increased network demand enterprise customers well growth service providers using slt products managed service offerings outsourced solutions customers additionally continued momentum enterprise market slt products well routing products portfolio serve 95 fortune 100 companies 30000 enterprise customers worldwide addition 45 50 state governments united states deployed technologies believe innovation market momentum enabled us maintain relationships partners including strategic resellers alcatellucent ericsson inc nokiasiemens networks bv “nsn” developing broader relationships technology leaders international business machines corporation “ibm” microsoft corporation better serve customers stock repurchase activity repurchased retired 694 million common shares average price 2337 per share total 16232 million part 20 billion common stock repurchase program approved board july 2006 february 2007 “2006 stock repurchase program” december 31 2007 2006 stock repurchase program remaining authorization 3768 million repurchases see note 15 item 8 discussion stock repurchase activity 2008 stock option investigation amendment certain stock options 2007 completed restatement historical financial statements result independent stock option investigation review historical stock compensation practices addition regained compliance listing standards nasdaq global select market recorded 60 million operating expenses 2007 connection stock option investigation compared 205 million nil 2006 2005 respectively april 2007 completed tender offer amend certain options granted juniper networks inc amended restated 1996 stock plan juniper networks inc 2000 nonstatutory stock option plan original exercise prices per share less fair market value per share common stock underlying option’s grant date determined us financial accounting purposes tender offer employees subject taxation united states canada opportunity increase strike price affected options appropriate fair market value per share date grant avoid unfavorable tax consequences united states internal revenue code section 409a “409a issue” canadian tax laws regulations exchange increasing strike price options committed make cash payment employees participating offer make employees whole incremental strike price compared original option exercise price connection offer amended options purchase 43 million shares common stock 2007 made aggregate cash payments 76 million offer participants january 2008 accrued aggregate payment liability recognized operating expense corresponding amount 2007 settlement securities exchange commission august 28 2007 announced commissioners sec authorized settlement us sec regarding previously disclosed sec inquiry historical stock option granting practices without admitting denying allegations sec’s complaint agreed settle charges consenting permanent injunction future violations antifraud reporting booksandrecords internal control provisions federal securities laws monetary penalties assessed us conjunction settlement concludes sec’s formal investigation company respect historical stock option granting practices adoption fin 48 adopted financial accounting standards board “fasb” interpretation 48 accounting uncertainty income taxes “fin 48” january 1 2007 first day fiscal 2007 fin 48 entity may recognize continue recognize tax positions meet “more likely not” threshold cumulative effect applying fin 48 192 million increase opening balance accumulated deficit january 1 2007 10 million increase goodwill date adoption total amount gross unrecognized tax benefits 852 million 708 million recognized would affect effective tax rate accordance accounting policy recognize accrued interest penalties related unrecognized tax benefits component tax expense consolidated statement operations policy change result adoption fin 48 accrued interest expense penalties 41 million within longterm liabilities consolidated balance sheets date adoption conduct business globally result one subsidiaries file income tax returns us federal jurisdiction various state foreign jurisdictions normal course business subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia us exceptions longer subject us federal state local nonus income tax examinations years 2003 although carryforward attributes generated prior 2003 may still adjusted upon examination irs attributes either used future period nature expenses manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs independent contract manufacturers produce products using design specifications quality assurance programs standards establish controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities primarily canada china malaysia united states generally components title products transfers contract manufacturers us immediately customers upon shipment contract manufacturers procure components based build forecasts actual component usage lower forecasts may past liable carrying obsolete material charges employees manufacturing operations organization manage relationships contract manufacturers manage supply chain monitor product testing quality employee related costs historically primary driver operating expenses expect trend continue employee related costs include items wages commissions bonuses vacation benefits stockbased compensation travel 5879 4833 4145 employees december 31 2007 2006 2005 respectively yearoveryear increases primarily attributable increases research development sales customer service activities headcount expected increase 2008 continue expand functions accounted stockbased compensation fair value approach fas 123r 2007 2006 2005 accounted stockbased compensation intrinsic value approach apb 25 details stockbased compensation expense described note 1 note 9 notes consolidated financial statements form 10k facility information technology departmental costs allocated departments based headcount departmental costs increased 2007 2006 due increases headcount facility leases resulting infrastructure systems added support growth past acquisitions facility information technology related headcount 224 177 168 december 31 2007 2006 2005 respectively 2008 expect invest companywide information technology infrastructure implement operational excellence initiatives operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen changes related currency exchange rates may affect operating results periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates ineffectiveness hedging instruments reported income expense consolidated statements operations increase operating expenses including research development sales marketing well general administrative expenses due foreign currency fluctuations net hedging approximately 2 2007 critical accounting policies estimates preparation financial statements accordance us generally accepted accounting principles requires us make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts net revenue expenses reporting period regularly evaluate estimates assumptions base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results experienced us may differ materially adversely management’s estimates extent material differences estimates actual results future results operations affected believe following critical accounting policies require us make significant judgments estimates preparation consolidated financial statements • revenue recognition products integrated software essential functionality equipment additionally provide unspecified upgrades enhancements related integrated software maintenance contracts products accordingly account revenue accordance statement position 972 software revenue recognition related interpretations recognize revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectibility reasonably assured evidence arrangement generally consists customer purchase orders certain instances sales contracts agreements shipping terms related documents written evidence customer acceptance applicable used verify delivery performance instances outstanding obligations related product delivery final acceptance product revenue deferred delivery acceptance criteria met assess whether sales price fixed determinable based payment terms whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit checks customer’s payment history us accounts receivable recorded net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements sales products include services allocate revenue element using residual method based vendor specific objective evidence fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vendor specific objective evidence fair value based price charged element sold separately recognize revenue deliverable accordance policies product service revenue recognition vendor specific objective evidence fair value one undelivered items exist revenue deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period ability recognize revenue future may affected actual selling prices significantly less fair value addition ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers recognize product revenue upon transfer title risk loss generally upon shipment practice identify enduser prior shipment valueadded reseller endusers valueadded resellers significant obligations future performance rights return pricing credits portion sales made distributors agreements allowing pricing credits andor rights return recognize product revenue sales made distributors upon sellthrough reported us distributors deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue record reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time additional reductions revenue would result actual product returns pricing adjustments exceed estimates addition report revenue net sales taxes services include maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less sell certain interests accounts receivables part distributor accounts receivable financing arrangement established us major financing company accounts receivables sold arrangement advance revenue recognition accounted debt 100 million nil december 31 2007 2006 respectively • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based demand forecasts based estimates future demand products turn based historical trends analysis sales marketing organizations adjusted overall market conditions establish reserves carrying charges obsolete material charges excess components purchased based historical trends actual component usage product demand significantly lower forecasted may caused factors outside control contractual liabilities exposures independent contract manufacturers carrying costs obsolete material exposures would adverse impact gross margins profitability • warranty reserve generally offer oneyear warranty hardware products 90day warranty media contains software embedded products establish reserves estimated product warranty costs time revenue recognized although engage extensive product quality programs processes warranty obligation affected product failure rates use materials technical labor costs associated overhead incurred correcting product failure actual product failure rates use materials service delivery costs differ estimates additional warranty reserves could required could reduce gross margins • goodwill purchased intangible assets goodwill recorded difference aggregate consideration paid acquisition fair value net tangible intangible assets acquired amounts useful lives assigned intangible assets impact amount timing future amortization amount assigned inprocess research development expensed immediately value intangible assets including goodwill could impacted future adverse changes future declines operating results ii decline valuation technology company stocks including valuation common stock iii significant slowdown worldwide economy networking industry iv failure meet performance projections included forecasts future operating results evaluate assets annual basis november 1 frequently believe indicators impairment exist process annual impairment review use market approach well income approach methodology valuation includes discounted cash flow method determine fair value intangible assets significant management judgment required forecasts future operating results used discounted cash flow method valuation estimates used consistent plans estimates use manage business possible however plans estimates used may incorrect actual results plans estimates used future impairment analyses lower original estimates used assess recoverability assets could incur additional impairment charges • stockbased compensation account stockbased compensation accordance fas 123r beginning 2006 provisions statement financial accounting standards 123 revised 2004 sharebased payment “fas 123r” stockbased compensation cost estimated grant date based award’s fair value calculated blackscholesmerton “bsm” optionpricing model recognized expense ratably requisite service period bsm model requires various highly subjective assumptions including volatility forfeiture rates expected option life assumptions used bsm model change significantly stockbased compensation expense may differ materially future recorded current period conjunction adoption fas 123r also adopted singleapproach method valuing stockbased awards well straightline method amortizing related stockbased compensation expense modified prospective approach prior adoption fas 123r accounted stockbased compensation intrinsic value recognition provisions apb opinion 25 accounting stock issued employees “apb 25” • income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth fas 109 accounting income taxes record valuation allowance reduce deferred tax assets amount believe likely realizable believe likely forecasted income together tax effects deferred tax liabilities sufficient fully recover remaining deferred tax assets event part net deferred tax assets determined realizable future adjustment valuation allowance would charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result january 1 2007 adopted fin 48 fin 48 interpretation fasb statement 109 accounting income taxes seeks reduce diversity practice associated certain aspects measurement recognition accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position entity takes expects take tax return additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition fin 48 entity may recognize continue recognize tax positions meet “more likely not” threshold addition application fin 48 may increase entity’s future effective tax rates future intraperiod effective tax rate volatility cumulative effect applying fin 48 192 million increase opening balance accumulated deficit january 1 2007 10 million increase goodwill • loss contingencies subject possibility various loss contingencies arising ordinary course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required addition time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation actions third party claims us may cause us incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely impact gross margins future periods events occur business financial condition results operations cash flows could materially adversely affected record charge equal least minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated however actual liability litigation may materially different estimates could result need record additional expenses results operations net revenues following table shows total net product service revenues net product service revenues percentage total net revenues millions except percentages total net revenues increased 5325 million 23 28361 million 2007 compared 2006 total net revenues increased 2396 million 12 23036 million 2006 compared 2005 increases years primarily due demand growth markets serve addition gained market share several areas capitalized opportunities targeted markets new existing product service offerings 2007 net product revenues net product revenue increased 4337 million 23 2006 23270 million 2007 increase result increased activity infrastructure product slt product sales service provider enterprise markets particular success selling products customers adopting ngn ip networks designed reduce total operating costs able offer multiple services single network addition number new product releases expanded new emerging markets 2007 net product revenue grew 1223 million 7 2005 2006 majority generated slt product revenue growth 2006 following table shows total net product revenues net product revenues percentage total net revenues product category millions except percentages infrastructure product revenues infrastructure product revenues accounted 17532 million 618 total net revenues increased 3398 million 24 2007 compared 2006 benefited strong worldwide demand highperformance router products service provider customers seek simplified scalable network infrastructures across fiber cable mobile access technologies support increasing performance demands networks infrastructure product revenue increase 2007 primarily attributable increased revenue mxseries router products driven service provider customers’ continued build ngn bandwidth requirement increases service provider customers also moved towards ngns designed enable fast costeffective deployment differentiating multiplay services allow generate new sources revenue also contributing revenue growth increase infrastructure product sales content service provider enterprise markets geographical perspective experienced strength americas region also experienced revenue increases apac emea infrastructure products accounted 14134 million 614 total net revenues 2006 13716 million 665 total net revenues 2005 infrastructure product net revenue grew 418 million 3 2005 2006 primarily due continued success significant year growth 2005 strengthened position supplier largest service providers world particularly americas emea experienced revenue growth higherend infrastructure chassis products increased penetration core edge router portfolio service providers acquired products ngns multiplay service offerings growth partially offset pause build ngns associated purchase decisions particularly japan major carriers prepare next stage bandwidth services expansion large product revenue deferral december 31 2006 products shipped one largest customers track infrastructure chassis revenue units recognized ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms essentially modular chassis serving base platform chassis certain number slots available populated components refer modules interfaces modules components router receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period following table shows infrastructure revenue units recognized ports shipped chassis revenue units increased 10 2006 2007 customers expanded capacity existing networks increase mainly due introduction mxseries products carrier ethernet base routers also experienced growth tseries products driven bandwidth demand service provider customers sought expand voice video capability existing networks port shipment units increased 41 2007 compared 2006 increase associated growth chassis revenue units larger expansion capacity customers’ need differentiate providing featurerich multiplay services chassis revenue units slightly increased 2005 2006 due primarily sales higherend tseries mseries products inclusion chassis units related 2005 acquisition partially offset decreases sales lowerend eseries mseries products sales higherend chassis units increased customers continued adopt expand ip networks order reduce total operating costs able offer multiple services single network port shipment units increased 2005 2006 primarily due increase port demands driven larger expansion capacity higherend chassis revenue units shipped 2006 partially offset lower port capacity ctpseries chassis revenue units slt product revenues slt product revenues accounted 202 total net revenues increased 939 million 20 5738 million 2007 compared 2006 revenue increase due sales increases across majority slt product families particularly firewall ssl wan optimization jseries products customers’ demands slt products grew due increasing focus addressing risks associated connecting delivering critical network services business applications integrated systems introduced prior 2007 isg ssg firewall products gained traction market place generated additional revenue 2007 revenue increase ssl products due deployments ssl solutions enterprises governments seeking enhance remote access data applications experienced considerable improvement revenue wan optimization application acceleration platforms customers sought boost responsiveness networks three geographic regions significant growth slt sales 2007 experienced growing demand slt products enterprise service provider markets focused crossselling integrated products solutions enterprise service provider markets leveraging partnerships open standards based interoperability slt products addition benefited typical fourthquarter seasonality generally experienced seasonality fluctuations demand slt products may result greater variations quarterly revenue january 2008 announced plan phase dx product line products supported 2013 expect plan material impact consolidated results operations cash flows financial condition slt products accounted 4799 million 208 total net revenues 2006 3994 million 193 total net revenues 2005 slt product net revenue increased 805 million 20 2005 2006 due growing demand brand recognition slt products large enterprises us federal government sales increased across various slt product families including firewalls idp jseries dx ssl addition new products announced 2006 dx application acceleration products added portfolio various acquisitions 2005 contributed increase addition experienced success crossselling slt products service providers infrastructure resale built upon acquisitions completed 2005 part increase due successfully selling much larger enterprise customers increased footprint complexity following table shows slt revenue units recognized slt product units increased 2007 compared 2006 primarily attributable growing demand slt products market place 30 increase number slt units greater revenue increase 20 primarily due increased revenue sales branch firewall products lower average selling price slt products slt product units increased 8 slt product revenue increased 20 2006 compared 2005 primarily due sales highend firewalls net service revenues net service revenues increased 988 million 24 5091 million 2007 compared 2006 represent 180 net revenues growth service revenue primarily driven increased technical support service contracts associated higher infrastructure slt product sales resulted increased renewals larger installed base equipment serviced installed base calculated customer based number systems customers maintenance majority service revenue earned customers purchase products enter maintenance contracts generally oneyear renewable periods also multiyear maintenance contracts typically services 24hour customer support nonspecified updates hardware repairs recognize revenue service contracts services completed ratably period obligation addition support services professional services also provide educational services consistent 2006 support service revenues represents 89 net service revenues 2007 lesser extent professional services also contributed growth net service revenues 2007 professional service revenue increased primarily due large customer deployments requiring consulting services net service revenues increased 1173 million 40 2005 2006 primarily due growth support services driven increase installed base servicing well increased attach rates new product sales improved enterprise service infrastructure allowing rapid implementation services addition new professional service offerings professional service revenue also increased lesser extent 2006 compared 2005 due primarily maintenancerelated onsite engineering services well additional consulting projects 2006 total net revenues geographic region following table shows total net revenues geographic region millions except percentages prior year information reclassified conform current period presentation continue experience varying distribution revenue among three geographic regions three years ended december 31 2007 expect trend continue net revenues americas region increased 3072 million 30 13405 million 2007 compared 2006 americas region represented 473 net revenues 2007 increase 25 percentage points 2006 increases largely due strength united states latin america net revenue united states increased 2655 million 2007 compared 2006 primarily due revenue growth infrastructure product segment service provider internet content provider customers lesser extent slt product service segments net revenues latin america increased 391 million 2007 compared 2006 primarily due strength brazil driven sales major local carrier total 2006 revenue recorded americas region grew 1004 million 2005 level remained approximately 45 worldwide revenue compared 2005 due significant success united states main service providers canada various south american countries including brazil argentina net revenue united states increased 713 million 2006 2005 due continued success enterprise customers us federal government well major service providers united states increase also due part sales major internet content providers cable providers success partially offset significant product revenue deferral products shipped one largest customers net revenue americas percentage total net revenue decreased slightly 2006 compared 2005 result strong growth emea net revenue emea region increased 1006 million 12 9180 million 2007 compared 2006 due increased infrastructure product slt product revenues along increased service revenue driven strong bandwidth demands region revenue increased belgium ireland united kingdom france partially offset decrease netherlands well revenue growth emerging markets eastern europe middle east net revenue emea percentage net revenues decreased 31 percentage points 324 2007 2006 primarily due relative strength americas region revenue emea region grew 2073 million 34 2006 compared 2005 due significant success ngn deployments across region particular sweden netherlands france germany well sales growth emerging regions including russia eastern europe middle east result net revenue emea percentage net revenues increased 59 percentage points 355 2006 2005 net revenue asia pacific region increased 1247 million 28 5776 million 2007 compared 2006 due increased revenue infrastructure products slt products service driven demands service providers well enterprise customers resulting crossselling product portfolio experienced revenue growth across region strength korea australia malaysia india indonesia revenue asia pacific region declined 681 million 13 2006 compared 2005 primarily due impact certain ngn project decision delays japan driving revenue year partially offset increased demands china nsn accounted greater 10 net product service revenues years ended december 31 2007 2006 2005 expect largest customers well key strategic partners continue account substantial portion net revenues 2008 cost revenues following table shows cost product service revenues related gross margin “gm” percentages millions except percentages cost product revenues product gross margin improved 707 2006 709 2007 slight increase product gross margin mainly due favorable product mix lesser extent improvements standard costs infrastructure products partially offset slight decrease slt product gross margin improvement standard costs percentage product revenue primarily due increased purchases contract manufacturers suppliers lower cost regions december 31 2007 2006 employed 190 149 people respectively manufacturing operations organization personnel manage relationships contract manufacturers manage supply chain monitor product testing quality infrastructure product gross margin percentages improved slightly 2007 compared 2006 infrastructure chassis revenue units increased 10 infrastructure ports shipped increased 41 2007 yearoveryear basis compared infrastructure product revenues increase 24 year experienced favorable product mix derived larger portion revenues richly configured highend mseries tseries router products also generated revenues highmargin port shipments addon components chassis routers increases chassis units port shipments driven bandwidth demand customers seeking expand capabilities networks offer differentiating featurerich multiplay services allow generate new revenue sources see details “infrastructure product revenues” section gross margin improvement infrastructure products offset slight decrease slt product gross margin 2007 decrease slt product gross margin primarily due product mix particularly increase mix lower margin branch firewall jseries products 2007 addition higher manufacturing costs associated newer complex products also impacting slt gross margin higher manufacturing costs partially offset realized benefit costreduction efforts moving manufacturing lower cost regions see details “slt product revenues” section cost product revenues increased 488 million 10 2006 compared 2005 increase primarily attributable increased product revenue enterprise service provider markets net product gross margin 707 2006 slightly decreased compared 714 2005 primarily due impact mix products mix territories partially offset reduced manufacturing costs december 31 2006 2005 employed 149 134 people respectively manufacturing operations organization increase stock compensation expense cost product revenue 2005 2006 09 million primarily due impact adopting fas 123r january 1 2006 product gross margins tend fluctuate due changes mix products sold gross margins may impacted introduce new products manage production costs among multiple contract manufacturers customers change timing purchases continue seek reductions production costs enter new markets including markets different pricing structures cost structures margins impacted changes distribution channels price competition well changes geographic mix sales discounts warranty costs changes shipment volume loss cost savings due changes component pricing also impact gross margins factors combined well execute strategy operating plans may lead margin variability cost service revenues cost service revenues increased 522 million 26 2514 million 2007 compared 2006 service gross margin decreased less one percentage point 506 2007 compared 2006 increase service costs decrease gross margin primarily attributable increases headcount related expenses associated expanding service delivery infrastructure professional service organization particularly north america india well increasing resources supporting network buildouts deployments customers service related headcount increased 137 employees 22 748 employees 2007 compared 611 2006 employee salary related expenses including stockbased compensation expense represented majority increases cost service revenues 2007 total employee salary related expenses percentage service revenues approximately 25 2007 20 2006 outside service expense increased used outside providers support increase customer support contracts professional engagements freight related expense increased due deployment spare parts supporting growth overseas facility expenses allocation cost service revenues increased 2007 consistent areas organization due headcount growth investment internal infrastructure support growing business partially offsetting increases decrease spares expense due large spares purchase made 2006 cost service revenues increased 520 million 35 1992 million 2006 compared 2005 increase direct result larger installed base products covered service contracts however service gross margin increased one percentage point 2005 2006 result improved efficiencies economies scale result better leveraged service organization total employee salary related expenses percentage service revenue approximately 20 2006 20 2005 however absolute dollars employee salary related expenses increased 2005 2006 primarily due investment new customer service personnel particularly support enterprise customers stock compensation expense cost service revenue also increased 2005 2006 primarily due impact adopting fas 123r 2006 addition personnel expenses outside services costs increased 2005 2006 primarily due contracting engineers provide professional services revenue particularly middle east emerging markets spares freight costs increased 2005 2006 due significant investment spares around world support increase customer contracts particularly enterprise market finally costs associated facilities depreciation expenses allocated cost service revenue increased 2005 2006 due increases revenue investment infrastructure support growing business research development sales marketing general administrative expenses table highlights operating expenses operating income loss millions except percentages nm meaningful following table highlights operating expenses operating income loss percentage net revenues research development expenses research development expenses include • costs developing products components prototypes finished products • costs outside services certifications new products • expenditures associated equipment used testing several components research development effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses expense research development costs incurred research development expense increased 1427 million 30 increased 12 percentage points net revenues 2007 2006 increase largely due commitment continue innovation products particular 2007 continued development ethernet products including mxseries new exseries ethernet switching products introduced january 2008 well development new t1600 product released november 2007 personnel related expenses comprise majority research development expenses increased primarily due headcount growth meritbased salary increases 2007 research development related headcount increased 493 employees 24 2007 2563 employees december 31 2007 headcount increase primarily due additional hires engineering organization within infrastructure segment addition personnel related expenses also increased prototype lab equipment expenses 2007 development new products additionally allocated facilities information technology well depreciation expenses research development organization increased 2007 due increases headcount additional internal systems support growth general grew engineering organizations support product innovation expand improve product portfolio address growth opportunities ngn bandwidth features service provider enterprise customers research development expenses increased 1230 million 35 percentage points net revenues 2006 2005 result focus development broader portfolio networking products increase absolute dollars primarily due increases personnel related expenses depreciation facility related expenses engineering testing expenses outside service expenses equipment related expenses increases personnel related expenses 2006 primarily due additional hires engineering organization across infrastructure slt segments headcount increased 19 1736 individuals 2070 individuals 2006 headcount increase attributable product innovation efforts areas including router security integration order capture potential future ngn infrastructure growth opportunities enterprise service provider markets lesser extent increases personnel expenses attributable meritbased salary increases beginning april 2006 facility engineering testing expense increased 2006 support product innovation efforts outside service expenses increased 2006 primarily due additional consulting projects developing future product roadmaps increase stock compensation expense research development expenses 2005 2006 240 million primarily due impact adopting fas 123r 2006 investment expansion global research development efforts primarily china india plan increase investment research development 2008 compared 2007 advance competitive advantage percentage net revenues anticipate research development spending decrease slightly 2008 sales marketing expenses sales marketing expenses include costs promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives extensive distribution channel place use target new customers increase sales made substantial investments distribution channel 2007 2006 2005 sales marketing expenses increased 1087 million 19 6667 million represented 235 total net revenues 2007 compared 242 2006 percentage net revenue sales marketing expenses decreased slightly 2007 due focus increasing operating margin efficiency sales activities increases absolute dollars primarily headcount related increases sales marketing related headcount increased 272 employees 17 2007 1863 december 31 2007 hired additional personnel across infrastructure slt organizations support larger product portfolio expand presence enterprise marketplace addition commission expenses increased primarily result strong revenue growth 2007 also increased consulting expenses support sales marketing initiatives likewise need expenses demonstration equipment grown seek capture new markets release new products sales marketing organization grows also grown information technology facilities organizations accounting increases related expense allocations 2007 2006 sales marketing expenses increased 1164 million 26 5580 million 2006 compared 2005 increased percent total net revenues increases primarily due increases personnel related expenses facility related expenses travel expenses marketing related activities equipment related expenses personnel related expenses increased 2006 primarily due additional hires support expansion distribution channels customer base well support larger portfolio products particular expanded enterprise sales force targeted key growth areas china middle east india added 171 individuals sales marketing function 2006 travel expense increased 2006 due primarily increased headcount activity emerging markets marketing related activities increased primarily result specific activities designed expand improve brand recognition support distribution channels introduction new products targeted solution value propositions increase awareness existing products broader range customers equipment related expenses increased 2006 due introduction new products increase stock compensation expenses sales marketing 2005 2006 245 million primarily due impact adopting fas 123r 2006 plan continue investment sales marketing activities direct channel sales well service provider enterprise focus anticipate sales marketing expenses increase absolute dollars decrease percentage net revenues 2008 general administrative expenses general administrative expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting certain corporate strategic services general administrative expenses increased 193 million 20 represented 41 total net revenues 2007 compared 42 2006 percentage net revenue general administrative expenses slightly decreased 2007 due focus increasing operating margin increases absolute dollars primarily due increases personnel related expenses outside professional services employee related expenses including salaries bonuses stockbased compensation fringe benefits expenses increased 2007 2006 headcount increased 56 employees 24 2007 291 employees december 31 2007 headcount increases primarily finance human resources organizations expanded organization infrastructure lower cost regions improved internal processes continued initiatives update information systems outside services increased 45 million 2007 compared 2006 invested designing efficient organizational structure improving internal systems increases offset decreases accounting legal fees 15 million 2007 compared 2006 consistent areas organization facilities information technology allocations increased order support initiatives growth business general administrative expenses increased 221 million 29 2006 compared 2005 percentage net revenues general administrative expenses increased slightly 36 2005 42 2006 increases driven increases personnel related expenses related expenses general administrative worldwide headcount increased 11 24 individuals 2006 support overall growth business bad debt expense increased 2006 primarily due bad debt expense benefit 2005 facility related allocation expense increased result personnel growth development systems infrastructure increase general administrative related stock compensation expense 2005 2006 118 million primarily due impact adopting fas 123r 2006 anticipate general administrative expenses increase absolute dollars decrease percentage net revenues 2008 amortization purchased intangible assets amortization purchased intangible assets decreased 59 million due purchased intangible assets reaching end amortization period 2007 compared 2006 amortization purchased intangible assets increased 66 million 2006 compared 2005 result recognizing full year amortization associated five acquisitions completed 2005 see note 3 item 8 information purchased intangible assets impairment goodwill purchased intangible assets impairment goodwill intangible assets 2007 impairment charges increased 12775 million 2006 compared 2005 result impairment goodwill purchased intangible assets 2006 due primarily decline company’s market capitalization occurred period approximately six months prior impairment review lesser extent decrease forecasted future cash flows used income approach evaluated carrying value goodwill reduced goodwill within slt segment 12800 million addition recorded 34 million impairment expense pertaining writedown intangible assets result decrease forecasted revenue sbc standalone products second quarter 2006 2005 wrote 59 million purchased intangible assets acquired kagoor networks inc “kagoor” see note 3 item 8 information impairment goodwill purchased intangible assets inprocess research development inprocess research development “iprd” charges 2007 2006 2005 total 110 million charged iprd expense connection three five acquisitions year total funk purchase price 53 million allocated iprd total peribit purchase price 38 million allocated iprd total kagoor purchase price 19 million allocated iprd none acorn packet solutions inc “acorn” redline networks inc “redline” purchase prices allocated iprd projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition funk peribit kagoor multiple iprd efforts way certain current future product lines • funk efforts included development new versions steelbelted radius “sbr” sbr high availability “ha” mobile ip module “mim” ii products related radius product offering iprd acquisition date also included development new versions endpoint assurance proxy remote control odyssey product families time funk acquisition estimated development efforts would completed next four months estimated cost approximately 09 million development efforts completed december 31 2007 • peribit efforts included development next versions software sequence reducer “sr” family sequence mirror “sm” family central management system “cms” products well hardware program sr sm families time peribit acquisition estimated development efforts would completed next twelve months estimated cost approximately 23 million development efforts completed december 31 2007 • kagoor efforts included variety signaling protocols next generation products operating systems time kagoor acquisition estimated development efforts would completed next eight months estimated cost approximately 08 million development efforts completed december 31 2007 charges net charges summarized follows • restructuring acquisition related reserves 2007 recorded net restructuring acquisition related charges 07 million 11 million pertained bonus accruals associated past acquisitions partially offset benefit 04 million pertaining net restructuring adjustments recorded net restructuring acquisition related bonus expenses 59 million 2006 56 million due bonus accruals associated funk acorn acquisitions 03 million due net restructuring related charges including 07 million restructuring charges associated initiation restructuring plan focused product development costs reductions discontinuation sbc product 65 million restructuring acquisition related benefit 2005 primarily consisted 69 million adjustments related restructuring accrual reoccupied portion former netscreen facility previously included acquisition related restructuring reserve partially offset 03 million bonus earnout accrual related funk acorn acquisitions • stock option investigation costs recorded expenses 60 million 205 million 2007 2006 respectively relating professional fees costs connection stock option investigation charges 2005 • stock option amendment tax related charges recorded 80 million 101 million operating expense 2007 2006 respectively relation amendment stock options payment certain taxes penalties associated stock option exercises employees charges 2005 • net settlement gain recognized net legal settlement gain 53 million 2007 connection cash settlement proceeds 62 million net 09 million legal expense related direct transaction costs incurred third quarter 2007 income expenses interest income interest expense gain minority equity investment income tax provision following table highlights income expenses income tax provision indicated periods millions except percentages interest income net interest income decreased 39 million 4 2007 compared 2006 decrease due decreases interest income resulting lower cash equivalents investment balance attributable funding repurchase approximately 16 billion common stock first second quarters 2007 partially offsetting decreases higher interest yield combined higher average cash equivalents investment balances particularly beginning 2007 primarily due higher positive cash flows operations compared 2006 interest expenses slightly increased 2007 compared 2006 primarily due costs associated distributor financing program interest expenses include shortterm debt expenses debt issuance cost amortization foreign exchange losses expenses bank fees net interest income increased 455 million 2006 compared 2005 primarily due 458 million increase interest income 2005 2006 result higher cash equivalents investment balances increase rates return realized investments throughout 2006 also interest expense decreased 03 million 2005 2006 primarily due lower portfolio management fees gain writedown investments net june 2007 one companies minority equity investment completed initial public offering “ipo” result realized gain 67 million 2007 based upon difference market value investment time ipo cost basis 2006 none investments gain loss 2005 recorded gain 17 million connection business combination transaction privately held company investment portfolio cost basis equity investment 10 million certain minority equity investments privately held companies carried cost adjusted impairment controlling interest ability exercise significant influence companies addition 2005 wrotedown investments 04 million changes market value believed otherthantemporary income tax provision income taxes increased 1498 million 2007 1044 million 2006 2007 effective rate 293 differs federal statutory rate 350 primarily due benefit income foreign jurisdictions subject lower rates research development credits united states provision income taxes decreased 1044 million 2006 1468 million 2005 2006 effective rate 116 differs federal statutory rate 350 primarily due inability benefit substantial portion goodwill impairment charge recorded 2006 2005 effective rate 295 differs federal statutory rate 350 due primarily benefit tax credits income foreign jurisdictions taxed lower rates reduction deferred tax liabilities related repatriation 2005 2250 million american jobs creation act 2004 gross unrecognized tax benefits increased approximately 95 million 2007 84 million recognized would affect effective tax rate interest penalties accrued period approximately 17 million reasonably possible amount liability unrecognized tax benefits may change within next 12 months due audit examinations however estimate range possible change cannot made time due high uncertainty resolution andor closure open audits currently examination irs 2004 tax year german tax authorities 2005 tax year additionally reached final resolution irs adjustment proposed 1999 2000 tax years examination major jurisdictions company files income tax returns december 31 2007 possible amount liability unrecognized tax benefits may change within next 12 months however estimate range possible change cannot made time provided uncertain tax positions require fin 48 liability additional details related income tax provision found note 13 notes consolidated financial statements segment information description products services segment found note 11 consolidated financial statements began track financial information three segments 2005 management structure responsibilities began measure business based management operating income loss description measures included management operating income loss also found note 11 consolidated financial statements included segment financial data three years period ended december 31 2007 comparative purposes financial information segment used management make financial decisions allocate resources follows millions except percentages 1 prior year information reclassified conform current year presentation 2 expense net 2007 included charges restructuring acquisition related charges stock option investigation costs well stock amendment tax related charges expense net 2006 included charges restructuring acquisition related charges stock option investigation costs tax related charges well certain restructuring charges cost product revenues expense net 2005 included charges restructuring acquisition related charges patent related charges following table shows financial information segment percentage total net revenues infrastructure operating segment analysis change revenue infrastructure segment change units found section titled “net revenues” infrastructure management operating income increased 746 million 18 2006 4955 million 2007 due revenue growth outpacing expense growth increase revenue partially offset continued investments research development efforts seek continue innovation products expand infrastructure product portfolio also allocate sales marketing general administrative well facility information technology expenses infrastructure segment generally based headcount revenue 2007 sales marketing expenses decreased slightly percentage net revenues increased absolute dollars increased efforts reach enterprise service provider customers continue make investments expand product features functionality based upon trends market place infrastructure management operating income decreased 683 million 14 2005 4209 million 2006 primarily due higher personnel related costs associated investments product innovation next generation core edge infrastructure products well increased operating expenses associated marketing related efforts improvements internal infrastructure partially offset savings sales expense 2006 increasingly leveraged existing distribution channel slt operating segment analysis change revenue slt segment change units found section titled “net revenues” slt management operating loss increased 70 million 62 2006 183 million 2007 due product mix increases manufacturing related costs loss primarily due effort build foundation help enable future slt revenue growth due slight decreases slt product gross margins increase slt operating expenses due large part increased allocated expenses slt segment information technology investments higher variable compensation expenses associated companywide revenue growth additionally strategically invested research development efforts develop technologies products junos platform effort control costs moved significant portion slt development organization lower cost regions expanding product portfolio slt management operating loss also impacted continued investments sales distribution channels allocate sales marketing general administrative well facility information technology expenses slt segment generally based revenue headcount third quarter 2007 increased allocation expenses slt segment compared period 2006 primarily due information technology investments higher variable compensation expenses associated companywide revenue increases slt gross margin decreased slightly 2007 compared 2006 due higher manufacturing costs associated newer complex products higher manufacturing costs partially offset realized benefit costreduction efforts moving manufacturing lower cost regions increases slt operating expenses partially offset revenue growth especially fourth quarter 2007 due customers’ demands security products particularly firewall due typical quarterly seasonality generally experienced quarterly seasonality fluctuations demand slt products particularly fourth quarter may result greater variations quarterly operating results slt segment incurred management operating loss 113 million 2006 compared management operating income 104 million 2005 due primarily higher product personnel related costs partially offset higher slt net revenues gross margin increases personnel related costs primarily related headcount growth order support product innovation new products sales larger customer base made strategic decision invest enterprise slt markets drive increased revenues slt productivity future service operating segment analysis change revenue service segment found section titled “net revenue” service management operating income increased 249 million 25 2006 1264 million 2007 achieving economies scale cost control initiatives revenue growth surpassed cost service expense growth 2007 primarily due growth installed base equipment serviced also increased service offerings customer service infrastructure service gross margin slightly decreased 2006 2007 increased headcount build global customer service professional service organizations expanded customer service center north america india well increased resources supporting network buildouts deployments customers service management operating income also impacted sales marketing general administrative expenses well facilities information systems management allocations service segment service gross margin percentages well service management operating income increased 2005 2006 due primarily improved economies scale achieved faster revenue growth infrastructure products slt products relative increases operating costs absolute dollars employee related expenses increased 2006 result increased service related headcount 476 611 individuals expenses associated spare components also increased 2006 support increased demands driven additional service contracts result growing installed base stockbased compensation related payroll taxes stockbased compensation expense increased 04 million 2007 compared 2006 increase primarily attributable new stock options rsu grants partially offset lower stock option expense 2007 result acceleration vesting certain unvested “outofthemoney” stock options completed december 2005 “2005 stock option vesting acceleration” stockbased compensation related payroll tax expense increased 50 million 2007 expenses represent employment taxes incurred connection employee stock programs changes expenses primarily attributable timing stock options exercises employees experienced considerable increase expenses due increase share price occurring 2007 contrast restrictions stock option exercises 2006 stockbased compensation expense increased 653 million 2006 compared 2005 primarily due adoption fas 123r stockbased compensation related payroll tax expense decreased 02 million 2006 compared 2005 primarily due restrictions stock option exercises 2006 result delayed periodic filings sec inprocess research development iprd charges 2007 2006 recognized iprd charges 110 million 2005 connection acquisitions completed year restructuring charges cost product revenues restructuring charges included cost product revenues 2007 2005 recognized restructuring charges cost product revenues 14 million 2006 connection restructuring plan implemented year amortization purchased intangible assets impairment goodwill intangible assets expense gain investments net interest income see “results operations” section information key performance measures addition financial metrics included consolidated financial statements use following key performance measures assess operating results days sales outstanding dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days b booktobill ratio represents ratio customer orders divided sum product shipments service invoicing respective period liquidity capital resources overview funded business issuing securities operating activities following table shows capital resources millions significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities debt deferred revenue working capital decreased 5839 million december 31 2006 december 31 2007 primarily due decrease cash equivalents availableforsale investments balance first second quarters 2007 total cash equivalents availableforsale investments decreased 5985 million 2007 primarily due stock repurchases 2006 stock repurchase program discussed additionally debt related outstanding zerocoupon convertible notes due within one year reclassified 3995 million debt underlying notes longterm shortterm liabilities result reduced working capital 2007 generated 7865 million cash operations 5718 million investing activities addition received financing cash flows 3550 million common stock issued employees stock option exercises employee stock purchase plan purchases 2007 repurchased 694 million shares common stock 16232 million average purchase price 2337 per share december 31 2007 2006 stock repurchase program remaining authorized funds 3768 million may repurchase additional shares opportunistically program subject review circumstances time see note 15 item 8 discussion stock repurchase activity 2008 june 2007 entered senior secured margin lending agreement thirdparty financial institution maximum credit facility 4000 million 90 fair market value underlying collateral establish flexible draw facility fund additional stock repurchases necessary credit facility bore floating interest rate equal threemonth usd libor plus 40 basis points per annum utilized would secured publicly traded fixed income securities portfolio equivalent 111 outstanding balance credit facility terminated september 26 2007 utilize credit facility time net accounts receivable increased 1303 million 52 3798 million december 31 2006 december 31 2007 primarily due increase revenue shipment linearity dso 42 days december 31 2007 compared 38 days december 31 2006 increase dso primarily result shipment linearity mix customers shipped fourth quarter 2007 shipment linearity represents rate products shipped period distributor financing program minimal impact dso 2007 approximately 100 million receivables sold distributor financing program recognized net revenues december 31 2007 therefore amounts recorded debt financing accrued liabilities deferred revenue increased 1277 million 33 5133 million december 31 2007 compared december 31 2006 product service deferred revenue increased 432 million 845 million respectively 2007 product deferred revenue increased due increases amount product shipments met revenue recognition criteria service deferred revenue increased due increase installed base equipment service contract liquidity capital resources may also impacted acquisitions investments strategic relationships may make networking equipment information security markets repurchase additional shares common stock 2006 stock repurchase program liquidity may impacted additionally portion cash investment balance held overseas may subject us taxes repatriated based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations well cash generated exercise employee stock options purchases employee stock purchase plan sufficient fund operations repayment outstanding debt growth believe working capital sufficient meet liquidity requirements capital expenditures commitments repurchases common stock liquidity requirements associated existing operations least next 12 months however future capital requirements may vary materially planned depending many factors including • overall levels sales products gross profit margins • business product capital expenditure research development plans • market acceptance products • repurchases common stock • issuance repayment debt • litigation expenses settlements judgments • volume price discounts customer rebates • levels accounts receivable maintain • acquisitions businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors’ responses products • relationships suppliers customers • expenses related future restructuring plans • tax expense associated stockbased awards • issuance stockbased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects international conflicts related uncertainties cash requirements contractual obligations principal commitments primarily consist obligations outstanding zero coupon convertible senior notes due june 15 2008 “senior notes” operating leases purchase commitments tax liabilities contractual obligations following table summarizes principal contractual obligations december 31 2007 effect obligations expected liquidity cash flow future periods millions contractual obligations operating leases primarily relate leased facilities noncancelable operating leases rent payments allocated costs operating expenses consolidated statements operations occupy approximately 18 million square feet world wide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires may 2016 b principal commitment december 31 2007 outstanding senior notes due june 15 2008 senior notes issued june 2003 senior unsecured obligations rank parity right payment existing future senior unsecured debt rank senior existing future debt expressly provides subordinated notes senior notes bear interest convertible shares common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances equivalent conversion price approximately 2014 per share carrying value senior notes december 31 2007 3995 million included current liabilities debt due less one year c order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based build forecasts december 31 2007 ncnr component orders placed contract manufacturers value 1028 million contract manufacturers use components build products based forecasts purchase orders received customers generally components title products transfers contract manufacturers us immediately customers upon delivery designated shipment location components go unused products go unsold specified periods time may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet forecast customer orders december 31 2007 accrued 222 million based estimate charges tax liabilities include longterm liabilities consolidated balance sheet unrecognized tax positions time unable make reasonably reliable estimate timing payments individual years beyond 12 months due uncertainties timing tax audit outcomes e contractual obligations consist escrow amount 22 million bonus accrual 07 million connection past acquisitions software subscription requiring payments 50 million january 2008 january 2009 joint development agreement requiring quarterly payments 35 million january 2010 summary cash flows operating activities net cash provided operating activities 7865 million 7556 million 6429 million 2007 2006 2005 respectively cash provided operating activities period due net income loss adjusted • noncash charges 2575 million 15364 million 3074 million 2007 2006 2005 respectively primarily related depreciation amortization expenses stockbased compensation tax benefit employee stock option plans inprocess research development acquisitions debt issuance costs restructuring expense impairment charges noncash charges 2007 2006 reduced excess tax benefit stockbased compensation 197 million 97 million respectively gain minority equity investment 67 million noncash charges 2006 also included charges 12834 million related impairment goodwill intangible assets 2005 noncash charges included 1281 million tax benefit employee stock options beginning 2006 tax benefit employee stock options accordance fas 123r longer included cash flows operations rather included financing activities noncash charges 2005 also included inprocess research development charge benefit reversal netscreen’s acquisition related liabilities loss due impairment equity investment partially offset gains associated availableforsale investments • net changes operating assets liabilities 1682 million 2206 million 151 million 2007 2006 2005 respectively generally generated normal course business changes highlighted follows • net cash increases 2007 primarily attributable increases accounts payable 349 million increase accrued compensation 483 million increase taxes payable 714 million increase deferred revenue 1277 million increase accounts payable due timing payments contract manufacturers growth business increase accrued compensation due increase headcount increase stock option exercises removal suspension employee purchases shares espp increase taxes payable due increase tax provision movement deferred tax assets timing payments increase deferred revenue due growing installed base customer payments advance product acceptance addition increases cash flows operations partially offset negative cash flow 1209 million primarily due increase net accounts receivable 2007 primarily due timing shipments mix customers purchased products shipped larger amount products late fourth quarter 2007 invoices would come due december 31 2007 • net cash increases 2006 primarily attributable increases deferred revenue 1328 million due growing installed base customer payments advance product acceptance increase operating cash flows also due decreases accounts receivable 207 million aggregate decreases prepaid expenses current assets longterm assets 230 million accounts payable increased 136 million accrued compensation increased 127 million primarily due costs headcount increases related employee bonuses changes taxes payable accrued liabilities contributed 183 million cash flows operations 2006 • net cash used 2005 changes primarily attributable increases net accounts receivable 681 million decreases accrued liabilities 1007 million accrued warranty 37 million partially offset decreases prepaid expenses current assets longterm assets accounts 53 million increases income taxes payable 266 million increases deferred revenue 643 million increases accounts payable 503 million increases accrued compensation 109 million investing activities net cash provided investing activities 5718 million 119 million 2007 2006 respectively net cash used investing activities 5837 million 2005 investing activities primarily included purchases sale maturities availableforsale securities purchase sale equity investments net cash used acquisitions capital expenditures net sales maturities investments availableforsale securities 10291 million 2007 compared net sales maturities 6321 million 2006 used cash fund stock repurchase program described financing activities section purchases availableforsale securities used 2986 million 2007 compared 5161 million 2006 primarily due funding stock repurchase program investment strategy 2007 positive net cash flows 1159 million generated sales maturities purchases availableforsale securities 2006 primarily due increased cash equivalent holdings result higher shortterm interest rates purchases sales maturities availableforsale securities used net cash 1310 million 2005 capital expenditures increased 448 million 1469 million 2007 39 million 1021 million 2006 mainly support new product developments overseas expansions capital expenditures 982 million 2005 mainly used support new product developments overseas expansions business acquisitions cash flows related restricted cash decreased 279 million cash inflow 205 million 2006 cash outflow 74 million 2007 primarily due funding insurance trust increase coverage due growth company 2005 used cash 3099 million 2005 acquisitions 348 million restricted cash funding escrow accounts relation 2005 acquisitions 98 million minority equity investment financing activities net cash used financing activities 12385 million 896 million 2007 2006 respectively 2007 repurchased 694 million shares common stock average price 2337 per share total 16232 million 2006 repurchased 101 million shares common stock average price 1851 per share total 1864 million addition cash provided periods issuance common stock related employee option exercises stock purchase plans total 3550 million 871 million 2007 2006 respectively 2007 2006 tax benefits 197 million 97 million respectively tax deductions excess expense recognized employee stock options presented financing cash flows due adoption fas 123r beginning january 1 2006 tax deductions excess expense recognized employee stock options included operating cash flows 2005 adoption fas 123r approximately 100 million receivables sold distributor financing program recognized revenue december 31 2007 therefore amounts recorded net borrowings cash flows financing activities net cash provided financing activities 1460 million 2005 primarily due common stock issued relation employee option exercises purchases employee stock purchase plan recent accounting pronouncements see note 1 consolidated financial statements item 8 part ii full description recent accounting pronouncements including expected dates adoption estimated effects results operations financial condition incorporated herein reference item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results juniper networks inc “company” based current expectations estimates forecasts projections industry operate beliefs assumptions management words ’expects’ ’anticipates’ ’targets’ ’goals’ ’projects’ ’intends’ ’plans’ ’believes’ ’seeks’ ’estimates’ variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file sec specifically recent reports form 10q forwardlooking statements best prediction time made rely undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation stockbased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions aid understanding operating results periods covered report provided executive overview summary significant events affected recent fiscal year discussion nature operating expenses sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part audited consolidated financial statements notes included item 8 part ii report executive overview 2008 performance result combination strong market demand networking security products well focused execution market share gains addition began shipment several new products contributed revenue growth year revenue growth substantial towards end 2008 worldwide economic conditions particular slowdown us led slowing rates growth reduced visibility future periods 2008 continued implementation series operational excellence initiatives intended strengthen management systems processes throughout organization support growth improve operational efficiency contain costs face difficult economic market conditions • net revenues net revenues increased 2008 compared 2007 primarily due growing acceptance router firewall products services service provider enterprise markets experienced growth product service revenues represented 815 185 respectively total net revenues 2008 product revenues increased 5840 million 25 29110 million 2008 compared 2007 service revenues increased 1523 million 30 6614 million 2008 compared 2007 net revenues increased three geographic regions 2008 compared 2007 • operating income operating income well operating margin percentage net revenues increased 2008 compared 2007 increases large part due growth revenues decrease operating expense percentage net revenues attributable efforts better manage expenses improve efficiencies 2008 compared 2007 effort manage expenses expanded rd headcount regions lower operating costs • net income net income per share increase net income net income per share 2008 compared 2007 primarily due increase operating income resulted growth revenues reduction operating expense percentage net revenues attributable decrease amortization purchased intangible assets implementation certain cost reduction initiatives compared 2007 increase operating income partially offset lower net interest income primarily due lower interest rates along higher income tax expense 2008 • financial highlights total deferred revenue increased 770 million 2008 primarily due growth installed equipment base maintenance customer support contracts 2008 generated net increase 3030 million cash equivalents primarily resulting 8752 million cash provided operating activities offset repurchase 6047 million common stock significant events business market environment design develop sell products services together provide customers highperformance network infrastructure creates responsive trusted environments accelerating deployment services applications single ipbased network serve highperformance networking requirements global service providers enterprises governments research education institutions view network critical success highperformance networking designed provide fast reliable secure access applications services scale offer highperformance network infrastructure includes ip routing ethernet switching security application acceleration solutions well partnerships designed extend value network worldwide services support designed optimize customer investments 2008 continued deliver new innovative highperformance network infrastructure solutions entered enterprise switching market introduction exseries family ethernet switches leverage operational simplicity carrierclass reliability junos software also introduced new category extensible networking security products srx series dynamic services gateways addition introduced new family idp appliances deliver 10 gigabits per second realworld throughput performance enable deployments network core integration services including firewall chassis clustering junos software implementation jseries services router security threat response manager “strm” platform capable providing businesses centralized scalable effective way log manage rapidly evolving threat landscape also announced advanced mobile ipmulti protocol label switching “mpls” solution portfolio new bx 7000 multiaccess gateway router cell site mseries circuit emulation physical interface cards aggregation site suite software features designed simplify deployment provisioning management mobile backhaul networks addition introduced jcs 1200 dedicated highperformance control plane scaling platform also delivered new enhancements existing solutions help customers maximize network infrastructure investments lower overall total cost ownership expanded network security manager “nsm” deliver centralized management solution routing security switching enabling customers consolidate simplify management network infrastructure announced enhancements access control solution deliver enhanced scalability performance centralized access policy management via nsm helping customers cost effectively achieve comprehensive network visibility broad enforcement capabilities introduced next generation wxc application acceleration platforms deliver scalable modular costeffective approach delivering fast consistent application response across wan addition announced three new line card families mxseries ethernet services routers 2008 growing weakness global economy united states particular affected purchasing behavior customers led lower revenue growth fourth quarter compared previous quarters delays purchase decisions reduced visibility regarding future business economic growth united states countries’ economies continues decline andor fail recover customers may delay reduce purchases could result reductions sales products longer sales cycles slower adoption new technologies increased price competition 2009 continue invest key research development projects believe lead future growth time containing costs allocating resources effectively japan distributor audit december 2008 course performance routine distributor audits became aware facts caused us question accuracy point sale reports distributors japan respect small number transactions result commenced review revenue sales distributors japan completed prior filing report result review deferred 30 million revenue sales distributors japan total revenues distributors japan 30 million deferral approximately 530 million 2008 approximately 130 million three months ended december 31 2008 financial data quarter ended december 31 2008 incorporates results review please see note 13 selected quarterly financial data unaudited notes consolidated financial statements item 8 part ii annual report form 10k stock repurchase activity 2008 repurchased 6047 million 251 million share common stock following two stock repurchase programs authorized board directors “board” 20 billion stock repurchase program approved 2006 2007 “2006 stock repurchase program” repurchased approximately 154 million shares common stock average price 2453 per share total purchase price 3768 million 2008 december 31 2008 repurchased retired approximately 848 million shares common stock 2006 stock repurchase program average price 2358 per share program remaining authorized funds available future stock repurchases board approved 10 billion stock repurchase program march 2008 “2008 stock repurchase program” program repurchased approximately 97 million shares common stock average price 2343 per share total purchase price 2279 million 2008 december 31 2008 stock repurchase program remaining authorized funds 7721 million see note 14 subsequent events notes consolidated financial statements item 8 part ii annual report form 10k discussion stock repurchase activity 2009 nature expenses manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs independent contract manufacturers produce products using design specifications quality assurance programs standards establish controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities primarily canada china malaysia mexico united states generally components title products transfers contract manufacturers us immediately customers upon shipment contract manufacturers procure components based build forecasts actual component usage lower forecasts may past liable carrying obsolete material charges recent years increasing amount products manufactured asia anticipate larger percentage products produced outside united states canada future contracts generally provide passage title risk loss designated point shipment customer manufacturing products asia shipment customers emea americas resulted additional shipment logistics freight timing issues us customers ongoing effort balance customers’ needs made changes occasion payment freight point shipment respect products shipped asia changes impact shipping costs timing revenue recognition affected shipments employees manufacturing operations organization manage relationships contract manufacturers manage supply chain monitor product testing quality employeerelated costs historically primary driver operating expenses expect trend continue employeerelated costs include items wages commissions bonuses vacation benefits stockbased compensation travel 7014 5879 4833 employees december 31 2008 2007 2006 respectively yearoveryear increases primarily attributable increases research development sales marketing organizations headcount expected remain flat 2009 continue cost reduction activities accounted stockbased compensation fair value approach statement financial accounting standards 123 revised 2004 sharebased payment “sfas 123r” 2008 2007 2006 details stockbased compensation expense described note 10 employee benefit plans notes consolidated financial statements item 8 part ii annual report form 10k facility information technology departmental costs allocated departments based usage headcount respectively departmental costs increased 2008 2007 2006 due increases headcount facility leases resulting infrastructure systems added support growth past acquisitions facility information technology related headcount 267 224 177 december 31 2008 2007 2006 respectively 2009 expect continue invest companywide information technology infrastructure implement operational excellence initiatives operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen changes related currency exchange rates may affect operating results periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified appropriate line item consolidated statement operations hedged transaction relates ineffectiveness hedging instruments reported income expense consolidated statements operations increase operating expenses including research development sales marketing well general administrative expenses due foreign currency fluctuations approximately 1 2008 critical accounting policies estimates preparation financial statements related disclosures conformity us generally accepted accounting principles requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes base estimates assumptions current facts historical experience various factors believe reasonable circumstances determine carrying values assets liabilities readily apparent sources note 1 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k describes significant accounting policies methods used preparation consolidated financial statements critical accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future results operations may affected • revenue recognition products generally integrated software essential functionality equipment additionally provide unspecified upgrades enhancements related integrated software maintenance contracts products accordingly account revenue accordance statement position 972 software revenue recognition related interpretations revenue recognized following criteria met • persuasive evidence arrangement exists generally rely upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred use shipping terms related documents written evidence customer acceptance applicable verify delivery performance instances outstanding obligations related product delivery final acceptance product revenue deferred delivery acceptance criteria met • sales price fixed determinable assess whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured assess collectability based creditworthiness customer determined credit checks customer’s payment history record accounts receivable net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements sales products include services allocate revenue element using residual method based vendorspecific objective evidence “vsoe” fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe fair value based price charged element sold separately recognize revenue deliverable accordance policies product service revenue recognition vsoe fair value one undelivered items exist revenue deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period ability recognize revenue future may affected actual selling prices significantly less fair value addition ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers recognize product revenue upon transfer title risk loss generally upon shipment practice identify enduser prior shipment valueadded reseller endusers valueadded resellers significant obligations future performance rights return pricing credits portion sales made distributors agreements allowing pricing credits rights return recognize product revenue sales made distributors upon sellthrough reported us distributors deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue record reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time actual product returns pricing adjustments differ estimates additional reductions revenue may required addition report revenue net sales taxes services include maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less sell certain interests accounts receivable nonrecourse basis part distributor accounts receivable financing arrangement primarily one major financing company record cash received arrangement advance revenue recognition shortterm debt balance 330 million 100 million december 31 2008 2007 respectively • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based demand forecasts based estimates future demand products turn based historical trends analysis sales marketing organizations adjusted overall market conditions establish provision inventory carrying costs obsolete material exposures excess components purchased based historical trends actual component usage product demand significantly lower forecasted may caused factors outside control could adverse impact gross margins profitability supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • warranty costs generally offer oneyear warranty hardware products 90day warranty media contains software embedded products accrue warranty costs part cost sales based associated material costs labor costs customer support overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead cost estimated primarily based upon historical trends cost support customer cases within warranty period although engage extensive product quality programs processes warranty obligation affected product failure rates use materials technical labor costs associated overhead incurred actual product failure rates use materials service delivery costs differ estimates may incur additional warranty costs could reduce gross margin • goodwill purchased intangible assets methodology allocating purchase price relating acquisitions determined established valuation techniques goodwill measured excess purchase price acquisition sum amounts assigned tangible identifiable intangible assets acquired less liabilities assumed amounts useful lives assigned identified intangible assets impacts amount timing future amortization value intangible assets including goodwill could impacted future adverse changes future declines operating results ii sustained decline market capitalization iii significant slowdown worldwide economy networking industry iv failure meet forecasted operating results evaluate assets annual basis november 1 frequently believe indicators impairment exist process evaluating potential impairment goodwill subjective requires significant judgment many points analysis process annual impairment review determine fair value intangible assets based upon weighting market approach income approach market approach estimate fair value reporting units comparing transactions involving publiclytraded companies similar lines business income approach calculate fair value reporting unit based present value estimated future cash flows weighted fair value reporting unit compared allocated book value reporting unit book value exceeds fair value revalue assets associated impaired reporting unit impairment difference new fair values existing book values impaired asset estimates used consistent plans estimates use manage business actual results plans estimates used future impairment analyses lower original estimates used assess recoverability assets could incur additional impairment charges • stockbased compensation recognize stockbased compensation expense sharebased payment awards including employee stock options restricted stock units “rsus” performance share awards purchases employee stock purchase plan granted december 31 2005 granted prior yet vested december 31 2005 accordance sfas 123r valued compensation expense expectedtovest stockbased awards granted prior december 31 2005 multipleoption approach amortize sharebased payments using accelerated attribution method subsequent december 31 2005 compensation expense expectedtovest stockbased awards valued singleoption approach amortized straightline basis net estimated forfeitures prior adoption sfas 123r accounted stockbased compensation intrinsic value recognition provisions apb opinion 25 accounting stock issued employees “apb 25” utilize blackscholesmerton “bsm” optionpricing model incorporate monte carlo simulation appropriate order determine fair value stockbased awards sfas 123r bsm model requires various highly subjective assumptions including volatility expected option life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties application management’s judgment factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense expectedtovest shares actual forfeiture rate materially different estimate recorded stockbased compensation expense could different • income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth statement financial accounting standards 109 accounting income taxes “sfas 109” extent believe amounts likely realized record valuation allowance reduce deferred tax assets believe likely future income reversal deferred tax liabilities forecasted income sufficient fully recover remaining deferred tax assets event determine part net deferred tax assets realizable future adjustment valuation allowance would charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding effect provision income taxes period determination made january 1 2007 adopted financial interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” change accounting income taxes fin 48 contains twostep approach recognizing measuring uncertain tax positions accounted accordance sfas 109 first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition application fin 48 may increase entity’s future effective tax rates future intraperiod effective tax rate volatility january 1 2007 cumulative effect applying fin 48 192 million increase opening balance accumulated deficit 10 million increase goodwill significant judgment required evaluating uncertain tax positions fin 48 determining provision income taxes although believe reserves fin 48 reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made provision income taxes includes effect reserves fin 48 changes reserves considered appropriate well related net interest penalties applicable • loss contingencies subject possibility various loss contingencies arising ordinary course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal least minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation actions thirdparty claims us may cause us incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely impact gross margins future periods events occur business financial condition results operations cash flows could adversely affected actual liability matters may materially different estimates could result need adjust liability record additional expenses recent accounting pronouncements see note 1 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table shows total net product service revenues net product service revenues percentage total net revenues millions except percentages net product revenues increased 2008 compared 2007 primarily due increased sales products infrastructure slt solutions service provider enterprise markets particular success selling infrastructure products service providers adopting ngn ip networks designed higher capacity efficiency help reduce total operating costs able offer multiple services single network 2008 new product releases expansion emerging markets contributed increase total net product revenues net service revenues increased 2008 compared 2007 primarily due increase maintenance revenue expanding installed base equipment service contracts net revenues increased 2007 compared 2006 primarily due growth product service revenues revenue performance share gains driven infrastructure slt product revenues service revenues also increased 2007 compared 2006 primarily due increase installed base equipment service contracts lesser extent growth professional service revenues changes segments beginning january 2008 realigned reporting structure resulted two segments infrastructure slt previously reported service segment combined following two segments • infrastructure segment consists primarily products services related e mx tseries router product families exseries switching products well circuittocircuit products • slt segment consists primarily products services related firewallvpn “firewall” systems appliances ssl vpn appliances idp appliances jseries router product family wan optimization platforms infrastructure segment revenues following table shows net infrastructure segment revenues net infrastructure segment revenues percentage total net revenues product service categories millions except percentages 1 prior period amounts reclassified reflect 2008 segment structure includes service revenues infrastructure slt segments infrastructure product infrastructure product revenues increased 2008 compared 2007 primarily attributable revenue growth mmx tseries product families sales service provider enterprise markets due customers’ increased demand network infrastructure solutions lesser extent exseries products introduced first quarter 2008 eseries products also contributed revenue growth 2008 experienced sales growth service provider enterprise markets geographical perspective 2008 experienced revenue growth three regions particular strength americas region infrastructure product revenues increased 2007 compared 2006 primarily attributable increased revenues mxseries router products driven service provider customers’ continued buildout ngns bandwidth requirement increased service provider customers also moved towards ngns designed enable fast costeffective deployment differentiating multiplay services allow generate new sources revenues also contributing revenue growth increase infrastructure product sales content service provider enterprise markets geographical perspective experienced revenue growth three regions particular strength americas region track infrastructure chassis revenue units ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms modular chassis serving base platform chassis certain number slots available populated components refer modules interfaces modules components platform receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period following table shows infrastructure revenue units ports shipped 1 excludes fixed configuration ethernet switching products infrastructure chassis revenue units increased 2008 compared 2007 primarily due product mix favored higher capacity chassis revenue units driven bandwidth demand customers sought expand capabilities networks offer differentiating featurerich multiplay services allow generate new sources revenues port shipments also increased 2008 compared 2007 primarily due increase overall number chassis revenue units richly configured mseries router chassis revenue units shipped 2008 period chassis revenue units increased 2007 compared 2006 primarily due introduction mxseries products carrier ethernet services routers also experienced growth tseries products driven bandwidth demand service provider customers sought expand voice video capability existing networks port shipment units increased 2007 compared 2006 primarily due growth chassis revenue units larger expansion capacity customers’ need differentiate providing featurerich multiplay services infrastructure service infrastructure service revenues increased 2008 compared 2007 primarily due increase installed base equipment serviced installed base calculated based number systems customers maintenance majority service revenues earned customers purchase products simultaneously enter service contracts support service also experienced increased professional service revenues due consulting projects infrastructure service revenues increased 2007 compared 2006 primarily driven increased technical support service contracts associated higher infrastructure product sales resulted increased renewals larger installed base equipment serviced lesser extent professional services also contributed growth net service revenues 2007 professional service revenues increased primarily due large customer deployments requiring consulting services slt segment revenues following table shows net slt segment revenues net slt segment revenues percentage total net revenues product service categories millions except percentages 1 prior period amounts reclassified reflect 2008 segment structure includes service revenues infrastructure slt segments slt product slt product revenues increased 2008 compared 2007 primarily due increase revenues firewall jseries products increases partially offset decline revenues dx wx products integrated systems introduced prior 2007 ssg firewall products gained traction market place revenues product lines growing 2008 compared 2007 2008 experienced sales growth service provider enterprise markets geographically revenues increased emea apac regions decreased americas region slt product revenues increased 2007 compared 2006 primarily attributable increased revenues across majority slt product families particular firewall ssl wan optimization jseries products integrated systems introduced prior 2007 isg ssg firewall products gained traction market place generated additional revenues 2007 three geographic regions significant growth slt revenues 2007 experienced growing demand slt products enterprise service provider markets focused crossselling integrated products solutions enterprise service provider markets leveraging partnerships open standardsbased interoperability slt products following table shows slt revenue units recognized slt revenue units increased slightly 2008 compared 2007 percentage increase slt revenue units lower percentage increase product revenues primarily due product mix favored products higher average selling prices january 2008 announced plan phase dx product line products supported 2013 expect plan material impact consolidated financial condition results operations cash flows slt revenue units increased 2007 compared 2006 primarily attributable growing demand slt products market place percentage increase slt revenue units greater percentage increase product revenues primarily due increased revenues sales branch firewall products lower average selling price slt products slt service slt service revenues increased 2008 compared 2007 primarily due increase installed base equipment serviced majority service revenues earned customers purchase products simultaneously enter support service contracts slt service revenues increased 2007 compared 2006 primarily driven increase support service contracts associated increase slt product sales lesser extent professional services also contributed growth net service revenues 2007 total net revenues geographic region following table shows total net revenues geographic region millions except percentages net revenues americas region increased absolute dollars percentage total net revenues 2008 compared 2007 primarily due growth infrastructure revenues service provider enterprise markets customers continued focus increasing network performance reliability scale united states net revenues increased absolute dollars percentage total net revenues 2008 compared 2007 primarily due growth revenues service provider enterprise markets net revenues americas region increased absolute dollars percentage total revenues 2007 compared 2006 primarily due strength united states latin america united states net revenues increased absolute dollars percentage total revenues 2007 compared 2006 primarily due revenue growth infrastructure product services service provider internet content provider customers net revenues emea increased absolute dollars 2008 compared 2007 primarily due revenue growth emerging markets middle east eastern europe driven service provider network buildouts result bandwidth demand well growth demand enterprise market net revenues emea percentage total net revenues decreased 2008 compared 2007 primarily due relative strength americas region net revenues emea increased absolute dollars 2007 compared 2006 primarily due increased infrastructure product slt product revenues along increased service revenues driven strong bandwidth demands europe well revenue growth sales emerging markets middle east eastern europe net revenues emea percentage total net revenues decreased 2007 compared 2006 primarily due relative strength americas region net revenues apac increased absolute dollars 2008 compared 2007 primarily due strength japan china association southeast asian nations “asean” countries mainly driven bandwidth demand well customers’ deployment routing platforms ngns partially offset decrease revenues australia net revenues apac increased absolute dollars percentage total net revenues 2007 compared 2006 primarily due increased revenues infrastructure products slt products service driven demands service providers well enterprise customers resulting crossselling product portfolio experienced revenue growth across region strength korea australia malaysia india indonesia net revenues markets customers sell highperformance network products service offerings infrastructure slt segments two primary markets service providers enterprise customers service provider market includes wireline wireless cable operators well major internet content application providers enterprise market represents businesses federal state local governments research education institutions 2008 service provider market accounted 719 total net revenues enterprise market accounted 281 total net revenues 2007 service provider market accounted 710 total net revenues enterprise market accounted 290 total net revenues net revenues service provider market increased 27 2008 compared 2007 net revenues enterprise market increased 22 2008 compared 2007 2006 service provider market accounted 708 total net revenues enterprise market accounted 292 total net revenues net revenues service provider market increased 24 2007 compared 2006 net revenues enterprise market increased 22 2007 compared 2006 single customer accounted 100 net revenues year ended december 31 2008 nsn predecessor companies accounted greater 100 net revenues 2007 2006 cost revenues following table shows cost product service revenues related gross margin “gm” percentages millions except percentages cost product revenues increased absolute dollars 2008 compared 2007 primarily due increase product revenues resulted higher product costs slight decrease product gross margin percentage product revenues 2008 compared 2007 primarily attributable changes product mix partially offset growth highermargin mseries product families within infrastructure segment increased sales highermargin firewall jseries products within slt segment december 31 2008 2007 230 190 employees respectively manufacturing operations organization primarily manage relationships contract manufacturers manage supply chain monitor manage product testing quality cost product revenues increased absolute dollars 2007 compared 2006 primarily attributable increased product revenues enterprise service provider markets product gross margin slightly increased 2007 compared 2006 primarily due favorable product mix lesser extent improvements standard costs infrastructure products partially offset slight decrease slt product gross margin december 31 2007 2006 190 149 employees respectively manufacturing operations organization cost service revenues service gross margin increased 2008 compared 2007 increase commensurate growth revenues absolute dollars attributable growth installed equipment base servicerelated headcount increased 35 employees 5 783 employees 2008 compared 748 2007 personnelrelated charges consisting salaries bonus fringe benefits expenses stockbased compensation expenses represented majority increases cost service revenues 2008 total personnelrelated charges percentage service revenues approximately 20 2008 23 2007 decrease personnelrelated charges 2008 percentage service revenues primarily due overall increase service revenues outside service expense also increased 2008 primarily support expanding installed equipment base freightrelated expense increased primarily support larger volume spare parts supporting growth additionally facilities information technology expenses related cost service revenues increased connection growth service business portion overall operations cost service revenues increased 2007 compared 2006 service gross margin decreased slightly 2007 compared 2006 increase service costs decrease gross margin primarily attributable increases headcountrelated expenses associated expanding service delivery infrastructure professional service organization particularly north america india well increasing resources supporting network buildouts deployments customers servicerelated headcount increased 137 employees 22 748 employees 2007 compared 611 2006 personnelrelated charges consisting salaries bonus fringe benefits expenses stockbased compensation expenses represented majority increases cost service revenues 2007 total personnelrelated charges percentage service revenues approximately 23 21 2007 2006 respectively outside service expense increased used outside providers support increase customer support contracts professional engagements freightrelated expense increased due deployment spare parts supporting growth overseas facilities information technology expenses related cost service revenues increased 2007 consistent areas organization due headcount growth investment internal infrastructure support growing business partially offsetting increases decrease spares component purchases due large purchase made 2006 operating expenses following table shows operating expenses millions except percentages table highlights operating expenses percentage net revenues research development expenses research development expenses include costs developing products components prototypes finished products costs outside services certifications new products expenditures associated equipment used testing several components research development effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses expense research development costs incurred research development expenses increased 2008 compared 2007 primarily due strategic initiatives expand product portfolio maintain technological advantage competitors particular 2008 continued expand exseries ethernet switching products invested recently announced srx dynamic services gateways intelligent services edge offering advances mxseries platforms research development expenses primarily consist personnelrelated expenses new product development costs personnelrelated charges consisting salaries bonus fringe benefits expenses stockbased compensation expenses increased 593 million 16 4352 million 2008 primarily due 25 increase headcount engineering organization 2563 3194 employees support product innovation intended capture anticipated future network infrastructure growth opportunities outside consulting development expense also increased support product innovation initiatives additionally facilities information technology expenses related research development expenses increased support engineering efforts research development expense increased 2007 compared 2006 primarily due commitment continue innovation products particular 2007 continued development ethernet products including mxseries exseries ethernet switching products introduced january 2008 well development t1600 product released november 2007 personnelrelated charges consisting salaries bonus fringe benefits expenses stockbased compensation expenses comprise majority research development expenses increased primarily due headcount growth meritbased salary increases 2007 research development related headcount increased 493 employees 24 2007 2563 employees december 31 2007 headcount increase primarily due additional hires engineering organization within infrastructure segment addition personnelrelated expenses also increased prototype lab equipment expenses 2007 development new products additionally facilities information technology expenses well depreciation expenses research development organization increased 2007 due increases headcount additional internal systems support growth general grew engineering organizations support product innovation expand improve product portfolio address growth opportunities ngn bandwidth features service provider enterprise customers sales marketing expenses sales marketing expenses include costs selling promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives extensive distribution channel place use target new customers increase sales made substantial investments distribution channel 2008 2007 2006 sales marketing expenses increased 2008 compared 2007 primarily due increases personnelrelated expenses marketing expenses percentage net revenues sales marketing expenses decreased 2008 due focus managing expenses creating efficiency sales activities personnelrelated charges consisting salaries commissions bonus fringe benefits stockbased compensation expenses increased 708 million 17 4972 million 2008 primarily due 18 increase headcount worldwide sales marketing organizations 1863 2190 employees included personnelrelated charges increase commission expense 53 million 2008 compared 2007 due higher net revenues also increased investment corporate channel marketing efforts prior year sales force grew also increased facilities information technology expenses related sales marketing organizations 2008 compared 2007 sales marketing expenses increased 2007 compared 2006 primarily due increases personnelrelated charges percentage net revenues sales marketing expenses decreased slightly 2007 due focus increasing operating margin efficiency sales activities increases absolute dollars primarily headcountrelated increases sales marketing related headcount increased 272 employees 17 2007 1863 december 31 2007 hired additional personnel across infrastructure slt organizations support larger product portfolio expand presence enterprise marketplace addition commission expenses increased primarily result strong revenue growth 2007 also increased consulting expenses support sales marketing initiatives likewise demand demonstration equipment grown seek capture new markets release new products sales marketing organization expands also grown facilities information technology expenses related sales marketing organization general administrative expenses general administrative expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting certain corporate strategic services general administrative expenses increased 2008 compared 2007 primarily due increase personnelrelated expenses outside professional services percentage net revenues general administrative expenses decreased slightly 2008 due focus managing expenses growing revenues personnelrelated charges consisting salaries bonus fringe benefits stockbased compensation expenses increased 124 million 21 712 million 2008 compared 2007 primarily due 20 increase headcount worldwide general administrative functions 291 350 employees support overall growth business outside professional service fees increased 2008 compared 2007 result increased legal fees business process reengineering costs additionally facilities information technology expenses related general administrative infrastructure increased support growing business general administrative expenses increased 2007 compared 2006 percentage net revenues general administrative expenses slightly decreased 2007 due focus increasing operating margin increases absolute dollars primarily due 24 increase headcount worldwide general administrative functions 235 291 employees support overall growth business headcount increases primarily finance human resources organizations expanded organization infrastructure lower cost regions improved internal processes continued initiatives update information systems outside services increased 45 million 2007 compared 2006 invested designing efficient organizational structure improving internal systems increases offset decreases accounting legal fees 15 million 2007 compared 2006 consistent areas organization facilities information technology expenses related general administrative infrastructure increased order support initiatives growth business amortization purchased intangible assets amortization purchased intangible assets decreased 2008 compared 2007 primarily due decrease amortization expense certain purchased intangible assets became fully amortized second quarter 2008 amortization purchased intangible assets decreased 2007 compared 2006 primarily due certain purchased intangible assets reaching end amortization period 2007 impairment goodwill purchased intangible assets impairment goodwill 2008 2007 2008 recognized impairment charge 50 million purchased intangible assets result phaseout dx products impairment purchased intangible assets 2007 2006 incurred impairment charges 12834 million result impairment goodwill purchased intangible assets impairment charges primarily due decline market capitalization occurred period approximately six months prior impairment review lesser extent decrease forecasted future cash flows used income approach based upon impairment review reduced carrying value goodwill within slt segment 12800 million 2006 recorded 34 million impairment charge pertaining writedown purchased intangible assets result decrease revenue forecast session border control “sbc” products see note 5 goodwill purchased intangible assets item 8 part ii annual report form 10k information impairment goodwill purchased intangible assets charges net charges summarized follows • restructuring acquisitionrelated charges restructuring acquisitionrelated charges 2008 2007 recorded net restructuring acquisitionrelated charges 07 million 11 million pertained bonus accruals associated past acquisitions partially offset benefit 04 million pertaining net restructuring adjustments recorded net restructuring acquisitionrelated charges 59 million 2006 56 million due accrued bonuses associated past acquisitions 03 million due net restructuringrelated charges including 07 million restructuring charges associated program reduce product development costs discontinuation sbc product • stock option investigation costs stock option investigation costs recorded 2008 recorded expenses 60 million 205 million 2007 2006 respectively related professional fees costs connection investigation historical stock option granting practices • stock option amendment taxrelated charges stock option amendment taxrelated charges recorded 2008 recorded 80 million 101 million operating expense 2007 2006 respectively relation amendment stock options payment certain taxes penalties associated employee stock option exercises • net settlement loss gain recorded net legal settlement loss 90 million 2008 related shareholder derivative lawsuit 2007 recognized net legal settlement gain 53 million consisted cash settlement proceeds 62 million net 09 million legal expense related direct transaction costs incurred third quarter 2007 legal settlement gains losses recorded 2006 net interest income gain loss equity investments income tax provision following table shows net interest income tax provision millions except percentages interest income net interest income decreased 2008 compared 2007 primarily due lower interest rates 2008 net interest income decreased 2007 compared 2006 resulting decrease interest income due lower cash equivalents investment balance attributable common stock repurchases approximately 16 billion first second quarters 2007 partially offsetting decreases higher interest yield combined higher positive cash flows operations compared 2006 interest expenses slightly increased 2007 compared 2006 primarily due costs associated distributor financing program see note 8 debt notes consolidated financial statements item 8 part ii annual report form 10k full description distributor financing program interest expenses include shortterm debt expenses debt issuance cost amortization foreign exchange losses miscellaneous expenses bank fees loss gain equity investments 2008 recognized impairment losses 148 million investments privatelyheld publiclytraded companies changes fair value believed temporary june 2007 one companies minority equity investment completed initial public offering “ipo” result realized gain 67 million 2007 based upon difference market value investment time ipo cost basis 2006 none investments recognized gain loss income tax provision effective tax rates 298 293 116 2008 2007 2006 respectively increase overall rate 2008 compared 2007 primarily due differences geographic mix taxable income level research development credits us 2006 effective tax rate differs 2008 2007 primarily due inability benefit substantial portion goodwill impairment charge recorded 2006 currently examination irs 2004 tax year indian tax authorities 2004 tax year german tax authorities 2005 tax year additionally reached final resolution irs adjustment proposed 1999 2000 tax years examination major jurisdictions file income tax returns december 31 2008 september 2008 part ongoing 2004 irs audit received proposed adjustment related business credit carryforwards agreed would reduce business credit carryforwards december 2008 received proposed adjustment indian tax authorities related 2004 tax year pursuing available administrative procedures relative matters december 2008 reached tentative settlement german tax authorities 2005 tax year believe adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations expect complete resolution irs audits within significant foreign state jurisdictions within next 12 months however reasonably possible may reach agreement certain issues result amount liability unrecognized tax benefits may decrease approximately 130 million within next 12 months complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 12 income taxes notes consolidated financial statements item 8 part ii annual report form 10k segment information description products services segment see item 1 part annual report form 10k description measures included management operating income loss also found note 11 segment information notes consolidated financial statements item 8 part ii annual report form 10k included segment financial data three years period ended december 31 2008 comparative purposes financial information segment used management make financial decisions allocate resources follows millions except percentages nm meaningful 1 prior year amounts reclassified reflect 2008 segment structure includes service revenues operating results infrastructure slt segments 2 corporate charges include workforcerebalancing charges primarily severance related costs workforcerebalancing activities considered part normal operations continue optimize cost structure workforcerebalancing costs included business segment results may incur additional workforcerebalancing costs future 3 charges net 2008 includes loss litigation settlement charges net 2007 includes charges restructuring acquisitionrelated charges stock option investigation costs well stock amendment taxrelated charges net 2006 includes charges restructuring acquisitionrelated charges stock option investigation costs taxrelated charges well certain restructuring charges cost product revenues following table shows financial information segment percentage total net revenues 1 prior year amounts reclassified reflect 2008 segment structure includes service revenues operating results infrastructure slt segments 2 corporate charges includes workforcerebalancing charges primarily severance related costs workforcerebalancing activities considered part normal operations continue optimize cost structure workforcerebalancing costs included business segment results may incur additional workforcerebalancing costs future 3 charges net 2008 includes loss litigation settlement charges net 2007 includes charges restructuring acquisitionrelated charges stock option investigation costs well stock amendment taxrelated charges net 2006 includes charges restructuring acquisitionrelated charges stock option investigation costs taxrelated charges well certain restructuring charges cost product revenues infrastructure segment analysis change revenues infrastructure segment change revenue units found section titled “net revenues” infrastructure segment operating income increased 2008 compared 2007 primarily due revenue growth router product families lesser extent new ethernet switching product family outpaced expense growth infrastructure product gross margin increased absolute dollars 2008 compared 2007 primarily due revenues richly configured highend mseries router products well highmargin port shipments infrastructure gross margin percentage decreased slightly 2008 compared 2007 primarily due product mix particularly increase mix lowermargin eseries products 2008 continued invest research development efforts continue innovation products expand infrastructure product portfolio research development expense decreased percentage infrastructure net revenues 2008 compared 2007 primarily due cost control initiatives resulted revenue growing faster expenses continue make investments expand product features functionality based upon trends marketplace additionally sales marketing expenses decreased slightly percentage infrastructure net revenues increased absolute dollars 2008 compared 2007 increased efforts reach enterprise service provider customers allocate sales marketing general administrative well facility information technology expenses infrastructure segment generally based upon revenue usage headcount infrastructure segment operating income increased 2007 compared 2006 primarily due revenue growth router product families outpaced expense growth increase revenue partially offset continued investments research development efforts sought continue innovation products expand infrastructure product portfolio 2007 sales marketing expenses decreased slightly percentage net revenues increased absolute dollars increased efforts reach enterprise service provider customers slt segment analysis change revenues slt segment change units found section titled “net revenues” slt segment operating income increased 2008 compared 2007 primarily due revenue growth firewall jseries products growth installed equipment base service contracts outpaced increase slt expenses slt product gross margin gross margin percentage increased 2008 compared 2007 primarily due product mix particularly increase mix highermargin firewall jseries products 2008 research development related costs increased absolute dollars decreased percentage slt revenues 2008 compared 2007 primarily due addition headcount regions lower operating costs revenue growing faster research development expenses additionally sales marketing well general administrative expenses decreased percentage slt net revenues 2008 compared 2007 primarily due focused execution allocate sales marketing general administrative well facility information technology expenses slt segment generally based revenue usage headcount past generally experienced quarterly seasonality fluctuations demand slt products particularly fourth quarter may result greater variations quarterly operating results slt segment operating income increased slightly 2007 compared 2006 primarily due revenue growth outpaced increase slt expenses slt product gross margin gross margin percentage increased 2007 compared 2006 primarily due product mix particularly increase favored highermargin products increase slt operating expenses due primarily increase information technology expenses allocated slt segment higher variable compensation expenses associated companywide revenue growth additionally strategically invested research development efforts develop technologies products junos platform effort control costs moved significant portion slt development organization lower cost regions expanding product portfolio slt segment operating income affected continued investments sales distribution channels slt gross margin decreased slightly 2007 compared 2006 due higher manufacturing costs associated new complex products higher manufacturing costs partially offset costreduction efforts move manufacturing lower cost regions increases slt operating expenses partially offset revenue growth especially fourth quarter 2007 due increased customer demand security products particularly firewall due typical quarterly seasonality stockbased compensation related payroll taxes stockbased compensation expense increased 2008 compared 2007 increase primarily attributable new stock options rsu grants 2008 timing recognition stockbased compensation expense rsus granted last month fourth quarter 2007 stockbased compensation related payroll tax expense represents employment taxes incurred connection employee stock programs decreased 2008 compared 2007 changes expenses primarily attributable timing volume stock options exercises employees experienced considerable decrease expenses due decrease share price 2008 stockbased compensation expense increased 2007 compared 2006 increase primarily attributable new stock options rsu grants partially offset lower stock option expense 2007 resulting acceleration vesting certain unvested “outofthemoney” stock options completed december 2005 “2005 stock option vesting acceleration” stockbased compensation related payroll tax expense increased 2007 compared 2006 experienced considerable increase expenses due increase share price 2007 contrast employee stock option exercises restricted majority 2006 due stock option investigation key performance measures addition financial metrics included consolidated financial statements use following key performance measures assess operating results 1 dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days 2 booktobill ratio represents ratio product orders booked divided product revenues respective period liquidity capital resources following sections discuss effects changes consolidated balance sheet cash flows contractual obligations commitments stock repurchase program liquidity capital resources overview historically funded business primarily operating activities issuance common stock following table shows capital resources millions except percentages significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities deferred revenue increase working capital december 31 2007 december 31 2008 primarily due increase cash equivalents noncash settlement current portion longterm debt due maturity senior convertible notes june 2008 see note 8 debt notes consolidated financial statements item 8 part ii annual report form 10k discussion senior convertible notes increase cash equivalents 2008 primarily due cash generated operating activities 8752 million along issuance common stock 1195 million stock option exercises employee stock purchase plan purchases partially offset repurchases common stock 6047 million summary cash flows operating activities net cash provided operating activities 8752 million 7865 million 7556 million 2008 2007 2006 respectively cash provided operating activities period due net income loss adjusted • noncash charges 2558 million 2575 million 15364 million 2008 2007 2006 respectively noncash charges primarily related depreciation amortization expenses stockbased compensation excess tax benefits employee stockbased compensation gainloss equity investments 2006 noncash charges also included charges 12834 million related impairment goodwill intangible assets • net changes operating assets liabilities 1076 million 1682 million 2206 million 2008 2007 2006 respectively generated normal course business changes primarily due increases accounts payable accrued compensation taxes payable deferred revenue partially offset accounts receivable increase accounts payable due timing payments contract manufacturers growth business increase accrued compensation due increases headcount additionally increase accrued compensation 2007 compared 2006 due removal suspension employee purchases shares employee stock purchase plan increase taxes payable due increase tax provision movement deferred tax assets timing payments increase deferred revenue due growing installed base customer payments advance product acceptance addition increases cash flows operations partially offset negative cash flow due increase net accounts receivable primarily due growth business net revenues investing activities net cash used investing activities 1498 million 2008 compared net cash generated investing activities 5718 million 2007 2006 cash generated investing activities 119 million changes periods primarily due movement cash short longterm investments cash equivalents 2007 anticipation stock repurchases 2006 stock repurchase program financing activities net cash used financing activities 4224 million 12385 million 896 million 2008 2007 2006 respectively 2008 used 6047 million repurchase common stock partially offset cash proceeds 1195 million common stock issued employees compared 16232 million common stock repurchases 2007 partially offset cash proceeds 3550 million common stock issued employees 2006 used 1864 million repurchase common stock partially offset cash proceeds 871 million common stock issued employees offbalance sheet arrangements none contractual obligations principal commitments primarily consist obligations outstanding operating leases purchase commitments tax liabilities contractual obligations following table summarizes principal contractual obligations december 31 2008 effect obligations expected liquidity cash flow future periods millions 1 contractual obligations operating leases primarily relate leased facilities noncancelable operating leases rent payments allocated costs operating expenses consolidated statements operations occupy approximately 19 million square feet worldwide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires january 2017 2 order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based build forecasts contract manufacturers use components build products based forecasts purchase orders received customers generally components title products transfers contract manufacturers us immediately customers upon delivery designated shipment location components go unused products go unsold specified periods time may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet forecast customer orders december 31 2008 accrued 304 million based estimate charges total purchase commitments december 31 2008 consisted 868 million ncnr orders 3 tax liabilities include current longterm liabilities consolidated balance sheet unrecognized tax positions reasonably possible may reach agreement certain issues result amount liability unrecognized tax benefits may decrease approximately 130 million within next 12 months time unable make reasonably reliable estimate timing payments related additional 782 million liabilities due uncertainties timing tax audit outcomes 4 contractual obligations consist acquisitionrelated escrow amount 23 million joint development agreement requiring quarterly payments 35 million january 2010 software subscription 227 million requiring payments january 2011 data center hosting agreement 264 million requiring payment april 2013 guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product service performance standby letters credit certain lease facilities recorded liability related indemnification guarantee provisions guarantees indemnification arrangements significant impact consolidated financial condition results operations cash flows stock repurchase activities 2008 repurchased 6047 million 251 million shares common stock following two stock repurchase programs authorized board 20 billion stock repurchase program approved 2006 2007 “2006 stock repurchase program” repurchased approximately 154 million shares common stock average price 2453 per share total purchase price 3768 million 2008 december 31 2008 repurchased retired approximately 848 million shares common stock 2006 stock repurchase program average price 2358 per share program remaining authorized funds available future stock repurchases board approved another 10 billion stock repurchase program march 2008 “2008 stock repurchase program” program repurchased approximately 97 million shares common stock average price 2343 per share total purchase price 2279 million 2008 december 31 2008 stock repurchase program remaining authorized funds 7721 million shares common stock purchased 2006 2008 stock repurchase programs retired future share repurchases 2008 stock repurchase program subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 14 subsequent events notes consolidated financial statements item 8 part ii annual report form 10k discussion stock repurchase activity 2009 liquidity capital resource requirements liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships may make future additionally repurchase additional shares common stock 2008 stock repurchase program liquidity may impacted also substantial portion cash investment balances held overseas may subject us taxes repatriated based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations cash generated exercise employee stock options purchases employee stock purchase plan sufficient fund operations debt growth least next 12 months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including • overall levels sales products gross profit margins • business product capital expenditures research development plans • market acceptance products • repurchases common stock • issuance repayment debt • litigation expenses settlements judgments • volume price discounts customer rebates • levels accounts receivable maintain • acquisitions businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors’ responses products • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated stockbased awards • issuance stockbased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results juniper networks inc “company” based current expectations estimates forecasts projections industry operate beliefs assumptions management words “expects” “anticipates” “targets” “goals” “projects” “would” “could” “intends” “plans” “believes” “seeks” “estimates” variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file sec specifically recent reports form 10q forwardlooking statements based reasonable expectations management time made rely undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles “us gaap” course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation stockbased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions aid understanding operating results periods covered report provided executive overview summary significant events affected recent fiscal year discussion nature operating expenses sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part audited consolidated financial statements notes included item 8 part ii report changes previously announced fiscal 2009 fourth quarter us gaap annual results subsequent january 28 2010 announcement preliminary fourth quarter full fiscal year results 2009 recorded additional litigation settlement charges 1693 million reported results february 5 2010 entered proposed agreement principle federal securities class action litigation pending us certain current former officers directors relating historical stock option granting practices litigation settlement charge resulted increase total operating expense reduction operating income taxes noncontrolling interest provision income taxes consolidated net income net income attributable juniper networks net income per share attributable juniper networks see discussion note 13 commitments contingencies “legal proceedings” notes consolidated financial statements item 8 part ii annual report form 10k set forth reconciliation january 28 2010 announcement preliminary results press release amounts reported annual report form 10k reflects mentioned adjustment millions except per share amounts executive overview performance fiscal year 2009 reflects weakness market demand networking security products compared fiscal year 2008 primarily due customers’ reaction weakened global economy decrease revenues primarily due slowdown europe middle east africa “emea” asia pacific “apac” service provider market global economy continues challenge marketplace portfolioselling strategy enabled us expand depth breadth enterprise service provider markets second half 2009 result fourth quarter 2009 strongest quarter enterprise market well service provider market us addition able navigate challenging economic conditions controlling operating costs continuing invest innovation customer satisfaction following table provides overview key financial metrics years ended december 31 2009 2008 millions except per share amounts percentages • net revenues net revenues decreased 2009 compared 2008 primarily due reduced demand products particularly infrastructure segment consistent overall decline global economy partially offset increase service revenue infrastructure slt segments net revenues enterprise customers increased 11 net revenues service providers decreased 14 2009 compared 2008 net revenues decreased regions 2009 compared 2008 • operating income operating income well operating margin percentage net revenues decreased 2009 compared 2008 decreases large part due decrease revenues increase litigation settlement charges partially offset efforts control expenses improve operational efficiencies 2009 compared 2008 • net income attributable juniper networks net income per share attributable juniper networks common stock holders decrease net income attributable juniper networks “net income” net income per share attributable juniper networks common stock holders “net income per share” 2009 compared 2008 primarily due decrease revenue increase litigation settlement charges total nonrecurring income tax charges 1185 million incurred 2009 1185 million 618 million related writeoff certain net deferred tax assets resulting change california income tax law 521 million related change tax treatment stockbased compensation expense transfer pricing arrangements certain us multinational companies due recent federal appellate court ruling 46 million related investigation india tax authorities • financial highlights total deferred revenue increased 1633 million 2009 primarily due growth installed equipment base maintenance customer support contracts increase channel inventory 2009 repurchased approximately 207 million shares common stock 2008 stock repurchase program average price 2191 per share total purchase price 4535 million business market environment design develop sell products services together provide customers highperformance network infrastructure creates responsive trusted environments accelerating deployment services applications single network serve highperformance networking requirements global service providers enterprises research public sector organizations view network critical success highperformance networking designed provide fast reliable secure access applications services scale offer highperformance network infrastructure includes ip routing ethernet switching security application acceleration solutions well partnerships designed extend value network worldwide services support designed optimize customer investments 2009 continued deliver new innovative highperformance network infrastructure solutions extended junos software platform include junos space network application platform junos pulse integrated multiservice network client launch next generation silicon trio enables 3d scaling positions mxseries routers “universal” edge platform networking market announced tx matrix plus multichassis system t1600 core router conjunction jcs12000 control plane system brings virtualization core internet additionally announced significant technological advance 100 gigabit ethernet interface cards t1600 core router also delivered adaptive threat management solution designed help customers identify respond security incidents help reduce overall risk introduced new solution intelligent services edge streamscope erm integrated video monitoring analysis product designed enable customers extend capabilities mxseries routers enhance quality video services cable wireless internet protocol television networks ethernet switching portfolio added ex2200 switch platform ex8208 modular switching platform ex8216 highcapacity modular switching platform designed deployment large enterprise data centers addition nextgeneration network infrastructure includes four new models srx family dynamic services gateways expanded srx family dynamic services gateways introduction srx3000 extended infrastructure enterprises started shipping srx100 dynamic service gateway platforms srx services gateways sold service provider mobile packet core security markets well enterprise market partnership front announced entry oem agreements dell offer networking solutions dell’s powerconnect brand ibm resell ethernet networking products support ibm’s data center customers addition entered joint venture nokia siemens networks bv “nsn” develop resell joint carrier ethernet solutions recent weakness global economy affected purchasing behavior customers particularly among service providers caused delays reductions purchase decisions led lower revenues 2009 compared 2008 well limited visibility regarding future business economic growth us countries’ economies declines andor fails recover customers may delay reduce purchases could result reductions sales products longer sales cycles slower adoption new technologies increased price competition continue plan invest key rd projects believe lead future growth remain focused continuing efforts contain costs allocate resources effectively nature expenses manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs independent contract manufacturers produce products using design specifications quality assurance programs standards establish independent contract manufacturers manufacture products primarily china malaysia mexico united states employees manufacturing operations organization manage relationships contract manufacturers manage supply chain monitor product testing quality december 31 2009 2008 244 230 employees respectively manufacturing operations organization primarily manage relationships contract manufacturers manage supply chain monitor manage product testing quality generally components title products transfers contract manufacturers us immediately customers upon shipment contract manufacturers procure components based build forecasts actual component usage lower forecasts may past liable carrying obsolete material charges recent years increasing amount products manufactured asia anticipate larger percentage products produced outside us future contracts generally provide passage title risk loss designated point shipment customer manufacturing products asia shipment customers emea americas resulted additional shipment logistics freight timing issues us well customers ongoing effort balance customers’ needs made changes occasion payment freight point shipment respect products shipped asia changes affect shipping costs timing revenue recognition shipments operating expenses include rd sales marketing ga expenses rd expenses include costs developing products components prototypes finished products costs outside services certifications new products expenditures associated equipment used testing several components rd effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses expense rd costs incurred sales marketing expenses include costs selling promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives extensive distribution channel place use target new customers increase sales made substantial investments distribution channel 2009 2008 2007 ga expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting certain corporate strategic services employeerelated costs historically primary driver cost service revenue operating expenses expect trend continue employeerelated costs include items wages commissions bonuses vacation benefits stockbased compensation travel 7231 7014 5879 employees december 31 2009 2008 2007 respectively yearoveryear increases primarily attributable increases rd customer service organizations headcount expected increase 2010 continue expand functions facility information technology “it” departmental costs allocated departments based usage headcount respectively despite increase headcount 2009 costs decreased due cost reduction initiatives facilities departmental costs increased 2008 2007 due increases headcount new facility leases added support growth facility related headcount 294 267 224 december 31 2009 2008 2007 respectively 2010 expect continue invest companywide infrastructure implement operational excellence initiatives cost service revenues operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen changes related currency exchange rates may affect operating results periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating cost service revenues operating expenses effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified appropriate line item consolidated statement operations hedged transaction relates ineffectiveness hedging instruments reported income expense consolidated statements operations decrease cost service revenues operating expenses including rd sales marketing well ga expenses due foreign currency fluctuations approximately 2 2009 increase cost service revenues operating expenses including rd sales marketing well ga expenses due foreign currency fluctuations approximately 1 2 2008 2007 respectively event listing new york stock exchange october 6 2009 submitted application transfer listing company’s common stock nyse nasdaq effective october 29 2009 transferred listing nasdaq nyse symbol “jnpr” critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes base estimates assumptions current facts historical experience various factors believe reasonable circumstances determine carrying values assets liabilities readily apparent sources note 1 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k describes significant accounting policies methods used preparation consolidated financial statements critical accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • revenue recognition products generally integrated software essential functionality equipment additionally provide unspecified upgrades enhancements related integrated software maintenance contracts products accordingly account revenue accordance financial accounting standards board “fasb” accounting standards codification “asc” topic 985605 software revenue recognition formerly statement position 972 software revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists generally rely upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred use shipping terms related documents written evidence customer acceptance applicable verify delivery performance instances outstanding obligations related product delivery final acceptance product revenue deferred delivery acceptance criteria met • sales price fixed determinable assess whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured assess collectability based creditworthiness customer determined credit checks customer’s payment history record accounts receivable net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements sales products include services allocate revenue element using residual method based vendorspecific objective evidence “vsoe” fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe fair value based price charged element sold separately recognize revenue deliverable accordance policies product service revenue recognition determining vsoe require substantial majority selling prices fall within reasonable range based historical discounting trends specific products services vsoe fair value one undelivered items exist revenue deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period account multiple agreements single customer one arrangement contractual terms andor substance agreements indicate may closely related effect parts single arrangement ability recognize revenue future may affected actual selling prices significantly less fair value addition ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers oem partners recognize product revenue upon transfer title risk loss generally upon shipment practice identify enduser prior shipment valueadded reseller oem partner endusers valueadded resellers significant obligations future performance rights return pricing credits agreements oem partners may allow future rights returns pricing credits portion sales made distributors agreements allowing pricing credits rights return recognize product revenue sales made distributors upon sellthrough reported us distributors deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue record reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time actual product returns pricing adjustments differ estimates additional reductions revenue may required addition report revenue net sales taxes service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less sell certain interests accounts receivable nonrecourse basis part customer financing arrangement primarily one major financing company record cash received arrangement advance revenue recognition shortterm debt • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based demand forecasts based estimates future demand products turn based historical trends analysis sales marketing organizations adjusted overall market conditions establish provision inventory carrying costs obsolete material exposures excess components purchased based historical trends actual component usage product demand significantly lower forecasted may caused factors outside control could adverse impact gross margins profitability supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • warranty costs generally offer oneyear warranty hardware products 90day warranty media contains software embedded products accrue warranty costs part cost sales based associated material costs labor costs customer support overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead cost estimated primarily based upon historical trends cost support customer cases within warranty period although engage extensive product quality programs processes warranty obligation affected product failure rates use materials technical labor costs associated overhead incurred actual product failure rates use materials service delivery costs differ estimates may incur additional warranty costs could reduce gross margin • goodwill purchased intangible assets make significant estimates assumptions evaluating impairment goodwill intangible assets ongoing basis well valuing goodwill intangible assets connection initial purchase price allocation acquired entity amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense value intangible assets including goodwill could impacted future adverse changes future declines operating results ii sustained decline market capitalization iii significant slowdown worldwide economy networking industry iv failure meet forecasted operating results evaluate assets annual basis november 1 frequently believe indicators impairment exist process evaluating potential impairment goodwill intangible assets subjective requires significant judgment many points analysis impairment goodwill tested reporting unit level comparing reporting unit’s carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income approach market approach market approach estimate fair value reporting units based market multiples revenue earnings comparable companies income approach calculate fair value reporting unit based present value estimated future cash flows fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing carrying value net assets assigned reporting unit exceeds fair value reporting unit must perform second step impairment test order determine implied fair value reporting unit’s goodwill carrying value reporting unit’s goodwill exceeds implied fair value record impairment loss equal difference performed impairment test goodwill november 1 2009 2008 2007 concluded goodwill impairment reporting units risk failing first step impairment test intangible assets evaluated impairment whenever events changes circumstances indicate carrying amount assets may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized amount carrying amount asset exceeds fair value assess recoverability intangible assets determining whether unamortized balances greater sum undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows estimates used consistent plans estimates use manage business actual results plans estimates used future impairment analyses lower original estimates used assess recoverability assets could incur additional impairment charges • stockbased compensation recognize stockbased compensation expense sharebased payment awards including employee stock options restricted stock units “rsus” performance share awards purchases employee stock purchase plan accordance fasb asc topic 718 formerly statement financial accounting standards “sfas” 123r sharebased payment “sfas 123r” stockbased compensation expense expectedtovest stockbased awards valued singleoption approach amortized straightline basis net estimated forfeitures utilize blackscholesmerton “bsm” optionpricing model order determine fair value stockbased awards bsm model requires various highly subjective assumptions including volatility expected option life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties application management’s judgment factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense expectedtovest shares actual forfeiture rate materially different estimate recorded stockbased compensation expense could different • income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth fasb asc topic income taxes “fasb asc topic 740” formerly sfas 109 accounting income taxes financial interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 extent believe amounts likely realized record valuation allowance reduce deferred tax assets believe likely future income reversal deferred tax liabilities forecasted income sufficient fully recover remaining deferred tax assets event determine part net deferred tax assets realizable future adjustment valuation allowance would charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting adjustment earnings period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize measure potential liabilities based upon criteria set forth fasb asc topic 740 based upon criteria estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result significant judgment required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized occurred connection california tax law change first quarter 2009 adjust valuation allowance corresponding effect provision income taxes period determination made discussion california tax law change refer note 12 income taxes notes consolidated financial statements item 8 part ii annual report form 10k significant judgment also required evaluating uncertain tax positions fasb asc topic 740 determining provision income taxes although believe reserves fasb asc topic 740 reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made second quarter 2009 recorded nonrecurring income tax charge result federal appellate court ruling xilinx inc v commissioner provision income taxes includes effect reserves fasb asc topic 740 changes reserves considered appropriate well related net interest penalties applicable • loss contingencies subject possibility various loss contingencies arising ordinary course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation actions thirdparty claims us may cause us incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely affect gross margins future periods events occur business financial condition results operations cash flows could adversely affected actual liability matters may materially different estimates could result need adjust liability record additional expenses recent accounting pronouncements see note 1 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents product service net revenues millions except percentages net product revenues decreased 2009 compared 2008 primarily due decreased revenue routing products service provider customers whose spending patterns affected weakened global economy partially offset increased revenues exseries switching products net service revenues increased 2009 compared 2008 primarily due increase professional services maintenance revenue expanding installed base equipment service contracts net product revenues increased 2008 compared 2007 primarily due increased sales products infrastructure slt solutions service provider enterprise markets particular success selling infrastructure products service providers adopting next generation ip networks designed higher capacity efficiency help reduce total operating costs able offer multiple services single network 2008 new product releases expansion emerging markets contributed increase total net product revenues net service revenues increased 2008 compared 2007 primarily due increase maintenance revenue expanding installed base equipment service contracts infrastructure segment revenues infrastructure segment consists primarily products services related e mx tseries router product families exseries switching products well circuittopacket products following table presents net infrastructure segment revenues net infrastructure segment revenues percentage total net revenues product service categories millions except percentages infrastructure product infrastructure product revenues decreased 2009 compared 2008 primarily due decreased revenue eseries product families attributable customers’ reduced demand due global economic environment partially offset revenue growth exseries switching products mxseries products 2009 experienced 23 decrease product revenue service provider market 40 increase product revenue enterprise market compared period 2008 decrease service provider market primarily due decreased capital spending market increase enterprise market primarily due growth exseries switching business continued focus selling infrastructure products enterprise market resulted growth enterprise revenues americas apac geographically infrastructure product revenue decreased three regions 2009 infrastructure product revenues increased 2008 compared 2007 primarily attributable revenue growth mx tseries product families sales service provider enterprise markets due customers’ increased demand network infrastructure solutions lesser extent exseries products introduced first quarter 2008 eseries products also contributed revenue growth 2008 experienced 28 increase product revenue service provider market 59 increase product revenue enterprise market compared period 2007 geographical perspective 2008 experienced revenue growth three regions particular strength americas region track infrastructure chassis revenue units ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms modular chassis serving base platform modular chassis certain number slots available populated components refer modules interfaces modules components platform receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period following table presents infrastructure revenue units ports shipped 1 excludes modular fixed configuration exseries switching products circuit packet products infrastructure chassis revenue units decreased 2009 compared 2008 primarily due reduced customer demand weakened global economy port shipments increased 2009 compared 2008 primarily due increase mxseries products generally contain higher number ports per chassis infrastructure chassis revenue units increased 2008 compared 2007 primarily due product mix favored higher capacity chassis revenue units driven bandwidth demand customers sought expand capabilities networks offer differentiating featurerich multiplay services allow generate new sources revenues port shipments also increased 2008 compared 2007 primarily due increase overall number chassis revenue units richly configured mseries router chassis revenue units shipped 2008 period infrastructure service infrastructure service revenues increased 2009 compared 2008 primarily due increase installed base equipment serviced service renewals 2009 experienced 12 increase service revenue service provider market 30 increase service revenue enterprise market compared period 2008 geographically infrastructure service revenue increased regions 2009 majority service revenues earned customers purchase products enter service contracts support service infrastructure service revenues increased 2008 compared 2007 primarily due increase installed base equipment serviced installed base calculated based number systems customers maintenance 2008 experienced 37 increase service revenue service provider market 3 increase service revenue enterprise market compared period 2007 also experienced increased professional service revenues due consulting projects geographical perspective 2008 experienced revenue growth three regions particular strength americas region slt segment revenues slt segment consists primarily products services related firewallvpn “firewall” systems appliances srx series services gateways ssl vpn appliances idp appliances jseries router product family wan optimization platforms following table presents net slt segment revenues net slt segment revenues percentage total net revenues product service categories millions except percentages slt product slt product revenues relatively flat 2009 compared 2008 primarily due increase revenue srx services gateways offset decrease revenue highend branch firewall products 2009 experienced 26 increase revenue service provider market 8 decrease revenue enterprise market compared 2008 geographically slt product revenue decreased emea apac regions increased americas region slt product revenues increased 2008 compared 2007 primarily due increase revenues firewall jseries products increases partially offset decline revenues dx wx products integrated systems introduced prior 2007 ssg products gained traction market place revenues product lines growing 2008 compared 2007 2008 experienced 1 increase revenue service provider market 8 increase revenue enterprise market compared 2007 geographically revenues increased emea apac regions decreased americas region following table presents slt revenue units recognized slt revenue units decreased 2009 compared 2008 percentage decrease revenue units greater percentage decrease slt product revenues primarily due product mix favored products higher average selling prices slt revenue units increased slightly 2008 compared 2007 percentage increase slt revenue units lower percentage increase product revenues primarily due product mix favored products higher average selling prices slt service slt service revenues increased 2009 compared 2008 primarily due increase installed base equipment serviced service renewals 2009 experienced 20 increase service revenue service provider market 10 increase service revenue enterprise market compared 2008 geographically slt service revenue increased regions 2009 majority service revenues earned customers purchase products enter support service contracts slt service revenues increased 2008 compared 2007 primarily due increase installed base equipment serviced 2008 experienced 33 increase service revenue service provider market 24 increase service revenue enterprise market compared 2007 geographically slt service revenue increased regions 2008 total net revenues geographic region following table presents total net revenues geographic region millions except percentages net revenues americas region decreased absolute dollars increased percentage total net revenues 2009 compared 2008 primarily due revenue decrease service provider market partially offset increase net revenues enterprise market particular united states mexico brazil accounted half decline net revenue americas region net revenues americas region increased absolute dollars percentage total net revenues 2008 compared 2007 primarily due growth infrastructure revenues service provider enterprise markets customers continued focus increasing network performance reliability scale united states net revenues decreased absolute dollars increased percentage total net revenues 2009 compared 2008 primarily due relative strength sales united states compared emea apac united states net revenues increased absolute dollars percentage total net revenues 2008 compared 2007 primarily due growth revenues service provider enterprise markets net revenues emea decreased absolute dollars percentage total net revenues 2009 compared 2008 primarily due reduced demand service provider market partially offset slight increase revenue enterprise market particular sweden germany belgium united kingdom attributed half decline net revenues emea net revenues emea increased absolute dollars 2008 compared 2007 primarily due revenue growth emerging markets middle east eastern europe driven service provider network buildouts result bandwidth demand well growth demand enterprise market net revenues emea percentage total net revenues decreased 2008 compared 2007 primarily due relative strength americas region net revenues apac decreased absolute dollars 2009 compared 2008 primarily due reduced demand service provider partially offset slight increase revenue enterprise market particular half decline apac net revenues attributable japan net revenues apac percentage total net revenues decreased slightly primarily due relative strength enterprise market united states net revenues apac increased absolute dollars 2008 compared 2007 primarily due strength japan china association southeast asian nations “asean” countries mainly driven bandwidth demand well customers’ deployment routing platforms next generation networks partially offset decrease revenues australia net revenues markets customers sell highperformance network products service offerings infrastructure slt segments two primary markets service provider enterprise service provider market includes wireline wireless cable operators well major internet content application providers enterprise market represents businesses federal state local governments research education institutions following table presents total net revenues markets millions except percentages net revenues service provider market decreased absolute dollars percentage total net revenues 2009 compared 2008 primarily due customers’ delayed investment new network buildouts purchases additional networking capacity reaction weak global macroeconomic environment decline service provider revenue percentage net revenues also attributable relative strength revenue enterprise market net revenues service provider market increased absolute dollars percentage total net revenues 2008 compared 2007 primarily due service provider network buildouts result bandwidth demand net revenues enterprise market increased absolute dollars percentage total net revenues 2009 compared 2008 primarily due revenue growth exseries switching products net revenues enterprise market increased absolute dollars percentage total net revenues 2008 compared 2007 primarily due strategy crossselling enterprise market introduction srx service gateways exseries switching products att inc accounted 104 net revenues year ended december 31 2009 single customer accounted 10 net revenues year ended december 31 2008 nsn accounted 128 net revenues 2007 cost revenues gross margin following table presents cost product service revenues related gross margins millions except percentages cost product revenues product gross margin decreased absolute dollars 2009 compared 2008 primarily due lower revenue level decrease product gross margin percentage revenues 2009 compared 2008 primarily attributable product mix favored products lower gross margin switching mxseries products geographical mix pricing cost product revenues increased absolute dollars 2008 compared 2007 primarily due increase product revenues resulted higher product costs slight decrease product gross margin percentage product revenues 2008 compared 2007 primarily attributable changes product mix partially offset growth highermargin mseries product families within infrastructure segment increased sales highermargin firewall jseries products within slt segment cost service revenues service gross margin increased 2009 compared 2008 increase cost service revenues attributable increased headcount increased spending servicerelated spares service gross margin increased primarily due continued efforts manage costs cost service revenues service gross margin increased 2008 compared 2007 increase corresponded growth revenues absolute dollars attributable growth installed equipment base servicerelated headcount increased 108 employees 14 891 employees 2009 compared 783 2008 total personnelrelated charges percentage service revenues approximately 18 2009 20 2008 decrease personnelrelated charges 2009 percentage service revenues primarily due overall increase service revenues outside service expense also increased 2009 primarily support expanding installed equipment base additionally facilities expenses related cost service revenues increased connection growth service business portion overall operations operating expenses following table presents operating expenses operating income millions except percentages following table highlights operating expenses operating income percentage net revenues rd expenses increased 2009 compared 2008 primarily due additional headcount strategic initiatives expand product portfolio maintain technological advantage competitors particular 2009 continued expand exseries switching product portfolio increased investments project stratus initiative deliver nextgeneration data center fabric project falcon effort develop mobility solutions service provider customers personnelrelated charges consisting salaries bonus fringe benefits expenses stockbased compensation expenses increased 256 million 6 4533 million 2009 primarily due 4 increase headcount engineering organization 3194 3308 employees support product innovation intended capture anticipated future network infrastructure growth opportunities outside consulting development expense also increased support product innovation initiatives additionally facilities expenses related rd expenses increased support engineering efforts rd expenses increased 2008 compared 2007 primarily due strategic initiatives expand product portfolio maintain technological advantage competitors particular 2008 continued invest exseries switching products srx dynamic services gateways intelligent services edge offering advances mxseries platforms rd expenses primarily consist personnelrelated expenses new product development costs personnelrelated charges consisting salaries bonus fringe benefits expenses stockbased compensation expenses increased 593 million 16 4352 million 2008 primarily due 25 increase headcount engineering organization 2563 3194 employees support product innovation intended capture anticipated future network infrastructure growth opportunities outside consulting development expense also increased support product innovation initiatives additionally facilities expenses related rd expenses increased support engineering efforts sales marketing expenses decreased 2009 compared 2008 primarily due decrease personnelrelated expenses travel expenses percentage net revenues sales marketing expenses increased slightly 2009 due increased spending related corporate rebranding channel marketing campaigns partially offset focus managing expenses creating efficiency sales activities personnelrelated charges consisting salaries commissions bonus fringe benefits stockbased compensation expenses decreased 158 million 3 4740 million 2009 primarily due 4 decrease headcount 2190 employees end 2008 2101 employees end 2009 addition commission expense decreased 120 million 10 due lower net revenues 2009 compared 2008 sales force decreased also decreased facilities expenses related sales marketing organizations 2009 compared 2008 sales marketing expenses increased 2008 compared 2007 primarily due increases personnelrelated expenses marketing expenses percentage net revenues sales marketing expenses decreased 2008 due focus managing expenses creating efficiency sales activities personnelrelated charges consisting salaries commissions bonus fringe benefits stockbased compensation expenses increased 708 million 17 4972 million 2008 primarily due 18 increase headcount worldwide sales marketing organizations 1863 2190 employees included personnelrelated charges increase commission expense 53 million 2008 compared 2007 due higher net revenues also increased investment corporate channel marketing efforts prior year sales force grew also increased facilities expenses related sales marketing organizations 2008 compared 2007 ga expenses increased 2009 compared 2008 primarily due increase personnelrelated expenses outside professional services percentage net revenues ga expenses decreased slightly 2009 due focus managing expenses personnelrelated charges consisting salaries bonus fringe benefits stockbased compensation expenses increased 72 million 10 784 million 2009 compared 2008 primarily due 12 increase headcount 350 393 employees worldwide ga functions support expected future growth business outside professional service fees increased 2009 compared 2008 result increased legal fees additionally facilities expenses related ga infrastructure increased support growing business ga expenses also increased 2008 compared 2007 primarily due increase personnelrelated expenses outside professional services percentage net revenues ga expenses decreased slightly 2008 due focus managing expenses growing revenues personnelrelated charges consisting salaries bonus fringe benefits stockbased compensation expenses increased 124 million 21 712 million 2008 compared 2007 primarily due 20 increase headcount worldwide ga functions 291 350 employees support overall growth business outside professional service fees increased 2008 compared 2007 result increased legal fees business process reengineering costs additionally facilities expenses related ga infrastructure increased support growing business amortization purchased intangible assets decreased 2009 compared 2008 primarily due certain purchased intangible assets reaching end amortization period second quarter 2009 amortization purchased intangible assets decreased 2008 compared 2007 primarily due decrease amortization expense certain purchased intangible assets became fully amortized second quarter 2008 impairment goodwill purchased intangible assets 2009 2008 impairment goodwill recognized impairment charge 50 million purchased intangible assets result phaseout dx products impairment goodwill purchased intangible assets 2007 2009 recorded litigation settlement charges 1823 million included 1690 million related agreement principle reached february 2010 settle securities class action litigation pending us certain current former officers directors 130 million related resolution dispute connection certain real estate sunnyvale california purchased 2000 03 million related another settlement recorded fourth quarter 2009 amounts 1813 million recorded fourth quarter 2009 2008 recorded litigation settlement loss 90 million related shareholder derivative lawsuit 2007 recognized net litigation settlement gain 53 million consisted cash settlement proceeds 62 million net 09 million legal expense related direct transaction costs incurred see note 13 commitments contingencies notes consolidated financial statements item 8 part ii annual report form 10k information 2009 recorded restructuring charges 195 million result restructuring plan reduce real estate portfolio workforce targeted areas company expect incur additional charges approximately 8 million 10 million relating additional facilities employee restructuring 2009 restructuring plan 2010 restructuring charges 2008 2007 recorded restructuring charges 07 million 11 million pertained bonus accruals associated past acquisitions partially offset benefit 04 million pertaining net restructuring adjustments see note 6 financial information notes consolidated financial statements item 8 part ii annual report form 10k information regarding restructuring liabilities charges summarized follows • stock option investigation costs stock option investigation costs recorded 2009 2008 recorded expenses 60 million 2007 related professional fees costs connection investigation historical stock option granting practices • stock option amendment taxrelated charges stock option amendment taxrelated charges recorded 2009 2008 recorded 80 million operating expense 2007 relation amendment stock options payment certain taxes penalties associated employee stock option exercises interest income net loss gain equity investments income tax provision following table presents interest income net loss gain equity investments income tax provision millions except percentages net interest income decreased 2009 compared 2008 primarily due lower interest rates increase customer financing charges 2009 net interest income decreased 2008 compared 2007 primarily due lower interest rates 2008 2009 2008 recognized impairment losses 55 million 148 million respectively investments privatelyheld companies changes fair value believed otherthantemporary 2007 one companies privatelyheld equity investment completed initial public offering “ipo” result realized gain 67 million 2007 based upon difference market value investment time ipo cost basis effective tax rates 631 298 293 2009 2008 2007 respectively increase overall rate 2009 compared 2008 federal statutory rate 35 primarily due following income tax charges 618 million discrete related charge resulted changes california income tax laws enacted 2009 ii 521 million charge resulted change unrecognized tax benefits related sharebased compensation due uncertainty regarding status decision reached us court appeals ninth circuit xilinx inc v commissioner iii 46 million charge related investigation india tax authorities effective rate impact charges partially offset federal rd credit benefit earnings foreign jurisdictions subject lower tax rates increase overall rate 2008 compared 2007 primarily due differences geographic mix taxable income level rd credits us 2008 2007 effective tax rates differ federal statutory rate 35 primarily due federal rd credit benefit earnings foreign jurisdictions subject lower tax rates complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 12 income taxes notes consolidated financial statements item 8 part ii annual report form 10k segment information description products services segment see item 1 part annual report form 10k description measures included management operating income also found note 11 segment information notes consolidated financial statements item 8 part ii annual report form 10k included segment financial data three years period ended december 31 2009 comparative purposes financial information segment used management make financial decisions allocate resources follows millions except percentages nm meaningful 1 corporate charges included severance related costs associated workforcerebalancing activities included business segment results 2 charges 2007 includes stock option investigation costs well stock amendment taxrelated charges following table shows financial information segment percentage total net revenues 1 corporate charges included severance related costs associated workforcerebalancing activities included business segment results 2 charges 2007 includes stock option investigation costs well stock amendment taxrelated charges infrastructure segment analysis change revenues infrastructure segment change revenue units found section titled “net revenues” infrastructure segment operating income decreased 2009 compared 2008 primarily due decrease revenues eseries product families due reduced demand service provider market reaction weak global economic environment partially offset revenue growth exseries switching products well mxseries products infrastructure product gross margin absolute dollars percentage infrastructure revenue decreased 2009 compared 2008 primarily due product mix pricing 2009 continued invest rd efforts expand infrastructure product portfolio continue innovation products continue make investments expand product features functionality based upon trends marketplace rd expense percentage infrastructure net revenues increased 2009 compared 2008 primarily due lower net revenues relative expenses additionally sales marketing expenses increased slightly percentage infrastructure net revenues 2009 compared 2008 increased efforts reach enterprise service provider customers allocate sales marketing ga well facility expenses infrastructure segment generally based upon revenue usage headcount infrastructure segment operating income increased 2008 compared 2007 primarily due revenue growth router product families lesser extent new ethernet switching product family outpaced expense growth infrastructure product gross margin increased absolute dollars 2008 compared 2007 primarily due revenues richly configured highend mseries router products well highmargin port shipments infrastructure gross margin percentage decreased slightly 2008 compared 2007 primarily due product mix particularly increase mix lowermargin eseries products 2008 slt segment analysis change revenues slt segment change units found section titled “net revenues” slt segment operating income increased 2009 compared 2008 primarily due 3 growth slt revenues driven product service revenue increases lowering expenses cost control initiatives engineering effectiveness measures slt gross margin absolute dollars percentage slt revenue increased 2009 compared 2008 primarily due increase service margin rd related costs percentage slt net revenues decreased 2009 compared 2008 primarily due cost control initiatives growth net revenues relative expenses additionally sales marketing expenses also decreased percentage slt net revenues 2009 compared 2008 primarily due growth slt net revenues reductions discretionary spending allocate sales marketing general administrative well facility information technology expenses slt segment generally based revenue usage headcount past generally experienced quarterly seasonality fluctuations demand slt products particularly fourth quarter may result greater variations quarterly operating results slt segment operating income increased 2008 compared 2007 primarily due revenue growth firewall jseries products growth installed equipment base service contracts outpaced increase slt expenses slt product gross margin gross margin percentage increased 2008 compared 2007 primarily due product mix particularly increase mix highermargin firewall jseries products 2008 stockbased compensation related payroll taxes stockbased compensation expense increased 2009 compared 2008 primarily attributable new stock option rsu grants 2009 increase performancebased rsu grants result strong operating results fourth quarter 2009 stockbased compensation related payroll tax expense represents employment taxes incurred connection employee stock programs decreased 2009 compared 2008 decrease payroll tax expense primarily attributable timing lower volume stock options exercises employees 2009 due lower share price year stockbased compensation expense increased 2008 compared 2007 primarily due new stock options rsu grants 2008 timing recognition stockbased compensation expense rsus granted last month fourth quarter 2007 stockbased compensation related payroll tax expense decreased 2008 compared 2007 result decrease share price 2008 discussion amortization purchased intangible assets litigation settlement charges gain restructuring charges interest income net loss gain equity investments refer operating expenses interest income net loss gain equity investments income tax provision sections key performance measures addition financial metrics included consolidated financial statements use following key performance measures assess operating results 1 dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days 2 booktobill ratio represents ratio product orders booked divided product revenues respective period liquidity capital resources following sections discuss effects changes consolidated balance sheets statements cash flows contractual obligations stock repurchase program liquidity capital resources overview historically funded business primarily operating activities lesser extent issuance common stock following table shows capital resources millions except percentages significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities deferred revenue decrease working capital december 31 2008 december 31 2009 primarily due increase short term deferred revenue partially offset increase shortterm investments total cash equivalents investments increased 2009 primarily due net cash generated operations partially offset cash used common stock repurchases fixed asset investments stock repurchase activities march 2008 board approved 2008 stock repurchase program authorized repurchase 10 billion company’s common stock program repurchased 207 million shares common stock average price 2191 per share total purchase price 4535 million 2009 december 31 2009 2008 stock repurchase program remaining authorized funds 3186 million 2008 repurchased 6047 million 251 million shares common stock average price 2410 per share 2008 stock repurchase program 20 billion stock repurchase program approved 2006 2007 “2006 stock repurchase program” december 31 2008 2006 stock repurchase program remaining authorized funds available future stock repurchases shares common stock purchased 2006 2008 stock repurchase programs retired addition february 2010 board approved new stock repurchase program “2010 stock repurchase program ” authorized repurchase 10 billion company’s common stock future share repurchases stock repurchase programs subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements programs may discontinued time see note 16 subsequent events notes consolidated financial statements item 8 part ii annual report form 10k discussion stock repurchase activity 2010 summary cash flows year ended december 31 2009 cash equivalents decreased 4144 million decrease result cash used investing financing activities 9483 million 2622 million respectively partially offset cash generated operating activities 7961 million operating activities net cash provided operating activities 7961 million 8752 million 7865 million 2009 2008 2007 respectively cash provided operating activities period due consolidated net income adjusted • noncash charges 2995 million 2558 million 2575 million 2009 2008 2007 respectively noncash charges primarily related depreciation amortization expenses stockbased compensation deferred income taxes gainloss equity investments excess tax benefits employee stockbased compensation • net changes operating assets liabilities 3813 million 1076 million 1682 million 2009 2008 2007 respectively generated normal course business changes primarily due increases deferred revenue income tax payable accrued compensation accrued liabilities partially offset increase accounts receivable increase deferred revenue due increase product revenue yet recognized growing installed base resulted additional support contracts increase income taxes payable due increase tax provision timing payments increase accrued compensation due variable compensation bonus program increase accrued liabilities primarily due increase accrual litigation settlements 2009 company accrued 1690 million proposed settlement securities class action lawsuit reached february 2010 paid prior filing report increases cash flows operations partially offset negative cash flow due increase net accounts receivable primarily due growth business net revenues 2008 2007 positive cash flows operating assets liabilities due increases deferred revenue income taxes payable investing activities net cash used investing activities 9483 million 2009 compared net cash generated investing activities 1498 million 2008 2007 cash generated investing activities 5718 million changes periods primarily due movement cash short longterm investments cash equivalents result company’s investment strategy financing activities net cash used financing activities 2622 million 4224 million 12385 million 2009 2008 2007 respectively 2009 used 4539 million repurchase common stock 2008 stock repurchase program lesser extent employees connection net issuance shares satisfy tax withholding obligations vesting certain rsu performance share awards partially offset cash proceeds 1642 million common stock issued employees proceeds 44 million non controlling interest 2008 used 6047 million common stock repurchases partially offset cash proceeds 1195 million common stock issued employees 2007 used 16232 million repurchase common stock partially offset cash proceeds 3550 million common stock issued employees offbalance sheet arrangements offbalance sheet arrangements december 31 2009 2008 contractual obligations principal commitments primarily consist obligations outstanding operating leases purchase commitments tax liabilities contractual obligations following table summarizes principal contractual obligations december 31 2009 effect obligations expected liquidity cash flow future periods millions 1 contractual obligations operating leases primarily relate leased facilities noncancelable operating leases rent payments allocated costs operating expenses consolidated statements operations occupy approximately 20 million square feet worldwide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires november 2022 2 order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based build forecasts contract manufacturers use components build products based forecasts purchase orders received customers generally components title product transfers contract manufacturers us immediately customers upon delivery designated shipment location components go unused products go unsold specified periods time may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet forecast customer orders december 31 2009 accrued 278 million based estimate charges total purchase commitments december 31 2009 consisted 1395 million ncnr orders 3 tax liabilities include current longterm liabilities consolidated balance sheet unrecognized tax positions reasonably possible may reach agreement certain tax authorities result amount liability unrecognized tax benefits may decrease approximately 15 million within next 12 months time unable make reasonably reliable estimate timing payments related additional 1755 million liabilities due uncertainties timing tax audit outcomes 4 contractual obligations consists indemnityrelated escrow amount 13 million 191 million remains unpaid data center hosting agreement remaining commitment expected paid end april 2013 154 million remains unpaid software subscription agreement remaining commitment expected paid end january 2011 35 million remains joint development agreement guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product service performance guarantees related thirdparty customer financing arrangements standby letters credit certain lease facilities december 31 2009 340 million guarantees standby letters credit recorded liability 219 million related thirdparty customerfinancing guarantee december 31 2008 recorded liability related guarantees indemnification arrangements liquidity capital resource requirements liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships may make future additionally repurchase additional shares common stock repurchase programs liquidity may impacted december 31 2009 50 cash investment balances held outside us may subject us taxes repatriated based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations cash generated exercise employee stock options purchases employee stock purchase plan sufficient fund operations anticipated growth least next 12 months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including • overall levels sales products mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • incurrence repayment debt • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • levels accounts receivable maintain • acquisitions businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • competitors’ responses products • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated stockbased awards • issuance stockbased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 managements discussion analysis financial condition results operations annual report form 10k “report” including “managements discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results juniper networks inc us “company” based current expectations estimates forecasts projections business results operations industry operate beliefs assumptions management words “expects” “anticipates” “targets” “goals” “projects” “would” “could” “intends” “plans” “believes” “seeks” “estimates” variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file sec specifically recent reports form 10q forwardlooking statements based reasonable expectations management time made rely undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles “us gaap” course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information critical accounting policies estimates see note 2 summary significant accounting policies notes consolidated financial statements item 1 part annual report form 10k “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” actual results may differ estimates different assumptions conditions aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part audited consolidated financial statements notes included item 8 part ii report executive overview 2010 experienced yearoveryear increase net revenues across regions enterprise service provider markets increases reflect growing market demand networking security products customers expand networks recovering global economy additionally net revenues grew continued control costs invested innovation customer satisfaction initiatives following table provides overview key financial metrics years ended december 31 2010 2009 millions except per share amounts percentages • net revenues net revenues increased across three regions service provider enterprise markets 2010 compared 2009 increases primarily due increased demand recent product lines mx series routers ex series switches srx service gateways improved macroeconomic environment • operating income operating income well operating margin increased 2010 compared 2009 increase large part due increase sales change customer demand favored higher margin products continued efforts control expenses improve efficiencies additionally 2009 impacted 1823 million litigation settlement charges • net income attributable juniper networks net income per share attributable juniper networks common stock holders increase net income attributable juniper networks net income per share attributable juniper networks common stockholders 2010 compared 2009 primarily due increase operating income nonrecurring income tax expense benefit recorded 2009 2010 respectively changes estimate unrecognized tax benefits related sharebased compensation changes result decisions made us court appeals ninth circuit xilinx inc v commissioner • stock repurchase activity stock repurchase programs repurchased approximately 197 million shares common stock average price 2867 per share total purchase price 5635 million year ended december 31 2010 • financial highlights total deferred revenue increased 1308 million 2010 primarily due increase deferred product revenue undelivered product commitments increase deferred service revenue largely due higher sales service contracts multiyear service billings business market environment design develop sell products services together provide customers highperformance network infrastructure creates responsive trusted environments accelerating deployment services applications single network serve highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success highperformance networking designed provide fast reliable secure access applications services scale offer highperformance network infrastructure includes ip routing ethernet switching security software application acceleration solutions well partnerships designed extend value network worldwide services support designed optimize customer investments 2010 experienced increased demand products services due growing network demand traffic carried internet computing centralized massive data centers people businesses rely digital devices connected network strategically making progress toward vision new network expanding portfolio products solutions organic growth acquisitions aligning products mobile internet cloud computing market trends continued deliver new innovative highperformance network infrastructure solutions 2010 expanded portfolio offerings enterprise market provide comprehensive portfolio routing switching security products running junos® operating system also launched next generation data center architecture named 321 enables customers connect large numbers data center servers storage devices way believe improves economics performance massive data centers announced began shipping ex4500 data center switch leverage virtual chassis technology create data center fabric across multiple networking devices offer 48 10gigabit ethernet “10gbe” ports began shipping new ex2200 line fixedconfiguration managed ethernet switches offers plugandplay solution addresses access connectivity requirements high performance businesses also announced began shipping ex820040xs line card enables modular switch ex8200 deliver 40 10gbe ports per line card mx80 3d universal edge router powered junos trio chipset designed service provider enterprise deployments announced latest fabric chipset enable customers upgrade existing series core routers additionally announced srx1400 consolidated security services gateway securing small midsize enterprise service provider mobile operator data center environments dual stack light ipv6 migration tool allow service providers handle ipv4 address exhaustion moreover announced industrys fastest core routing platform t4000 core router powered junos provides scalability flexibility meet bandwidth requirements extending investment protection series platform area mobility announced began shipping junos pulse gateway downloadable client software secure connections across mobile devices including notebooks netbooks smartphones tablets well nonmobile devices broad range corporate applications better simpler experience users additionally announced several new expanded mobility partnerships intended deliver software solutions mobile operators improve experience economics networks addition infrastructure mobility products announced four new applications enable managers orchestrate automation security networks single useroriented management interface juniper virtual control junos spacebased application help data center customers manage juniper physical switches vmware virtual switches ii juniper ethernet design unified ethernet management application enables data center campus network dial needed response needs applications users iii juniper security design software application allows pointandclick turnup security devices services iv juniper service insight software application proactive detection diagnosis resolution network performance issues 2010 completed acquisitions ankeena networks inc “ankeena” privatelyheld company gives us video delivery capabilities optimize webbased video delivery provide key components content delivery network architecturesolution improve consumers online video experience reduce service provider carrier service provider infrastructure costs providing webbased video ii smobile systems inc “smobile” privatelyheld software company allows us extend security focus integration smobiles product portfolio junos pulse iii altor networks altor privatelyheld company strengthens ability deliver integrated highlyscalable security architecture protects physical virtual systems enterprise service provider customers iv trapeze networks subsidiary belden inc expands infrastructure product portfolio include scalable secure highly available wired wireless infrastructure products critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes base estimates assumptions current facts historical experience various factors believe reasonable circumstances determine carrying values assets liabilities readily apparent sources note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k describes significant accounting policies methods used preparation consolidated financial statements critical accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected •revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists generally rely upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred use shipping terms related documents written evidence customer acceptance applicable verify delivery performance • sales price fixed determinable assess whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured assess collectability based creditworthiness customer determined credit checks payment histories record accounts receivable net allowance doubtful accounts estimated customer returns pricing credits adopted accounting standards update “asu” 200913 topic 605 multipledeliverable revenue arrangements “asu 200913” asu 200914 topic 985 certain revenue arrangements include software elements “asu 200914” prospective basis beginning fiscal 2010 new materially modified arrangements originating december 31 2009 new standards allocate total arrangement consideration separable element arrangement based relative selling price element arrangement consideration allocated undelivered elements deferred delivery fiscal 2010 future periods pursuant guidance asu 200913 sales arrangement contains multiple elements software nonsoftware components function together deliver tangible products essential functionality allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available recognize revenue deliverable accordance policies product service revenue recognition vsoe based price charged element sold separately determining vsoe require substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers however products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing products similar functionality typically cannot obtained additionally unable reliably determine competitors products selling prices standalone basis typically able determine tpe determining best estimate selling price apply management judgment considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles transactions initiated prior january 1 2010 revenue arrangements multiple elements sales products include services allocated element using residual method based vsoe fair value undelivered items pursuant asc topic 985605 software revenue recognition residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe fair value one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period result adoption asu 200913 asu 200914 net revenue year ended december 31 2010 approximately 237 million higher net revenue would recorded previous accounting rules increase revenue due recognition revenue products shipped period included approximately 183 million year ended december 31 2010 related undelivered product commitments unable demonstrate fair value pursuant previous accounting standards remainder increase revenue year due products sold multipleyear service arrangements recognized ratably previous accounting standards change allocation methodology residual method relative selling price method prescribed asu 200913 cannot reasonably estimate effect adopting standards future financial periods impact vary depending nature volume new materially modified arrangements given period well changes business practices however asu 200913 asu 200914 would allow us recognize revenue portion allocated delivered items multiple element arrangements defer revenue portion allocated undelivered items expect magnitude deferrals related undelivered product commitments items previously would able establish vsoe gradually decrease time account multiple agreements single customer one arrangement contractual terms andor substance agreements indicate may closely related effect parts single arrangement ability recognize revenue future may affected actual selling prices significantly less fair value addition ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers original equipment manufacturers oem partners recognize product revenue upon transfer title risk loss generally upon shipment practice identify enduser prior shipment valueadded reseller endusers valueadded resellers significant obligations future performance rights return pricing credits agreements oem partners may allow future rights returns additionally portion sales made distributors agreements allowing pricing credits rights return recognize product revenue sales made distributors upon sellthrough reported us distributors deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue record reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded managements judgment respect amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time actual product returns pricing adjustments differ estimates additional reductions revenue may required addition report revenue net sales taxes service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less sell certain accounts receivable nonrecourse basis part customer financing arrangement primarily one major financing company record cash received arrangement advance revenue recognition shortterm debt • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers manufacture products primarily china malaysia mexico united states employees manufacturing operations organization manage relationships independent contract manufacturers manage supply chain monitor product testing quality generally components title products transfers independent contract manufacturers us immediately customers upon shipment independent contract manufacturers produce products using design specifications quality assurance programs standards establish procure components manufacture products based demand forecasts estimates future demand products based upon historical trends analysis sales marketing organizations adjusted overall market conditions establish provision inventory carrying costs obsolete material exposures excess components purchased based historical trends actual component usage product demand significantly lower forecast may caused factors outside control may incur charges excess components could adverse impact gross margins profitability supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • warranty costs generally offer oneyear warranty hardware products 90day warranty media contains software embedded products accrue warranty costs part cost sales based associated material costs labor costs customer support overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead cost estimated primarily based upon historical trends cost support customer cases within warranty period although engage extensive product quality programs processes actual product failure rates use materials service delivery costs differ estimates additional warranty costs may incurred could reduce gross margin • goodwill purchased intangible assets make significant estimates assumptions evaluating impairment goodwill intangible assets ongoing basis well valuing goodwill intangible assets connection initial purchase price allocation acquired entity amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense value intangible assets including goodwill could impacted future adverse changes future declines operating results ii sustained decline market capitalization iii significant slowdown worldwide economy networking industry iv failure meet forecasted operating results process evaluating potential impairment goodwill intangible assets subjective requires significant judgment many points analysis evaluate goodwill annual basis november 1st frequently believe impairment indicators exist goodwill tested impairment reporting unit level comparing reporting units carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income market approaches income approach calculate fair value reporting unit based present value estimated future cash flows market approach estimate fair value reporting units based market multiples revenue earnings comparable companies fair value reporting unit exceeds carrying value net assets assigned unit goodwill impaired required perform testing fair value reporting unit exceed carrying value net assets assigned reporting unit must perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference intangible assets evaluated impairment whenever events changes circumstances indicate carrying amount assets may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate impairment loss recognized amount carrying amount asset exceeds fair value assess recoverability intangible assets determining whether unamortized balances greater sum undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows estimates used consistent plans estimates use manage business actual results plans estimates used future impairment analyses lower original estimates used assess recoverability assets could incur additional impairment charges • sharebased compensation recognize sharebased compensation expense sharebased payment awards including employee stock options restricted stock units “rsus” performance share awards psas purchases employee stock purchase plan espp accordance asc topic 718 compensation stock compensation asc topic 718 sharebased compensation expense expectedtovest sharebased awards valued singleoption approach amortized straightline basis net estimated forfeitures utilize blackscholesmerton “bsm” optionpricing model order determine fair value stock options bsm model requires various highly subjective assumptions including volatility expected option life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience terms conditions stock awards granted employees potential effect options exercised determine fair value rsus psas based closing market price common stock grant date addition estimate sharebased compensation expense psas based vesting criteria recognize expense portions annual targets set assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application managements judgment factors change different assumptions used sharebased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense expectedtovest shares actual forfeiture rate materially different estimate recorded sharebased compensation expense could different • income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth asc topic 740 income taxes “asc topic 740” extent believe amounts likely realized record valuation allowance reduce deferred tax assets believe likely future income reversal deferred tax liabilities forecasted income sufficient fully recover remaining deferred tax assets event determine part net deferred tax assets realizable future adjustment valuation allowance charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance reversed resulting adjustment earnings period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize measure potential liabilities based upon estimate whether extent additional taxes due significant judgment required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding effect provision income taxes period determination made significant judgment also required evaluating uncertain tax positions asc topic 740 determining provision income taxes although believe reserves asc topic 740 reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made first quarter 2010 recorded nonrecurring income tax benefit result taxpayer favorable federal appellate court ruling xilinx inc v commissioner provision income taxes includes effect reserves asc topic 740 changes reserves considered appropriate well related net interest penalties applicable • loss contingencies subject possibility various loss contingencies arising ordinary course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation actions thirdparty claims us may cause us incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely affect gross margins future periods events occur business financial condition results operations cash flows could adversely affected actual liability matters may materially different estimates could result need adjust liability record additional expenses discussion current litigation please see heading legal proceedings note 15 commitments contingencies notes consolidated financial statements item 8 part ii annual report form 10k recent accounting pronouncements see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents product service net revenues millions except percentages net product revenues increased 2010 compared 2009 primarily due increase infrastructure product sales service provider enterprise customers across regions service layer technologies slt product sales enterprise customers across regions slt product sales service provider customers americas increased revenue result increased demand recent product lines mx series routers ex series switches srx service gateways well improved macroeconomic environment compared 2009 additionally net service revenues increased 2010 compared 2009 due increase sales enterprise customers across regions service provider customers emea asia pacific apac regions primarily driven growth installed base continued strength contract renewals support services yearoveryear change also reflects impact approximately 237 million related adoption new revenue recognition accounting guidance described critical accounting policies section net product revenues decreased 2009 compared 2008 primarily due decreased revenue routing products service provider customers whose spending patterns affected weakened global economy partially offset increased revenues ex series switching products net service revenues increased 2009 compared 2008 primarily due increase professional services maintenance revenue expanding installed base equipment service contracts infrastructure segment revenues infrastructure segment consists primarily products services related e mx series router product families ex series switching products well circuittopacket products additionally infrastructure segment offers complete wireless local area network wlan solution provides high reliability performance security management mobile applications following table presents net infrastructure segment revenues net infrastructure segment revenues percentage total net revenues product service categories millions except percentages infrastructure product 2010 infrastructure products revenue experienced growth enterprise service provider markets across regions compared 2009 increase primarily attributable revenue growth mx series routers ex series switches increased demand products primarily due growing network demand attributable increased reliance digital devices connected network lesser extent improved macroeconomic environment infrastructure product revenues decreased 2009 compared 2008 primarily due decreased revenue e series product families attributable customers reduced demand result global economic environment partially offset revenue growth ex series switching products mx series products experienced decrease product revenue service provider market 2009 compared 2008 primarily due decreased capital spending market experienced increase product revenue enterprise market 2009 compared 2008 primarily due growth ex series switching business continued focus selling infrastructure products enterprise market resulted growth enterprise revenues americas apac geographically infrastructure product revenue decreased three regions 2009 track infrastructure chassis revenue units ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms modular chassis serving base platform modular chassis certain number slots available populated components refer modules interfaces modules components platform receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period following table presents infrastructure revenue units ports shipped 1 excludes modular fixed configuration ex series switching products circuit packet products infrastructure chassis revenue units increased 2010 compared 2009 commensurate infrastructure product revenue growth year infrastructure port shipments increased 2010 compared 2009 primarily due continued growth sales mx series products generally contain higher number ports per chassis infrastructure chassis revenue units decreased 2009 compared 2008 primarily due reduced customer demand weakened global economy port shipments increased 2009 compared 2008 primarily due increase mx series products generally contain higher number ports per chassis infrastructure service majority service revenue earned customers purchase products enter support services contracts support infrastructure service revenues increased 2010 compared 2009 primarily driven increased revenue new product sales strong contract renewals support services geographical market perspective increase infrastructure service revenues primarily due increase enterprise business across regions service provider business emea apac regions increases partially offset decrease service revenue americas service provider market infrastructure service revenues increased 2009 compared 2008 primarily due increase installed base equipment serviced support services renewals geographical market perspective increase infrastructure service revenues primarily due increase enterprise service provider business across regions year ended december 31 2009 slt segment revenues slt segment consists primarily products services related srx series services gateways firewallvpn “firewall” systems appliances ssl vpn appliances j series router product family idp appliances wan optimization platforms following table presents net slt segment revenues net slt segment revenues percentage total net revenues product service categories millions except percentages slt product experienced increase slt product revenue year ended december 31 2010 compared period 2009 primarily due increased demand branch highend srx service gateway products geographical market perspective experienced revenue growth americas service provider market across regions enterprise market 2010 slt product revenues relatively flat 2009 compared 2008 primarily due increase revenue srx services gateways offset decrease revenue highend branch firewall products 2009 experienced increase revenue service provider market decrease revenue enterprise market compared 2008 geographically slt product revenue decreased emea apac regions increased americas region following table presents slt revenue units recognized slt revenue units increased 2010 compared 2009 commensurate growth slt product revenue percentage increase slt revenue units less increase slt product revenues due product mix favored higher average selling prices slt revenue units decreased 2009 compared 2008 percentage decrease slt revenue units greater percentage decrease slt product revenue primarily due product mix favored products higher average selling prices slt service increase slt service revenue 2010 compared 2009 primarily driven increased revenue new product sales strong contract renewals support services geographical market perspective increase slt service revenues due growth enterprise service provider markets across regions slt service revenues increased 2009 compared 2008 primarily due increase installed base equipment serviced contract renewals support services 2009 experienced increase service revenue service provider enterprise markets compared 2008 geographically slt service revenue increased regions 2009 total net revenues geographic region following table presents total net revenues geographic region millions except percentages net revenues americas region increased absolute dollars percentage total net revenues 2010 compared 2009 primarily due increased demand united states united states net revenues increased absolute dollars increased percentage total net revenues 2010 compared 2009 due relative strength enterprise service provider markets united states net revenues americas region decreased absolute dollars increased percentage total net revenues 2009 compared 2008 primarily due revenue decrease service provider market partially offset increase net revenues enterprise market particular united states mexico brazil accounted half decline net revenue americas region united states net revenues decreased absolute dollars increased percentage total net revenues 2009 compared 2008 primarily due relative strength sales united states compared emea apac net revenues emea increased absolute dollars percentage total net revenues 2010 compared 2009 primarily due increased demand russian federation germany united kingdom increase largely driven product sales enterprise service provider markets net revenues emea decreased absolute dollars percentage total net revenues 2009 compared 2008 primarily due reduced demand service provider market partially offset slight increase revenue enterprise market particular sweden germany belgium united kingdom attributed half decline net revenues emea net revenues apac increased absolute dollars 2010 compared 2009 primarily due increased demand japan china australia increase primarily driven product sales enterprise customers service sales service provider customers net revenues apac decreased absolute dollars 2009 compared 2008 primarily due reduced demand service provider partially offset slight increase revenue enterprise market particular half decline apac net revenues attributable japan net revenues apac percentage total net revenues decreased slightly primarily due relative strength enterprise market united states net revenues markets customers following table presents total net revenues markets millions except percentages sell highperformance network products service offerings infrastructure slt segments two primary markets service provider enterprise service provider market includes wireline wireless cable operators well major internet content application providers enterprise market represents businesses federal state local governments research education institutions net revenues sales service provider market increased absolute dollars 2010 compared 2009 primarily due customers’ increased investment new network buildouts purchases additional networking capacity support network growth net revenues service provider market decreased absolute dollars percentage total net revenues 2009 compared 2008 primarily due customers delayed investment new network buildouts purchases additional networking capacity reaction weak global macroeconomic environment decline service provider revenue percentage net revenues also attributable relative strength revenue enterprise market net revenues sales enterprise market increased absolute dollars percentage total net revenues 2010 compared 2009 primarily due expanded portfolio products continued investments expand footprint enterprise market net revenues enterprise market increased absolute dollars percentage total net revenues 2009 compared 2008 primarily due revenue growth ex series switching products verizon communications inc accounted 106 net revenues year ended december 31 2010 att inc accounted 104 net revenues year ended december 31 2009 single customer accounted 10 net revenues year ended december 31 2008 cost revenues gross margin following table presents cost product service revenues related gross margins millions except percentages 1 prior period information reclassified conform current periods presentation refer note 1 basis presentation notes consolidated financial statements item 8 part ii annual report form 10k manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs cost product revenues increased absolute dollars 2010 compared 2009 primarily due increase product volume product gross margin product gross margin percentage product revenues 2010 compared 2009 increased primarily due change product mix favored higher margin products continued efforts manage costs december 31 2010 2009 273 244 employees respectively manufacturing operations organization primarily manage relationships independent contract manufacturers manage supply chain orchestrate new product introductions monitor manage product testing quality cost product revenues product gross margin decreased absolute dollars 2009 compared 2008 primarily due lower revenue level decrease product gross margin percentage revenues 2009 compared 2008 primarily attributable product mix favored products lower gross margin switching mx series products geographical mix pricing cost service revenues increased 2010 compared 2009 primarily due increased headcount outside services support customer needs variable compensation support professional educational services also referred “servicerelated” headcount increased 19 1064 employees december 31 2010 compared 891 employees december 31 2009 total personnelrelated costs percentage service revenues relatively flat 2010 continued manage costs growing revenues information technology “it” expenses related cost service revenues increased 2010 compared 2009 commensurate increase headcount service gross margin increased absolute dollars primarily due increased service revenues service gross margin percentage service revenues decreased primarily due shift mix driven increase valueadded service related revenue cost service revenues service gross margin increased 2009 compared 2008 increase cost service revenues attributable increased headcount increased spending servicerelated spares service gross margin increased primarily due continued efforts manage costs servicerelated headcount increased 108 employees 14 891 employees 2009 compared 783 2008 total personnelrelated costs percentage service revenues approximately 18 2009 20 2008 decrease personnelrelated costs 2009 percentage service revenues primarily due overall increase service revenues outside service expense also increased 2009 primarily support expanding installed equipment base additionally facilities expenses related cost service revenues increased connection growth service business portion overall operations decrease cost service revenues operating expenses including rd sales marketing ga expenses due foreign currency fluctuations approximately 1 2 1 2010 2009 2008 respectively facility departmental costs allocated cost revenues operating expense based usage headcount respectively costs increased 201 million 2010 compared 2009 due increase departmental headcount continued buildout domestic international development test centers applications support internal operations facility related headcount 388 294 267 december 31 2010 2009 2008 respectively 2011 expect continue invest companywide infrastructure implement operational excellence initiatives operating expenses following table presents operating expenses operating income millions except percentages nm meaningful 1 prior period information reclassified conform current periods presentation refer note 1 basis presentation notes consolidated financial statements item 8 part ii annual report form 10k following table highlights operating expenses operating income percentage net revenues 1 prior period information reclassified conform current periods presentation refer note 1 basis presentation notes consolidated financial statements item 8 part ii annual report form 10k personnelrelated costs including wages commissions bonuses vacation benefits sharebased compensation travel historically primary driver operating expenses expect trend continue 8772 7231 7014 employees december 31 2010 2009 2008 respectively 2010 yearoveryear increase due growth across organizations result efforts grow business rd expenses increased 2010 compared 2009 primarily due additional headcount strategic initiatives expand product portfolio particular focused delivering optical capabilities packetoptimized transport system help service providers better support packet ipbased services video mobility cloud computing personnelrelated costs increased 1116 million 2010 primarily due 25 increase headcount engineering organization 3308 4132 employees support product innovation intended capture anticipated future network infrastructure growth opportunities additionally outside consulting facilities costs related rd expenses increased support rd efforts rd expenses increased 2009 compared 2008 primarily due additional headcount strategic initiatives expand product portfolio maintain technological advantage competitors particular 2009 continued expand ex series switching product portfolio increased investments project stratus initiative deliver nextgeneration data center fabric project falcon effort develop mobility solutions service provider customers personnelrelated costs increased 256 million 2009 primarily due 4 increase headcount engineering organization 3194 3308 employees support product innovation intended capture anticipated future network infrastructure growth opportunities outside consulting development expense also increased support product innovation initiatives additionally facilities expenses related rd expenses increased support engineering efforts sales marketing expenses increased 2010 compared period 2009 primarily due 2010 advertising campaign events new product launches increase personnelrelated costs 958 million increase personnelrelated costs primarily due 17 increase sales marketing headcount 2101 2466 employees increase variable compensation driven growth revenues increase outside services support sales marketing programs percentage net revenues sales marketing expenses decreased slightly 2010 due focus managing expenses creating efficiency sales activities sales marketing expenses decreased 2009 compared 2008 primarily due decrease personnelrelated expenses travel expenses percentage net revenues sales marketing expenses increased slightly 2009 due increased spending related corporate rebranding channel marketing campaigns partially offset focus managing expenses creating efficiency sales activities personnelrelated costs decreased 158 million 2009 primarily due 4 decrease headcount 2190 employees end 2008 2101 employees end 2009 addition commission expense decreased 120 million due lower net revenues 2009 compared 2008 sales force decreased also decreased facilities expenses related sales marketing organizations 2009 compared 2008 ga expenses increased 2010 compared 2009 primarily due increase personnelrelated expenses percentage net revenues ga expenses decreased slightly 2010 due continued focus managing expenses personnelrelated costs increased 250 million 2010 primarily due 14 increase headcount 393 449 employees worldwide ga functions support expected future growth business well higher variable compensation driven growth revenues additionally facilities expenses related ga infrastructure increased support growing business ga expenses increased absolute dollars percentage net revenues 2009 compared 2008 primarily due increase personnelrelated expenses outside professional services personnelrelated costs increased 72 million 2009 compared 2008 primarily due 12 increase headcount 350 393 employees worldwide ga functions support expected future growth business outside professional service fees increased 2009 compared 2008 result increased legal fees additionally facilities expenses related ga infrastructure increased support growing business amortization purchased intangible assets decreased 2010 compared 2009 compared 2008 primarily due certain purchased intangible assets reaching end amortization period 2009 impairment goodwill purchased intangible assets 2010 2009 2008 impairment goodwill recognized impairment charge 50 million purchased intangible assets result phaseout dx products 2009 recorded litigation settlement charges 1823 million included 1690 million related agreement principle reached february 2010 settle securities class action litigation pending us certain current former officers directors 130 million related resolution dispute connection certain real estate sunnyvale california purchased 2000 03 million related another settlement recorded fourth quarter 2009 amounts 1813 million recorded fourth quarter 2009 2008 recorded litigation settlement loss 90 million related shareholder derivative lawsuit see note 15 commitments contingencies notes consolidated financial statements item 8 part ii annual report form 10k information charges incurred 2010 2009 recorded 108 million 195 million respectively result restructuring plan reduce real estate portfolio workforce targeted areas company restructuring charges 2008 december 31 2010 2009 restructuring plan complete see note 8 financial information notes consolidated financial statements item 8 part ii annual report form 10k information regarding restructuring liabilities 2010 recorded 63 million direct indirect acquisitionrelated costs financial advisory legal due diligence integration costs acquisitions ankeena smobile altor trapeze see note 3 business combinations notes consolidated financial statements item 8 part ii annual report form 10k discussion acquisitions acquisitionrelated charges recorded 2009 2008 sharebased compensation companys sharebased compensation expense associated stock options espp rsus psas recorded following categories three years ended december 31 2010 millions except percentages 1 prior period information reclassified conform current periods presentation refer note 1 basis presentation notes consolidated financial statements item 8 part ii annual report form 10k 2010 sharebased compensation expense includes value vested restricted shares paid certain former ankeena employees refer note 5 cash equivalents investments heading restricted cash notes consolidated financial statements item 8 part ii annual report form 10k sharebased compensation expense increased 2010 compared 2009 due increase rsu psa grants period primarily resulting increase number participants increase 2009 compared 2008 primarily relates new stock option grants particularly late 2008 interest income net gain loss equity investments income tax provision following table presents interest income net gain loss equity investments income tax provision millions except percentages net interest income decreased 2010 compared 2009 compared 2008 primarily due lower interest rates increase customer financing charges 2010 recognized total gain 87 million primarily due acquisitions privatelyheld equity investments ankeena altor impairment charges related equity investments year ended december 31 2010 2009 2008 recognized impairment losses 55 million 148 million respectively equity investments changes fair value believed otherthantemporary effective tax rates 204 631 298 2010 2009 2008 respectively decrease overall rate 2010 compared 2009 federal statutory rate 35 primarily due 541 million income tax benefit recorded companys first quarter resulting change companys estimate unrecognized tax benefits due taxpayer favorable ruling us court appeals ninth circuit “court” xilinx inc v commissioner related sharebased compensation federal rd credit benefit earnings foreign jurisdictions subject lower tax rates increase overall rate 2009 compared 2008 federal statutory rate 35 primarily due following income tax charges 618 million discrete related charge resulted changes california income tax laws enacted 2009 ii 521 million charge resulted change unrecognized tax benefits related sharebased compensation iii 46 million charge related investigation india tax authorities effective rate impact charges partially offset federal rd credit benefit earnings foreign jurisdictions subject lower tax rates 2008 effective tax rate differs federal statutory rate 35 primary due federal rd credit benefit earnings foreign jurisdictions subject lower tax rates complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii annual report form 10k segment information description products services segment see item 1 business part annual report form 10k description measures included management operating income also found note 13 segment information notes consolidated financial statements item 8 part ii annual report form 10k select segment financial data three years period ended december 31 2010 follows millions except percentages 1 reconciliation total segment operating income taxes noncontrolling interest found note 13 segment information notes consolidated financial statements item 8 part ii annual report form 10k infrastructure segment analysis change revenues infrastructure segment change revenue units found section titled “infrastructure segment revenues” infrastructure operating income increased percent infrastructure revenue 2010 compared 2009 primarily due higher gross margin percentage attributable changes product mix favored higher margin products additionally although infrastructure sales marketing expenses increased absolute dollars increased efforts reach enterprise service provider customers decreased percentage infrastructure revenues infrastructure segment operating income percent revenue decreased 2009 compared 2008 primarily due lower gross margin percentage driven changes product mix lesser extent pricing additionally rd expenses increased percentage infrastructure revenue 2009 continued make investments expand product features functionality sales marketing expenses increased slightly percentage infrastructure revenue increased efforts reach enterprise service provider customers slt segment analysis change revenues slt segment change units found section titled “slt segment revenues” slt operating income increased percent revenue 2010 compared 2009 due primarily due decrease operating expenses percent slt revenue continued efforts carefully manage costs additionally increase attributable higher gross margin percentage resulting changes product mix efficiencies achieved higher 2010 revenues slt operating income increased percentage revenue 2009 compared 2008 primarily due lower rd operating expenses percent slt revenue reductions discretionary spending part cost control initiatives higher gross margin percentage changes product mix key performance measures addition financial metrics included consolidated financial statements use following key performance measures assess operating results 1 dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days 2 booktobill ratio represents ratio product orders booked divided product revenues respective period liquidity capital resources following sections discuss effects changes consolidated balance sheets statements cash flows contractual obligations stock repurchase program liquidity capital resources overview historically funded business primarily operating activities lesser extent issuance common stock following table shows capital resources millions except percentages significant components working capital cash equivalents accounts receivable short term investments reduced deferred revenue accrued liabilities accounts payable increase working capital december 31 2009 december 31 2010 primarily due higher cash equivalents higher accounts receivable due timing shipments end period higher prepaid income taxes partially offset decrease accrued litigation settlements stock repurchase activities february 2010 board directors “board” approved new stock repurchase program “2010 stock repurchase program” authorized repurchase 10 billion common stock new authorization addition stock repurchase program approved board march 2008 “2008 stock repurchase program” also authorized repurchase 10 billion common stock two stock repurchase programs repurchased approximately 197 million shares common stock average price 2867 per share total purchase price 5635 million year ended december 31 2010 approximately 207 million shares common stock average price 2191 per share total purchase price 4535 million year ended december 31 2009 december 31 2010 remaining authorized funds 2008 stock repurchase program 7551 million remaining authorized funds 2010 stock repurchase program addition repurchases stock repurchase programs also brokertransacted repurchases common stock employees connection net issuance shares satisfy tax withholding obligations vesting certain rsus psas repurchases approximately 01 million shares common stock average price 2575 per share aggregate purchase price 19 million connection net issuances year ended december 31 2010 immaterial amount brokertransacted repurchases common stock employees connection net issuance shares year ended december 31 2009 shares common stock repurchased 2008 2010 stock repurchase programs employees connection net issuances retired future share repurchases 2010 stock repurchase program subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 18 subsequent events discussion stock repurchase activity 2011 summary cash flows year ended december 31 2010 cash equivalents increased 2072 million increase result cash generated operating activities 8123 million partially offset cash used investing financing activities 5328 million 724 million respectively operating activities net cash provided operating activities 8123 million 7961 million 8752 million 2010 2009 2008 respectively increase 162 million fiscal 2009 fiscal 2010 primarily due higher net income partially offset litigation settlement payments prepaid taxes higher accounts receivable operating cash flow decreased 791 million fiscal 2008 fiscal 2009 primarily due lower net income partially offset increase accrued liabilities due litigation settlement reached fourth quarter 2009 investing activities net cash used investing activities 5328 million 9483 million 1498 million 2010 2009 2008 respectively change periods primarily due movement cash equivalents short longterm investments due investment strategy change 2009 2010 impacted net cash paid acquisitions 2010 financing activities net cash used financing activities 724 million 2622 million 4224 million 2010 2009 2008 respectively change periods due increase cash used repurchase common stock repurchase programs partially offset greater cash proceeds issuance common stock employees period result higher stock prices deferred revenue following table summarizes deferred product service revenues millions deferred gross product revenue december 31 2010 increased 462 million compared december 31 2009 primarily due increase undelivered product commitments product deferrals total deferred service revenue increased 834 million compared december 31 2009 largely due higher sales service contracts multiyear service billings offbalance sheet arrangements offbalance sheet arrangements december 31 2010 2009 contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments tax liabilities contractual obligations following table summarizes principal contractual obligations december 31 2010 effect obligations expected liquidity cash flow future periods millions 1 contractual obligations operating leases primarily relate leased facilities noncancelable operating leases rent payments allocated costs operating expenses consolidated statements operations occupy approximately 22 million square feet worldwide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires november 22 2022 2 order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based build forecasts contract manufacturers use components build products based forecasts purchase orders received customers generally components title product transfers contract manufacturers us immediately customers upon delivery designated shipment location components go unused products go unsold specified periods time may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet forecast customer orders december 31 2010 accrued 227 million based estimate charges total purchase commitments december 31 2010 consisted 1986 million ncnr orders 3 tax liabilities include 1039 million longterm liabilities consolidated balance sheet unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes 4 contractual obligations consists 650 million indemnityrelated servicerelated escrows required certain acquisitions completed 2005 2010 132 million remaining balance data center hosting agreement requires payments end april 2013 92 million license service agreements 77 million software subscription agreement requires payments end january 2011 guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product service performance standby letters credit certain lease facilities guarantees related thirdparty customer financing arrangements december 31 2010 216 million guarantees standby letters credit december 31 2009 340 million guarantees standby letters credit liquidity capital resource requirements liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships may make future additionally repurchase additional shares common stock repurchase programs liquidity may impacted december 31 2010 60 cash equivalents marketable securities held outside us may subject us taxes repatriated august 2010 filed 15 billion shelf registration sec filing replaced prior 10 billion shelf registration expired shelf registration intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions offerings securities made pursuant prospectus focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant intention fiscal year 2010 fiscal year 2011 target number shares underlying equity awards granted annual basis approximately three percent 3 common stock outstanding based upon shares underlying grants date options rsus psas counting ontarget measure psas achieved goal respect 2010 believe track respect goal 2011 based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations cash generated exercise employee stock options purchases employee stock purchase plan sufficient fund operations anticipated growth least next 12 months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including • overall levels sales products mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • incurrence repayment debt • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • levels accounts receivable maintain • acquisitions businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • competitors responses products • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated stockbased awards • issuance stockbased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 managements discussion analysis financial condition results operations annual report form 10k “report” including “managements discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results juniper networks inc us “company” based current expectations estimates forecasts projections business results operations industry operate beliefs assumptions management words “expects” “anticipates” “targets” “goals” “projects” “would” “could” “intends” “plans” “believes” “seeks” “estimates” variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file sec specifically recent reports form 10q forwardlooking statements based reasonable expectations management time made rely undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles “us gaap” course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information critical accounting policies estimates see note 2 summary significant accounting policies notes consolidated financial statements item 1 part annual report form 10k “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” actual results may differ estimates different assumptions conditions aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part audited consolidated financial statements notes included item 8 part ii report business market environment juniper networks focus architecting new network design develop sell products services together provide customers highperformance network infrastructure built simplicity security openness scale serve highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success broad product portfolio spans routing switching security application acceleration identity policy control network management provide customers high performance greater choice flexibility reducing overall total cost ownership business three geographic regions americas europe middle east africa “emea” asia pacific “apac” operations organized two reportable segments infrastructure service layer technologies “slt” infrastructure segment primarily offers scalable routing switching products used control direct network traffic core edge aggregation customer premise equipment level well complete wireless local area network wlan solution provides high reliability performance security management mobile applications slt segment offers solutions meet broad array customers priorities protecting network data network maximizing existing bandwidth acceleration applications across distributed network segments offer worldwide services including technical support maintenance contracts professional services well educational training programs customers past two years aligned organization around common vision new network together highperformance product service offerings help customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers remain dedicated uncovering new ideas innovations serve exponential demands networked world continue build solutions center simplification automation open innovation 2011 continued experience challenging macroeconomic environment effect increased macro volatility escalated especially second half year due sovereign debt concerns europe well slow economies apac americas number largest us customers including tier 1 service providers financial service firms reduced spend toward end year additionally customers held core routing purchases anticipation t4000 series launch entered new product cycle despite impact nearterm challenges revenue grew 2011 investments made rd delivering wave new products new offerings data center qfabric enterprise mobility converged supercore routing technology three core components qfabricthe node interconnect director released next wave mobilenext features including gateway mobile operators announced year converged supercore solution ptx series switches expected begin shipment first quarter 2012 t4000 core router commenced shipment fourth quarter 2011 addition put right organization structure place effectively drive innovative portfolio support customers nextgeneration network requirements coming year remain focused balancing longerterm needs business remaining agile prudent spending short term believe underlying fundamentals business remain healthy focused executing strategy address market trends mobile internet cloud computing believe strategy aligns well driving forces network believe innovation drive longterm value creation networking industry customers forgo complexity unnecessary costs old architectures embrace open systems scale across multiple dimensions network growth strategy innovation pipeline deeper penetration service provider enterprise markets plan navigate challenging nearterm environment 2012 based following five operating principles • assume continued uncertainty nearterm macro environment • grow faster markets serve focusing new product introductions accelerate growth exit 2012 • maintain investments deliver innovation product roadmap • focus prudent cost management • generate good cash flows support strategic needs maintain strong balance sheet financial results key performance metrics overview following table provides overview key financial metrics years ended december 31 2011 2010 2009 millions except per share amounts percentages • net revenues net revenue increased across three geographic regions service provider enterprise markets year ended december 31 2011 compared prior year increases primarily driven increases revenue routing switching products well higher service revenue across infrastructure slt segments partially offset slight decrease slt product revenue • gross margin gross margin percentage net revenues decreased year ended december 31 2011 compared prior year primarily due lower product service gross margin percentages higher proportion service revenue gross margin generally lower product margin product gross margin percentage product revenue declined due shift geographic mix increased overhead increased inventory related costs service gross margin percentage service revenue declined mainly due investment resources support expanded product portfolio • operating income operating income decreased percentage revenues year ended december 31 2011 compared 2010 primarily due slower revenue growth relative increase investments sales marketing research development rd expenses continue invest innovative portfolio increase sales coverage new products addition recorded restructuring charges 306 million year ended december 31 2011 primarily related workforce reduction activities asset impairments • net income attributable juniper networks net income per share attributable juniper networks common stockholders decrease net income attributable juniper networks year ended december 31 2011 compared 2010 reflects lower operating income discussed well higher interest expense 495 million primarily attributable interest longterm debt issued march 2011 • operating cash flows operating cash flows december 31 2011 increased compared 2010 operating cash flows prior year included 1693 million litigation settlement payment • deferred revenue total deferred revenue increased 826 million 9670 million december 31 2011 compared 8844 million december 31 2010 due increase deferred service revenue driven product sales renewals slightly offset small decrease deferred product revenue total deferred service revenue increased 861 million compared december 31 2010 primarily due increase new service contracts renewal existing contracts deferred gross product revenue december 31 2011 decreased 154 million compared december 31 2010 primarily due release approximately 627 million various product commitments made december 31 2010 delivered 2011 partially offset new product commitments deferrals • dso december 31 2011 relatively flat compared prior year dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days • booktobill one quarter ended december 31 2011 greater one quarter ended december 31 2010 booktobill represents ratio product orders booked divided product revenues respective period product orders exclude certain future revenue adjustments items product revenue deferrals sales return reserves service revenue allocations early payment discounts • stock repurchase plan activity stock repurchase program repurchased approximately 175 million shares common stock average price 3093 per share aggregate purchase price 5412 million year ended december 31 2011 critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes base estimates assumptions current facts historical experience various factors believe reasonable circumstances determine carrying values assets liabilities readily apparent sources note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k describes significant accounting policies methods used preparation consolidated financial statements critical accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available estimated selling price “esp” neither vsoe third party evidence tpe available establish vsoe selling price using price charged deliverable sold separately esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years apply esp majority product revenue vsoe service revenue 2011 2010 • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers produce products using design specifications quality assurance programs standards establish procure components manufacture products based demand forecasts estimates future demand products based upon historical trends analysis sales marketing organizations adjusted overall market conditions establish provision inventory carrying costs obsolete material exposures excess components purchased based historical trends significant judgment used establishing forecasts future demand inventory carrying costs obsolete material exposures actual component usage product demand significantly lower forecast may caused factors outside control may incur charges excess components could adverse impact gross margins profitability supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times december 31 2011 2010 contract manufacturer liabilities 148 million 227 million respectively • warranty reserves generally offer oneyear warranty hardware products 90day warranty media contains software embedded products use judgment estimates determining warranty costs part cost sales based associated material costs labor costs troubleshooting repair overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead cost estimated primarily based upon historical trends cost support customer cases within warranty period although engage extensive product quality programs processes actual product failure rates use materials service delivery costs differ estimates additional warranty costs may incurred could reduce gross margin december 31 2011 2010 warranty reserves 283 million 359 million respectively • goodwill longlived assets make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense value goodwill intangible assets could impacted future adverse changes limited significant adverse change legal factors business climate b substantial decline market capitalization c adverse action assessment regulator unanticipated competition e loss key personnel f likelythannot expectation sale disposal reporting unit significant portion thereof g realignment resources restructuring existing businesses response changes industry market conditions h testing recoverability significant asset group within reporting unit higher discount rate used impairment analysis impacted increase interest rates evaluate goodwill annual basis november 1st frequently believe impairment indicators exist goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit fair values reporting units estimated using significant judgment based combination income market approaches income approach estimate fair value reporting unit based present value forecasted future cash flows reporting unit expected generate remaining life market approach estimate fair value reporting units based analysis compares value reporting units values publiclytraded companies similar lines business fair value reporting unit exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference determining fair value reporting unit indefinitelived purchased intangible asset highly judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows operating trends riskadjusted discount rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocated shared assets liabilities determine carrying values reporting units december 31 2011 goodwill recorded slt segment infrastructure segment 22826 million 16455 million respectively hypothetical decrease 5 estimated fair value reporting units would result excess fair value carrying value approximately nil slt segment 73 billion infrastructure segment evaluate longlived assets property plant equipment purchased intangible assets impairment whenever events changes circumstances indicate carrying amount assets may recoverable events changes circumstances include limited significant decrease fair value underlying asset group significant decrease benefits realized acquired assets difficulty delays integrating business significant change operations acquired assets use asset longlived asset considered impaired carrying amount exceeds estimated future undiscounted cash flows asset group expected generate longlived asset considered impaired impairment recognized amount carrying amount asset exceeds fair value • sharebased compensation recognize sharebased compensation expense sharebased payment awards including employee stock options restricted stock units “rsus” performance share awards psas purchases employee stock purchase plan espp based awards fair value grant date utilize blackscholesmerton “bsm” optionpricing model order determine fair value stock options espp bsm model requires various highly subjective assumptions including volatility expected award life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience terms conditions stock awards granted employees potential effect options exercised determine fair value rsus psas based closing market price common stock grant date addition use significant judgment estimating sharebased compensation expense psas based vesting criteria recognize expense portions annual targets set assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application managements judgment factors change different assumptions used sharebased compensation expense could materially different future additionally required estimate expected forfeiture rate based historical experience well judgment recognize expense expectedtovest shares actual forfeiture rate materially different estimate recorded sharebased compensation expense could different • income taxes subject income taxes united states numerous foreign jurisdictions effective tax rates may differ statutory rate due factors limited foreign operations rd tax credits tax audit settlements changes valuation allowance recorded deferred tax assets nondeductible compensation transfer pricing adjustments effective tax rate 257 204 631 2011 2010 2009 respectively significant judgment required evaluating uncertain tax positions determining provision income taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made provision income taxes includes effect reserves changes reserves considered appropriate well related net interest penalties applicable estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income extent believe amounts likely realized reversal deferred tax liabilities future income record valuation allowance reduce deferred tax assets event determine part net deferred tax assets realizable future adjustment valuation allowance charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance reversed resulting adjustment earnings period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize measure potential liabilities based upon estimate whether extent additional taxes due significant judgment required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding effect provision income taxes period determination made • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation actions thirdparty claims us may cause us incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely affect gross margins future periods events occur business financial condition results operations cash flows could adversely affected actual liability matters may materially different estimates could result need adjust liability record additional expenses discussion current litigation please see heading legal proceedings note 15 commitments contingencies notes consolidated financial statements item 8 part ii annual report form 10k recent accounting pronouncements see note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents product service net revenues millions except percentages net product revenue increased 2011 compared 2010 primarily due increase sales infrastructure routing products particularly mx series routers service provider enterprise customers across regions reflecting competitive position customers demand edge products switching products including ex series qfabric wlan products increased due strength ex series products data center campus deployments also recorded initial revenues first deployment qfabric solution increase infrastructure revenue partially offset decline revenue series routers primarily attributable weaker overall demand service providers driven uncertain macroeconomic environment well expected pause introduce t4000 router slt product revenue also slight decrease 2011 compared 2010 primarily attributed decline highend product lines influenced timing highend srx service provider deployments transition older enterprise security products new security product portfolio service revenue increased 2011 primarily attributable sales mx series routers ex series switches primarily attributable sales contract renewals mx series routers ex series switches highend srx products net product revenues increased 2010 compared 2009 primarily due increase infrastructure product sales service provider enterprise customers across regions slt product sales enterprise customers across regions slt product sales service provider customers americas increased revenue result increased demand recent product lines mx series routers ex series switches srx service gateways well improved macroeconomic environment compared 2009 additionally net service revenues increased 2010 compared 2009 due increase sales enterprise customers across regions service provider customers emea apac regions primarily driven growth installed base continued strength contract renewals support services net revenues market customer following table presents total net revenues market millions except percentages sell highperformance network products service offerings infrastructure slt segments two primary markets service provider enterprise determination market particular revenue transaction relates based primarily upon customers industrial classification code may also include judgmental factors intended use product service provider market generally includes wireline wireless cable operators well major internet content application providers including provide social networking search engine services enterprise market generally comprises businesses federal state local governments research education institutions net revenue increased 2011 attributable increase sales service provider market across three geographic regions specifically americas emea regions increase largely attributable customers adoption infrastructure products including mx series routers ex series switches wlan products across three regions slightly offset decline slt products americas net revenues sales service provider market increased absolute dollars 2010 compared 2009 primarily due customers’ increased investment new network buildouts purchases additional networking capacity support network growth revenues sales enterprise market also increased 2011 compared 2010 reflecting demand routing switching products including mx series routers ex series switches wlan products driven value proposition offer customers well strategy expanding presence enterprise market increase enterprise revenues 2011 experienced across three geographic regions net revenues sales enterprise market increased absolute dollars percentage total net revenues 2010 compared 2009 primarily due expanded portfolio products continued investments expand footprint enterprise market customers accounted greater 10 net revenues year ended december 31 2011 verizon communications inc accounted 106 net revenues year ended december 31 2010 att inc accounted 104 net revenues year ended december 31 2009 net revenues geographic region following table presents total net revenues geographic region millions except percentages net revenues americas increased absolute dollars 2011 compared 2010 primarily due increased sales united states attributable demand routing switching products services enterprise service provider customers net revenues americas decreased percentage total revenue 2010 2011 primarily due relative strength emea net revenues americas region increased absolute dollars percentage total net revenues 2010 compared 2009 primarily due increased demand united states united states net revenues increased absolute dollars increased percentage total net revenues 2010 compared 2009 due relative strength enterprise service provider markets united states net revenues emea increased absolute dollars percentage total net revenues 2011 compared 2010 driven service provider enterprise demand routing switching products related services service provider enterprise markets increases largely attributable sweden eastern europe netherlands addition initiated first revenue top service provider eastern europe spanning broad range product portfolio net revenues emea increased absolute dollars percentage total net revenues 2010 compared 2009 primarily due increased demand russia germany united kingdom increase largely driven product sales enterprise service provider markets net revenues apac increased 2011 compared 2010 due increase revenues routing switching slt products services service provider enterprise markets revenue increased southeast asia australia partially offset continued weakness japan push demand china net revenues percentage total revenues remain relatively flat 2011 compared 2010 net revenues apac increased absolute dollars 2010 compared 2009 primarily due increased demand japan china australia increase primarily driven product sales enterprise customers service sales service provider customers gross margins following table presents gross margins millions except percentages product gross margin percentage decreased 2011 compared 2010 primarily due lower proportion router revenue shift geographic mix revenue americas increased fixed overhead inventoryrelated costs december 31 2011 2010 296 273 employees respectively manufacturing operations organization primarily manage relationships independent contract manufacturers manage supply chain orchestrate new product introductions monitor manage product testing quality product gross margin product gross margin percentage product revenues 2010 compared 2009 increased primarily due change product mix favored higher margin products continued efforts manage costs service gross margin increased absolute dollars 2011 compared 2010 mainly attributed 16 growth service revenue service gross margin percentage decreased 2011 compared 2010 primarily due growth headcount 21 1289 employees december 31 2011 compared 1064 employees december 31 2010the higher headcount due increase service support resources expanded product portfolio service gross margin increased 2010 compared 2009 absolute dollars primarily due increased service revenues service gross margin percentage service revenues decreased primarily due shift mix driven increase valueadded service related revenue operating expenses following table presents operating expenses operating expenses percentage net revenues millions except percentages personnelrelated costs including wages commissions bonuses vacation benefits sharebased compensation travel historically primary driver operating expenses expect trend continue facility information technology “it” departmental costs allocated departments based usage headcount facility related headcount 375 388 294 december 31 2011 2010 2009 respectively 9129 8772 7231 employees december 31 2011 2010 2009 respectively yearoveryear increase 2011 due growth across organizations result efforts grow business rd expenses increased 2011 compared 2010 primarily due increase personnelrelated expenses 757 million also contributing increase higher consulting facilities costs associated rd projects support new product initiatives including data center mobilityand core solutions increase partially offset lower variable compensation 2011 rd headcount relatively flat 4138 december 31 2011 compared prior year result restructuring activities second half 2011 rd expenses increased 2010 compared 2009 primarily due additional headcount strategic initiatives expand product portfolio particular focused delivering optical capabilities packetoptimized transport system help service providers better support packet ipbased services video mobility cloud computing personnelrelated costs increased 1116 million 2010 primarily due 25 increase headcount engineering organization 3308 4132 employees support product innovation intended capture anticipated future network infrastructure growth opportunities additionally outside consulting facilities costs related rd expenses increased support rd efforts sales marketing expenses increased 2011 compared 2010 primarily due increase personnelrelated expenses 1285 million additionally contributing increase 2011 increase commission expense driven higher revenue increase outside services incurred support sales marketing activities result restructuring activities second half 2011 sales marketing headcount increased 4 2466 employees december 31 2010 2568 employees december 31 2011 sales marketing expenses increased 2010 compared period 2009 primarily due 2010 advertising campaign events new product launches increase personnelrelated costs 958 million increase personnelrelated costs primarily due 17 increase sales marketing headcount 2101 2466 employees increase variable compensation driven growth revenues increase outside services support sales marketing programs percentage net revenues sales marketing expenses decreased slightly 2010 due focus managing expenses creating efficiency sales activities general administrative ga expense relatively flat 2011 compared 2010 costs associated ga headcount growth 3 449 december 31 2010 463 december 31 2011 largely offset lower variable compensation ga expenses increased 2010 compared 2009 primarily due increase personnelrelated expenses percentage net revenues ga expenses decreased slightly 2010 due continued focus managing expenses personnelrelated costs increased 250 million 2010 primarily due 14 increase headcount 393 449 employees worldwide ga functions support expected future growth business well higher variable compensation driven growth revenues additionally facilities expenses related ga infrastructure increased support growing business amortization purchased intangible assets increased 2011 compared 2010 due addition intangible assets acquisitions 2011 2010 amortization purchased intangible assets decreased 2010 compared 2009 primarily due certain purchased intangible assets reaching end amortization period 2009 impairment goodwill purchased intangible assets 2011 2010 incurred 306 million net restructuring charges 2011 primarily related restructuring plan 2011 restructuring plan implemented third quarter 2011 align business operations macroeconomic market conditions restructuring charges 171 million primarily related workforce reductions remaining liabilities 2011 restructuring plan expected paid first half 2012 complete alignment next two quarters may incur additional severance facility costs primarily facility related may range 14 million 21 million included charges 135 million charge related impairment abandoned inprocess internal use software project 2010 2009 recorded 108 million 195 million respectively result restructuring plan reduce real estate portfolio workforce targeted areas company december 31 2011 2009 restructuring plan complete see note 9 financial information notes consolidated financial statements item 8 part ii annual report form 10k information regarding restructuring liabilities 2011 2010 recorded 71 million 63 million respectively direct indirect acquisitionrelated costs financial advisory legal due diligence integration costs acquisitions completed 2011 2010 2009 recorded litigation settlement charges 1823 million included 1690 million related agreement principle reached february 2010 settle securities class action litigation pending us certain current former officers directors 130 million related resolution dispute connection certain real estate sunnyvale california purchased 2000 03 million related another settlement recorded fourth quarter 2009 amounts 1813 million recorded fourth quarter 2009 see note 15 commitments contingencies notes consolidated financial statements item 8 part ii annual report form 10k information charges incurred 2010 2011 sharebased compensation sharebased compensation expense associated stock options employee stock purchases restricted stock units rsus performance share awards psas recorded following cost expense categories millions except percentages sharebased compensation expense increased 2011 compared 2010 primarily due increase award grants driven headcount growth higher fair value equity awards attributable increase market value common stock awards sharebased compensation expense increased 2010 compared 2009 due increase rsu psa grants period primarily resulting increase number participants income expense net income tax provision following table presents income expense net income tax provision millions except percentages interest income primarily includes interest income cash equivalents investments interest expense increased 2011 compared 2010 primarily due 377 million interest expense debt issued march 2011 typically consists investment foreign exchange gains losses nonoperational income expense items 2011 included certain legal expenses unrelated current recent operations approximately 70 million 2010 recognized total gain 87 million primarily due acquisitions privatelyheld equity investments ankeena altor 2009 recognized impairment loss 55 million equity investments changes fair value believed otherthantemporary effective tax rates 257 204 631 2011 2010 2009 respectively effective rate 2011 differed federal statutory rate 35 primarily due federal rd credit benefit earnings foreign jurisdictions subject lower tax rates effective tax rate 2011 differed 2010 result items referenced recognized 2010 decrease overall rate 2010 compared 2009 federal statutory rate 35 primarily due federal rd credit benefit earnings foreign jurisdictions subject lower tax rates 541 million income tax benefit 2010 resulting change companys estimate unrecognized tax benefits due taxpayer favorable ruling us court appeals ninth circuit “court” xilinx inc v commissioner related sharebased compensation effective tax rate 2009 higher federal statutory rate 35 primarily due following income tax charges 618 million discrete related charge resulted changes california income tax laws enacted 2009 ii 521 million charge resulted change unrecognized tax benefits related share based compensation iii 46 million charge related investigation india tax authorities effective rate impact charges partially offset federal rd credit benefit earnings foreign jurisdictions subject lower tax rates complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii annual report form 10k segment information description products services segment see item 1 business part annual report form 10k description measures included management operating income also found note 13 segment information notes consolidated financial statements item 8 part ii annual report form 10k select segment financial data three years period ended december 31 2011 follows millions except percentages units infrastructure 1 chassis revenue units represent number chassis revenue recognized period number ports module varies widely depending functionality throughput offered module excludes modular fixed configuration ex series ethernet switching products circuittopacket products timing servers 2 reconciliation total segment operating income taxes noncontrolling interest found note 13 segments notes consolidated financial statement item 8 form 10k 2011 infrastructure products revenue increased across three regions service provider enterprise markets increases primarily sales routing switching products mx series routers ex series switches wlan increase infrastructure service revenue 2011 primarily driven strong contract renewals support services increased installed base infrastructure product sales infrastructure operating income decreased percent infrastructure revenue 2011 compared 2010 largely due decline product margins higher operating expenses partially offset lower variable compensation 2011 track infrastructure chassis revenue units ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms modular chassis serving base platform modular chassis certain number slots available populated components refer modules interfaces modules components platform receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period infrastructure chassis revenue units increased 2011 compared 2010 primarily due increase shipments mx series routers particularly midrange mx product lines increase shipments midrange mx product lines generally contain higher number ports per chassis drove higher number ports shipped 2011 compare 2010 infrastructure products revenue experienced growth enterprise service provider markets across regions compared 2009 increase primarily attributable revenue growth mx series routers ex series switches increased demand products primarily due growing network demand attributable increased reliance digital devices connected network lesser extent improved macroeconomic environment infrastructure chassis revenue units increased 2010 compared 2009 commensurate infrastructure product revenue growth year infrastructure port shipments increased 2010 compared 2009 primarily due continued growth sales mx series products generally contain higher number ports per chassis majority service revenue earned customers purchase products enter support services contracts support infrastructure service revenues increased 2010 compared 2009 primarily driven increased revenue new product sales strong contract renewals support services geographical market perspective increase infrastructure service revenues primarily due increase enterprise business across regions service provider business emea apac regions increases partially offset decrease service revenue americas service provider market infrastructure operating income increased percent infrastructure revenue 2010 compared 2009 primarily due higher gross margin percentage attributable changes product mix favored higher margin products additionally although infrastructure sales marketing expenses increased absolute dollars increased efforts reach enterprise service provider customers decreased percentage infrastructure revenues slt 1 reconciliation total segment operating income taxes noncontrolling interest found note 13 segments notes consolidated financial statement item 8 form 10k slt product revenues decreased 2011 compared 2010 largely driven decrease revenue highend srx highend firewall branch firewall products partially offset increase branch srx revenue decline primarily experienced americas service provider market although slt product revenue decreased 2011 revenue units increased due higher sales lower priced branch products increase slt service revenue 2011 compared 2010 primarily driven strong contract renewals support services service provider enterprise markets across regions slt operating income decreased percent revenue 2011 compared 2010 primarily due decline revenue shift lower margin products experienced increase slt product revenue year ended december 31 2010 compared period 2009 primarily due increased demand branch highend srx service gateway products geographical market perspective experienced revenue growth americas service provider market across regions enterprise market 2010 slt revenue units increased 2010 compared 2009 commensurate growth slt product revenue percentage increase slt revenue units less increase slt product revenues due product mix favored higher average selling prices increase slt service revenue 2010 compared 2009 primarily driven increased revenue new product sales strong contract renewals support services geographical market perspective increase slt service revenues due growth enterprise service provider markets across regions slt operating income increased percent revenue 2010 compared 2009 primarily due decrease operating expenses percent slt revenue continued efforts carefully manage costs additionally increase attributable higher gross margin percentage resulting changes product mix efficiencies achieved higher 2010 revenues liquidity capital resources historically funded business primarily operating activities issuance common stock recently issuance longterm debt following table shows capital resources millions except percentages days sales outstanding nm meaningful significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities shortterm deferred revenue working capital increased 12306 million year ended december 31 2011 primarily due higher cash equivalent balance result 10 billion debt offering march 2011 summary cash flows december 31 2011 cash equivalents increased 10985 million december 31 2010 increase mainly result cash generated operating financing activities 9867 million 8190 million respectively partially offset cash used investing activities 7072 million operating activities net cash provided operating activities 9867 million 8123 million 7961 million 2011 2010 2009 respectively cash flows operations increased 1744 million 2011 compared prior year primarily due onetime litigation settlement payment 1693 million 2010 occur 2011 increase partially offset lower consolidated net income 2011 2010 operating cash flows increased 162 million 2009 primarily due higher consolidated net income partially offset litigation settlement payments prepaid taxes higher accounts receivable investing activities net cash used investing activities 7072 million 5328 million 9483 million 2011 2010 2009 respectively 2011 invested proceeds march 2011 debt offering availableforsale securities purchased property equipment buildout new headquarter campus sunnyvale ca change net cash used investing activities 2009 2010 primarily due net cash paid acquisitions 2010 financing activities net cash generated financing activities 8190 million 2011 net cash used 724 million 2622 million 2010 2009 respectively generated additional cash financing activities 2011 compared 2010 primarily due issuance longterm debt march 5 2011 partially offset repurchase outstanding common stock discussion longterm debt see note 10 financing notes consolidated financial statements item 8 part ii annual report form 10k 2010 used additional cash financing activities repurchase outstanding common stock repurchase programs partially offset cash proceeds issuance common stock employees result higher stock prices stock repurchase activities february 2010 board directors board approved stock repurchase program “2010 stock repurchase program” authorized us repurchase 10 billion common stock authorization addition stock repurchase program approved board march 2008 “2008 stock repurchase program” also enabled us repurchase 10 billion common stock repurchased retired approximately 175 million shares common stock average price 3093 per share aggregate purchase price 5412 million year ended december 31 2011 2010 stock repurchase program december 31 2011 remaining authorized funds 2008 stock repurchase program 2138 million remaining authorized funds 2010 stock repurchase program offbalance sheet arrangements offbalance sheet arrangements december 31 2011 2010 contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments tax liabilities contractual obligations following table summarizes principal contractual obligations december 31 2011 effect obligations expected liquidity cash flow future periods millions 1 contractual obligations operating leases primarily relate leased facilities noncancelable operating leases rent payments allocated costs operating expenses consolidated statements operations occupy approximately 25 million square feet worldwide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires november 30 2022 2 order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based build forecasts contract manufacturers use components build products based forecasts purchase orders received customers generally components title product transfers contract manufacturers us immediately customers upon delivery designated shipment location components go unused products go unsold specified periods time may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet forecast customer orders december 31 2011 accrued 148 million based estimate charges total purchase commitments december 31 2011 consisted 1506 million ncnr orders 3 tax liabilities include 1085 million longterm liabilities consolidated balance sheet unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes 4 march 2011 issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes together 2016 notes 2021 notes interest notes payable cash semiannually may redeem notes time whole time part subject makewhole premium event change control holders notes may require us repurchase cash part notes purchase price equal 101 aggregate principle amount plus accrued unpaid interest indenture governs notes also contains various covenants including limitations ability incur liens enter saleleaseback transactions certain dollar thresholds 5 contractual obligations primarily consisted 251 million indemnityrelated service related escrows required certain acquisitions completed 2005 2010 2011 307 million campus buildout obligations miscellaneous commitments guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products infringe intellectual property rights thirdparty also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities december 31 2011 2010 199 million 216 million respectively bank guarantees standby letters credit related financial guarantees liquidity capital resource requirements liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships made may make future additionally repurchase additional shares common stock 2010 stock repurchase program liquidity may impacted december 31 2011 49 cash investment balances held outside us may subject us taxes repatriated august 2010 filed 15 billion shelf registration sec march 2011 issued notes amount 10 billion shelf registration statement therefore current plans may issue 500 million additional securities shelf registration statement shelf registration intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions additional offerings securities shelf registration statement made pursuant prospectus focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant intention fiscal year 2011 target number shares underlying equity awards granted annual basis less three percent 3 common stock outstanding based upon shares underlying grants date options rsus psas counting ontarget measure psas achieved goal 2011 also managed equity compensation programs reduce overall number shares subject outstanding awards past two years total number common shares subject outstanding option rsu psa awards 582 million 635 million 765 million shares december 31 2011 2010 2009 respectively reflecting consecutive decline three years ended december 31 2011 based past performance current expectations believe existing cash equivalents shortterm longterm investments includes proceeds issuance notes together cash generated operations well cash generated exercise employee stock options purchases employee stock purchase plan sufficient fund operations anticipated growth least next 12 months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including • level mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • incurrence repayment debt related interest obligations • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • accounts receivable levels maintain • acquisitions andor funding businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors responses products andor pricing • relationships supplies partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated sharebased awards • issuance sharebased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 managements discussion analysis financial condition results operations following discussion read consolidated financial statements related notes item 8 report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles “us gaap” course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report business market environment juniper networks design develop sell products services highperformance networks combine scale performance agility efficiency customers build best networks businesses routing switching security products address highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success silicon systems software represent innovations transform economics experience networking helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership business three geographic regions americas emea apac 2013 operated two business segments platform systems division psd software solutions division ssd psd segment primarily offers scalable routing switching products used service provider enterprise public sector networks control direct network traffic data centers core edge aggregation campus wide area networks wans consumer business devices ssd segment offers solutions focused network security network services applications service providers enterprise customers segments offer worldwide services including technical support professional services well educational training programs customers 2013 realigned certain products psd segment ssd segment connection acquisition contrail systems inc contrail addition consolidated operational oversight management security products within ssd segment result product realignment security products previously reported psd segment including branch srx branch firewall j series product families reported ssd segment reclassified segment data prior years conform current year presentation believe changes provide investors increased financial reporting transparency enable better insight market performance trends driving business 2013 saw revenue growth service provider enterprise markets well shift product mix towards edge routing switching data center solutions continue remain focused turning around security business customers build highiq networks cloud environments believe experiencing improving still uncertain global macroeconomic environment customers exercise care conservatism investment prioritization project deployments expect customers remain thoughtful capital spending believe product gross margins may decline future due competitive pricing pressures may offset additional operational improvements cost efficiencies nevertheless focused executing strategy address market trends mobile internet cloud computing continue believe positive longterm fundamentals highperformance networking including highiq networking well cloud environments data centers continued invest innovation strengthening product portfolio resulted new product offerings 2013 including series new products enterprise campus data center infrastructures including ex9200 ethernet switch programmable core switch support emerging applications growing workloads additionally enhanced mx series portfolio release mx104 mx2010 mx2020 service provider edge routers designed rapid service delivery application enablement also released worlds smallest supercore ptx3000 address scale flexibility challenges facing service providers converge networks optimize business furthermore help enterprise organizations service providers address challenges associated managing multiple geographically dispersed data centers unveiled metafabric new architecture next generation data centers metafabric simplifies accelerates deployment delivery applications within across multiple data center locations also announced availability juniper networks contrail standardsbased highly scalable network virtualization intelligence solution sdn introduced opencontrail new initiative makes source code library contrail available open source license believe help foster innovation sdn also announced enhancements sdnready mx series 3d universal edge router portfolio significantly expands system capacity subscriber bandwidth service performance 2013 initiated restructuring plan 2013 restructuring plan continue improve cost structure rationalize product portfolio rebalance investments 2013 restructuring plan consists workforce reductions contract terminations project cancellations 283 million recorded 2013 able achieve full benefit cost savings goal 1000 million 2013 see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities february 2014 announced integrated operating plan iop refocus company innovation matters service providers enterprises demand highiq networks bestinclass cloud environments driving growth iop strategy capitalizes upon engineering expertise across routing switching security control network management align focus become leading provider secure highiq networks serving needs cloud builders execution iop plan coalesce engineering talent gotomarket teams rd around strategy resulting streamlined operations business portfolio operational efficiencies implement iop possible segments may change financial results key performance metrics overview following table provides overview key financial metrics years ended december 31 2013 2012 2011 millions except per share amounts percentages days sales outstanding dso booktobill dso booktobill fourth quarter ended 2013 2012 2011 • net revenues 2013 compared 2012 experienced net revenue growth americas service provider enterprise offset declines revenue apac emea yearoveryear increase net revenues 2013 primarily due increases edge routing switching services partially offset decline security products • gross margin gross margin percentage net revenues increased 2013 compared 2012 primarily due higher restructuring charges recorded 2012 partially offset higher inventory provisions 2013 legacy platforms • operating income operating income percentage revenues increased 2013 compared 2012 primarily due growth net revenues also contributing increase operating income lower restructuring charges 522 million compared 2012 • stock repurchase plan activity stock repurchase programs repurchased approximately 289 million shares common stock open market average price 1976 per share aggregate purchase 5706 million year ended december 31 2013 • operating cash flows operating cash flows increased 2013 compared 2012 primarily due higher net income timing payments vendors higher deferred revenue lower taxes paid partially offset timing payments incentive compensation employees timing receipts customers • dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days dso quarter ended december 31 2013 increased 6 days 17 compared quarter ended december 31 2012 increase primarily due large multiyear service renewals end period increased outstanding receivables compared period 2012 dso quarter ended december 31 2012 decreased 11 days 24 compared quarter ended december 31 2011 decrease primarily due shipment linearity resulting greater proportion periods shipments converted cash end period increase collections outstanding receivables • booktobill represents ratio product orders booked divided product revenues respective period booktobill greater one quarters ended december 31 2013 december 31 2012 indicating strong product demand one quarter ended december 31 2011 • deferred revenue total deferred revenue increased 1459 million 10693 million december 31 2013 compared 9234 million december 31 2012 primarily due increase deferred service revenue driven execution several multiyear support agreements lesser extent increase annual agreement renewals slightly offset decrease deferred product revenue critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense evaluate goodwill annual basis november 1st frequently event occurs circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit fair values reporting units estimated using significant judgment based combination income market approaches income approach estimate fair value reporting unit based present value forecasted future cash flows reporting unit expected generate remaining life market approach estimate fair value reporting units based analysis compares value reporting units values publiclytraded companies similar lines business fair value reporting unit exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows operating trends riskadjusted discount rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units december 31 2013 goodwill recorded psd segment ssd segment 16166 million 24411 million respectively fair value reporting units particular ssd sensitive events changes circumstances adverse changes operating results macroeconomic conditions changes managements business strategy declines stock price hypothetical 5 decrease estimated fair value reporting units would result fair value ssd segment equal carrying value see item 1a part risk factors information • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process stated lower average cost market provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2013 december 31 2012 inventory balances 527 million 572 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2013 december 31 2012 contract manufacturer liabilities 229 million 277 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence tpe vsoe available estimated selling price “esp” neither vsoe tpe available establish vsoe selling price using price charged deliverable sold separately tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years applied esp majority product revenue vsoe service revenue 2013 2012 2011 • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns internal revenue service “irs” tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents product service net revenues millions except percentages 2013 compared 2012 increase product revenues 2013 compared 2012 primarily due increase volume sales edge routing products switching products service provider enterprise customers reflecting customer demand highperformance networking highiq networks cloud environments data centers also contributing increase product revenues new product introductions enterprise campus data center infrastructures partially offset decrease sales security products increase service revenue 2013 compared 2012 primarily driven strong contract renewals installed base across routing switching security products 2012 compared 2011 decrease product revenues 2012 compared 2011 primarily due decline sales core edge routing firewall products partially offset increase switching highend srx products increase service revenues 2012 compared 2011 primarily driven strong contract renewals certain edge routing switching security products net revenues market customer following table presents net revenues market millions except percentages market sell highperformance network products service offerings psd ssd segments two primary markets service provider enterprise determination market particular revenue transaction relates based primarily upon customers industrial classification code may also include subjective factors intended use product service provider market generally includes wireline wireless carriers cable operators well major internet content application providers including provide social networking search engine services enterprise market generally comprised businesses federal state local governments financial services research education institutions 2013 compared 2012 net revenues sales service provider market increased 2013 compared 2012 primarily due increase sales content providers cable providers americas partially offset slight decrease sales wireless carriers service provider market emea apac relatively flat addition service provider demand switching data center solutions 2013 stronger 2012 net revenues enterprise market increased 2013 compared 2012 primarily due broadbased growth americas enterprise market well recognition large us federal government contract partially offset weaker demand apac emea 2012 compared 2011 net revenues sales service provider market decreased 2012 compared 2011 primarily due reduced routing purchases international content service providers partially offset strong growth large service providers americas net revenues generated enterprise market decreased 2012 compared 2011 primarily due lower revenue federal financial services offset expanding presence apac emea customer accounted greater 10 net revenues year ended december 31 2013 2011 year ended december 31 2012 verizon accounted 103 net revenues net revenues geographic region following table presents net revenues geographic region millions except percentages 2013 compared 2012 net revenues americas increased 2013 compared 2012 primarily due increase revenues service provider enterprise markets increase service provider revenues due increase sales content providers cable providers partially offset slight decrease sales carriers increase enterprise revenues 2013 compared 2012 primarily attributable broadbased improvement customer demand well recognition large us federal government contract net revenues emea decreased 2013 compared 2012 primarily due decline revenues enterprise market attributable certain large sales 2012 net revenues apac decreased 2013 compared 2012 primarily due lower revenues enterprise resulting weaker conditions china enterprise market service provider revenues relatively flat decline sales certain large service providers japan offset higher revenue certain large carriers china additionally recognition revenue large service provider singapore offset declines revenues certain service providers apac 2012 compared 2011 net revenues americas increased 2012 compared 2011 primarily due increased sales united states certain service providers offset decline enterprise market particularly among federal financial services customers net revenues emea decreased 2012 compared 2011 primarily due decreased sales western southern europe believe result challenging economic climate areas decrease partially offset increased revenues middle east top service provider eastern europe across broad range product portfolio net revenues apac decreased 2012 compared 2011 primarily due decrease sales certain service provider customer japan following large product deployment occurred 2011 gross margins following table presents gross margins millions except percentages 2013 compared 2012 product gross margin percentage increased slightly 2013 compared 2012 primarily due higher restructuring charges recorded 2012 partially offset higher inventory provisions 2013 legacy platforms product gross margin benefited cost reductions supply chain 2013 offset impact higher pricing discounts service gross margin increased 2013 compared 2012 primarily due higher service revenues greater efficiency delivery services 2012 compared 2011 product gross margin percentage decreased 2012 compared 2011 primarily due 443 million inventory charge related component inventory held excess forecasted demand intangible asset impairment charge 161 million related 2012 restructuring activities lesser extent decrease due increase size number strategic contracts lower margins shift product mix lower margin products service gross margin increased 2012 compared 2011 primarily due higher service revenues combined continuing focus operational improvements cost efficiencies operating expenses following table presents operating expenses millions except percentages operating expenses historically driven personnelrelated costs including wages commissions bonuses vacation benefits sharebased compensation travel expect trend continue facility information technology “it” departmental costs allocated departments based usage headcount facility related headcount 396 368 375 december 31 2013 2012 2011 respectively total 9483 9234 9129 employees december 31 2013 2012 2011 respectively expect initiate substantial cost reduction plan connection iop accomplished various restructuring activities resulting annualized operating expense savings 160 million across research development sales marking general administrative expenses able make reasonable estimate future restructuring costs associated iop 2013 compared 2012 research development expense decreased 2013 compared 2012 primarily due lower depreciation expense 283 million attributable extended useful lives computers equipment 2013 well lower prototype development costs 186 million addition outside services facilities costs decreased related cancellation certain projects facility closures decrease research development expense partially offset increases personnelrelated expenses primarily attributable higher sharebased compensation expense lesser extent higher variable compensation research development headcount increased 1 4081 december 31 2012 4135 december 31 2013 additionally continued shift headcount lower cost regions sales marketing expense increased 2013 compared 2012 primarily due higher personnelrelated expenses related increase commission expense driven improved sales achievement partially offset lower sharebased compensation expense lower outside service travel due cost reduction efforts creating efficiency sales activities sales marketing headcount decreased 2 2680 december 31 2012 2626 december 31 2013 result restructuring activities general administrative expense increased 2013 compared 2012 primarily due higher litigation costs increase general administrative expense partially offset lower personnelrelated expenses primarily sharebased compensation expense general administrative headcount increased 6 486 december 31 2012 513 december 31 2013 support financerelated initiatives including erp implementation restructuring charges decreased 2013 compared 2012 due higher charges recorded 2012 connection 2012 restructuring plan 2013 implemented 2013 restructuring plan incurred restructuring charges 391 million related workforce reductions contract terminations project cancellations facility closures connection plans connection 2013 restructuring plan expect record aggregate future charges 20 million related severance charges see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities 2012 compared 2011 research development expense increased 2012 compared 2011 primarily due increase engineering program costs driven new product initiatives first half year addition higher variable compensation research development headcount decreased 1 december 31 2012 4081 compared 4138 december 31 2011 result restructuring activities second half 2012 sales marketing expense increased slightly 2012 compared 2011 primarily due increase personnelrelated expenses 4 increase headcount 2568 employees december 31 2011 2680 employees december 31 2012 well higher demo costs associated bringing new products market increases partially offset lower commissions decrease outside services general administrative expense increased 2012 compared 2011 primarily due increase outside professional services consists legal consulting fees support financerelated initiatives including erp implementation increase general administrative expense also attributable increase general administrative headcount increased 5 463 december 31 2011 486 december 31 2012 restructuring charges increased 2012 compared 2011 due 2012 restructuring plan initiated third quarter 2012 bring cost structure line desired longterm financial strategic model lesser extent also incurred charges related restructuring plan 2011 restructuring plan implemented third quarter 2011 align business operations macroeconomic market conditions 2012 incurred 468 million restructuring charges related restructuring plans primarily workforce reductions facility closures sharebased compensation sharebased compensation expense associated equity incentive awards include stock options restricted stock units rsus restricted stock awards rsas performance share awards psas well employee stock purchase plan espp recorded following cost expense categories millions except percentages 2013 compared 2012 sharebased compensation expense remained consistent 2013 compared 2012 offsetting increases expense related rsas assumed connection acquisition contrail end 2012 decreases actual shares vested decline grant date fair values due lower stock prices 2012 compared 2011 sharebased compensation expense increased 2012 compared 2011 primarily due higher number rsu awards granted well change standard vesting terms four years three years rsu awards granted 2012 increase partially offset decrease stock options grants valued lower fair value decrease expense associated psas due lower achievement performance targets expense net income tax provision following table presents expense net income tax provision millions except percentages expense net interest income primarily includes interest income cash equivalents investments interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements typically consists investment foreign exchange gains losses nonoperational income expense items 2013 compared 2012 interest income decreased 2013 compared 2012 due lower cash balances interest rates well shift certain investments yielding lower interest expense increased 2013 compared 2012 primarily due higher capitalized interest 2012 resulting phased campus buildout expense lower 2013 compared 2012 due higher net gains recorded 2012 related privatelyheld investments included 147 million gain acquisition privatelyheld investment contrail 2012 compared 2011 interest income increased 2012 compared 2011 primarily due higher balance longterm investments yielding higher interest expense increased 2012 compared 2011 primarily due issuance 10 billion senior notes near end first quarter 2011 related interest expense 400 million net capitalized interest 2012 recognized gains 455 million including gain 147 million acquisition privatelyheld investment contrail impairment losses 200 million included related privatelyheld investments 2011 included certain legal expenses unrelated current recent operations approximately 70 million income tax provision effective rate 2013 lower federal statutory rate 35 primarily due benefit federal research development rd credit tax settlement internal revenue service “irs” recognition domestic production activities deductions earnings foreign jurisdictions subject lower tax rates effective tax rate 2012 substantially similar federal statutory rate 35 increase overall effective tax rate 2012 compared 2011 primarily due effect changes foreign earnings exclusion benefit federal rd credit expired december 31 2011 effective tax rate 2011 differed federal statutory rate 35 primarily due federal rd credit benefit earnings foreign jurisdictions subject lower tax rates effective tax rate could fluctuate significantly quarterly basis could adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate could also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items result expiration federal research development credit december 31 2013 expect effective tax rate increase 2014 see item1a part risk factors report description relevant risks may adversely affect results complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report segment information description products services segment see item 1 business part report description measures included segment contribution margin also found note 13 segment information notes consolidated financial statements item 8 part ii report select segment financial data three years period ended december 31 2013 follows platform systems division segment millions except percentages reconciliation total segment contribution margin income taxes noncontrolling interest found note 13 segments notes consolidated financial statement item 8 report 2013 compared 2012 psd product revenues increased 2013 compared 2012 primarily due higher revenue edge routing switching products specifically due growth mx ptx ex qfabric product families result new products enhancements enterprise campus data center infrastructures majority service revenues earned customers purchase products enter contracts support services psd service revenues increased 2013 compared 2012 primarily due strong contract renewals support services psd contribution margin percent psd revenues increased 2013 compared 2012 primarily due combination revenue growth lower operating expenses 2012 compared 2011 psd product revenues decreased 2012 compared 2011 due decline sales core edge routing products decline sales primarily attributable lower spending international customers content service provider customers americas partially offset increase sales switching products psd service revenues increased 2012 compared 2011 primarily due strong contract renewals support services psd contribution margin percent psd revenues decreased 2012 compared 2011 primarily due decline revenues decrease also attributable shift product mix lower margin products higher prototype development costs 2012 decrease contribution margin partially offset reduced costs result continuing focus operational improvements cost efficiencies software solutions division segment millions except percentages reconciliation contribution margin income taxes noncontrolling interest found note 13 segments notes consolidated financial statement item 8 report 2013 compared 2012 ssd product revenues decreased 2013 compared 2012 primarily due decline sales security products driven lower demand highend srx products service providers revenues branch srx security products improved slightly 2013 compared 2012 ssd service revenues increased 2013 compared 2012 primarily driven strong contract renewals support services ssd contribution margin percentage ssd revenues decreased 2013 compared 2012 due lower revenue decrease gross margin partially offset lower operating expenses 2012 compared 2011 ssd product revenues decreased 2012 compared 2011 primarily due decline sales highend branch firewall products routing services products partially offset increase sales highend srx products ssd service revenues increased 2012 compared 2011 primarily driven strong contract renewals support services ssd contribution margin percentage ssd revenues remained relatively stable 2012 compared 2011 due shift product mix lower margin products offset reduced costs result continued focus operational improvements cost efficiencies liquidity capital resources historically funded business primarily operating activities issuance common stock issuance longterm debt following table shows capital resources millions except percentages significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities shortterm deferred revenue working capital increased 838 million year ended december 31 2013 primarily due increase current assets primarily accounts receivable shortterm investments lower accounts payable partially offset decrease cash equivalents summary cash flows december 31 2013 cash equivalents decreased 1238 million december 31 2012 primarily due cash used investing financing activities related repurchase common stock purchase investments capital expenditures following table summarizes cash flows consolidated statements cash flows millions except percentages operating activities 2013 compared 2012 cash flows operations increased 1999 million 2013 compared 2012 primarily due higher consolidated net income timing payments vendors higher deferred revenue lower taxes paid partially offset timing payments incentive compensation employees timing collections outstanding receivables 2012 compared 2011 cash flow operations decreased 3443 million 2012 compared 2011 primarily due lower consolidated net income higher taxes paid timing payments vendors decrease deferred revenue offset timing collections outstanding receivables investing activities 2013 compared 2012 net cash used investing activities decreased 323 million 2013 compared 2012 primarily due lower spending acquisitions asset purchases well lower capital expenditures completed phased campus buildout partially offset higher purchases investments 2012 compared 2011 net cash used investing activities decreased 1105 million 2012 compared 2011 primarily due fewer purchases investments offset higher spending asset purchases property equipment acquisitions 2011 invested proceeds issuance notes availableforsale securities purchased property equipment phased campus buildout corporate headquarters sunnyvale ca financing activities 2013 compared 2012 net cash used financing activities decreased 1466 million 2013 compared 2012 primarily due lower purchases retirement common stock partially offset increase proceeds employee stock option exercises well proceeds customer financing arrangements 2012 compared 2011 net cash used financing activities 5483 million 2012 net cash provided financing activities 8190 million 2011 change 2011 2012 primarily due issuance notes 2011 increase purchases retirement common stock fewer proceeds employee stock option exercises 2012 stock repurchase activities dividends july 2013 board directors “board” approved stock repurchase program authorized us repurchase 10 billion common stock time managements discretion authorization addition 10 billion stock repurchase program approved board announced june 2012 10 billion stock repurchase program approved board february 2010 december 31 2013 9977 million authorized funds remaining stock repurchase programs part iop announced february 2014 committed return minimum 30 billion shareholders next three years combination share repurchases dividends part plan board directors authorized 20 billion share repurchases executed end first quarter 2015 including 12 billion accelerated share repurchase program entered first quarter 2014 also initiate quarterly cash dividend 010 per share common stock beginning third quarter 2014 expectation increase dividend time activities funded combination existing cash balances debt offerings following table summarizes repurchases retirements common stock repurchase programs repurchases associated minimum tax withholdings millions except per share amounts deferred revenue deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training following table summarizes deferred product service revenues millions december 31 2013 net deferred product revenue decreased 509 million 2450 million compared 2959 million december 31 2012 primarily due strong channel sales resulting lower ending channel inventory timing future feature releases december 31 2013 increase deferred service revenue 1968 million attributed execution several multiyear support agreements lesser extent increase annual agreement renewals offbalance sheet arrangements december 31 2013 2012 relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2013 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments 2 see note 10 longterm debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt december 31 2013 1144 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table legal proceedings see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information liabilities may arise litigation contingencies liquidity capital resource requirements liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships made may make future august 2013 filed automatic shelf registration statement sec replace previous shelf registration statement expired pursuant sec rules september 2013 august 2013 automatic shelf registration statement enables us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions offerings securities automatic shelf registration statement made pursuant prospectus focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant intention 2013 target number shares underlying equity awards granted annual basis 275 less common stock outstanding pure share basis option rsu rsa psa granted counted one share based upon shares underlying grants date options rsus rsas psas achieved goal 2013 repurchased 289 million cost 5706 million expect continue calibrate buybacks future quarters market conditions time also managed equity compensation programs reduce overall number shares subject outstanding awards past two years reduced use stock options equity compensation programs total number common shares subject outstanding awards connection juniper plans 438 million 542 million 582 million shares december 31 2013 2012 2011 respectively reflecting consecutive decline three years ended december 31 2013 based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets sufficient fund operations iop anticipated growth least next twelve months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including limited • level mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock dividends • incurrence repayment debt related interest obligations • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • accounts receivable levels maintain • acquisitions andor funding businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors responses products andor pricing • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated sharebased awards • issuance sharebased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties cannot provide assurance additional sources capital including debt available us terms acceptable us item 7aitem 7 managements discussion analysis financial condition results operations following discussion read consolidated financial statements related notes item 8 part ii report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles us gaap course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report business market environment juniper networks design develop sell products services highperformance networks enable customers build highly scalable reliable secure costeffective networks businesses achieving agility efficiency value automation focus customers partners across key market verticals view network attributes fundamental business including telecom cable providers cloud providers national government financial services enterprise strategic verticals believe product solution differentiation relentless customer focus enable us achieve goal growing revenue faster market products sold three geographic regions americas europe middle east africa emea asia pacific apac highperformance routing switching security networking products service offerings sold service provider enterprise markets believe silicon systems software represent innovations transform economics experience networking helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership addition products offer technical support professional services well education training programs customers together highperformance product service offerings help customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers fiscal 2015 results showed improvement yearoveryear net revenue increases across verticals geographies solid growth routing switching highend srx platforms security software products anticipated second half 2015 us telecom showed improvement net revenues compared first half 2015 well second half 2014 top ten customers fiscal 2015 five telecom customers three outside us five cloud cable providers expect overall revenue environment challenging nearterm market dynamics may impact demand customers also anticipate exchange rate us dollar currencies remain strong believe product gross margins may continue vary future due competitive pricing pressures may offset additional operational efficiencies nevertheless focused executing strategy focused designing developing selling products services highperformance networks believe product portfolio continues strong remain focused operational excellence cost discipline targeted growth initiatives well partnerships tuckin acquisitions complement rd strategy example january 2016 announced intent acquire optical equipment provider bti systems believe allow us accelerate delivery open automated packet optical transport solutions integrated network management based bti systems pronx service manager connectivity services director well northstar controller believe together products provide unified management interface multilayer provisioning endtoend services across ip optical networks intent lead area software solutions simplify operation networks allow customers across key verticals deliver real value networks anticipate increased focus software business models result increase software revenue percentage total revenue time 2015 continued invest innovation strengthening product portfolio resulted new product offerings across routing switching security routing expanded acx series portfolio addition acx500 acx5000 routers enabling service providers handle added capacity accelerate service orchestration announced new line cards ptx3000 ptx5000 expanded converged supercore architecture addition ptx1000 compact 3tbps fixed configuration core router enhanced mx series 3d universal edge routing portfolio new line cards software features triple throughput enable network automation introduced nfx series first planned series network services platforms operate secure onpremises devices running multiple virtual network functions vfns us third parties simultaneously thereby significantly reducing costs giving service providers ability update network functions without purchase new hardware additionally announced cloud cpe fully automated endtoend network functions virtualization nfv solution builds proven ability juniper networks contrail networking scale across nfv deployment models switching announced qfx10000 high performance data center switches powered new q5 chip purposebuilt asic believe enables unprecedented performance port density scale well new junos fusion data centers provide industryleading network scale automation capabilities small internetscale cloud networks also announced disaggregated version junos software provide customers ultimate choice data center deployment options addition announced qfx5200 line access switches first platform run disaggregated junos software well support emerging 25 50 gigabit ethernet gbe standard additionally highlighted rapid implementation metafabric architecture contrail sdn technologies across leading converged hyperconverged stack solutions also juniper networks unite announced new campus architecture provides simplified secure network infrastructure solutions required modernize enterprise campus branch networks cloudenabled service platforms additionally announced junos fusion enterprise new open architecture based 8021br industry standard combined ex series ethernet switches believe enable configuration management entire distributed enterprise network single network entity furthermore unveiled qfx5100aa switch qfxpfa new packet flow accelerator module collectively solution provides data center switch consolidates compute resources customizable logic network enterprise partnered ruckus wireless provide highperformance scalable open network solutions wired wireless products additionally announced new technology alliance aerohive deliver simple secure cloudmanaged wired wireless solutions enterprises security announced advanced malware protection zeroday threat protection cloud redesigned security management latest firewalls enterprise campus branch networks part new juniper networks unite architecture latest security solutions include juniper networks sky advanced threat prevention junos space security director juniper networks srx300 series services gateways srx1500 designed provide customers sophisticated threat protection security management automation scale needed defend threats point network without hindering network performance also introduced new hardware software juniper networks srx5800 services gateway improvements increase available internet mix imix firewall throughput two terabits per second 2 tbps additionally optimization capability called express path introduced juniper network srx5000 series services gateways delivering powerful performance enhancements boost throughput reduce latency also announced new application security capabilities appsecure 20 virtual firewall vsrx deliver enhanced protection cloud hybrid data centers addition new product announcements continued deliver previously announced capital return program fiscal year 2015 repurchased 11425 million shares common stock paid four quarterly cash dividends 010 per share aggregate amount 1563 million since first quarter 2014 inclusive share repurchases dividends returned approximately 36 billion capital shareholders commitment return 41 billion end 2016 given almost completed 41 billion dollar capital return commitment going forward intend target capital return policy approximately 50 annual free cash flow inclusive share repurchases dividends free cash flow calculated net cash provided operating activities less capital expenditures 2015 issued 3000 million aggregate principal amount 330 senior notes due 2020 notes 3000 million aggregate principal amount 435 senior notes due 2025 notes intend refinance subject market business conditions 300 million previously issued debt maturing march 2016 financial results key performance metrics overview following table provides overview key financial metrics years ended december 31 2015 2014 2013 millions except per share amounts percentages days sales outstanding dso booktobill dso booktobill fourth quarter ended december 31 2015 2014 2013 • net revenues 2015 net revenues increased compared 2014 result increases across verticals geographies primarily due increase service providers net revenues across three geographies well increase enterprise net revenues americas yearoveryear increase net revenues also result strong increase net revenues routing products partially offset decrease net revenues screen os products divestiture pulse secure products third quarter 2014 net revenues slightly compared 2013 result decline net revenues us carriers partially offset growing demand cloud providers americas well improving demand among service provider emea yearoveryear decline net revenues primarily due decrease net revenues routing security products partially offset increase switching products revenue service revenue • gross margin gross margin percentage net revenues increased 2015 compared 2014 result higher restructuring benefit charges recorded 2014 2015 connection restructuring plan initiated first quarter 2014 restructuring plan well steady increase net revenues compared 2014 gross margin percentage net revenues decreased 2014 compared 2013 result higher inventory charges driven product rationalizations connection 2014 restructuring plan charges related industrywide memory product quality defect component third party supplier • operating income loss 2015 compared 2014 experienced increase operating income loss percentage net revenues result higher net revenues effective management cost structure additionally operating loss 2014 included 8500 million goodwill impairment charge restructuring charges 2077 million connection 2014 restructuring plan 2014 compared 2013 experienced decline operating income loss percentage net revenues primarily due 8500 million goodwill impairment charge related security reporting unit recorded fourth quarter 2014 restructuring charges 2077 million related severance facility consolidations closures asset writeoffs contract terminations connection 2014 restructuring plan well component remediation charge 207 million relating memory product quality defect • cash dividends declared per common stock 2015 declared four quarterly cash dividends 010 per share payable march 24 2015 june 23 2015 september 22 2015 december 22 2015 stockholders record close business march 3 2015 june 2 2015 september 1 2015 december 1 2015 respectively aggregate amount 1563 million 2014 declared two quarterly cash dividends 010 per share payable september 23 2014 december 23 2014 stockholders record close business september 2 2014 december 2 2014 respectively aggregate amount 860 million previously paid cash dividends • stock repurchase plan activity stock repurchase program repurchased approximately 454 million shares common stock open market average price 2516 per share aggregate purchase 11425 million 2015 2014 repurchased approximately 961 million shares common stock open market average price 2341 per share aggregate purchase 22500 million • operating cash flows cash flow operations increased 1291 million 2015 compared 2014 primarily due higher revenue improved operating margin operating cash flows decreased 2014 compared 2013 primarily due lower cash collections customers higher payments primarily related 2014 restructuring plans higher taxes paid lower prepayments compared prior year • dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days dso quarter ended december 31 2015 increased 4 days 8 compared quarter ended december 31 2014 increase dso primarily due significant increase service billings invoiced late fourth quarter dso quarter ended december 31 2014 increased 8 days 20 compared quarter ended december 31 2013 2014 transitioned certain distribution partners third party financing program junipers commercial payment terms going forward expect dso range 45 55 days • booktobill represents ratio product orders booked divided product revenues respective period booktobill greater one quarters ended december 31 2015 2014 2013 indicating strong product demand • deferred revenue total deferred revenue increased 924 million 11681 million december 31 2015 compared 10757 million december 31 2014 primarily due increase deferred service revenue 777 million driven timing service contract renewals well higher product deferrals result increase channel inventory subscription deferrals december 31 2014 compared december 31 2013 total deferred revenue increased 64 million primarily due increase deferred service revenue 258 million primarily driven execution several multiyear support agreements annual agreement renewals increase deferred service revenue partially offset decrease deferred product revenue 194 million result lower distributor inventory multiple revenue releases relation previously deferred product revenue critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense goodwill represents future economic benefits arising assets acquired business combination acquisition individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit reporting units determined based components operating segment constitutes business discrete financial information available segment management regularly review operating results component provisions accounting standard goodwill intangibles allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test various factors considered qualitative assessment including macroeconomic conditions financial performance sustained decrease share price result qualitative assessment deemed likely fair value reporting unit less carrying amount management perform quantitative test quantitative goodwill impairment test necessary involves twostep process identify goodwill impairment measure amount goodwill impairment loss recognized first step tests potential impairment comparing fair value reporting units reporting unit’s net asset values fair value reporting units exceeds carrying value reporting unit’s net assets goodwill impaired testing required fair value reporting units exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill second step requires assignment reporting unit’s fair value reporting unit’s assets liabilities using relevant acquisition accounting guidance determine implied fair value reporting unit’s goodwill implied fair value reporting unit’s goodwill compared carrying amount reporting unit’s goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference first step fair value reporting units determined using income market valuation approaches believe income approach market approach equally representative reporting unit’s fair value income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publiclytraded companies similar lines business application income market valuation approaches required make estimates future operating trends judgments discount rates variables determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results related assumed variables could differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units income approach calculate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units apply control premium determined considering control premiums offered part acquisitions occurred market segments comparable reporting units income approach market approach equally weighted derive fair value reporting unit prior second step longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group needed impairment charge recognized amount carrying amount asset group exceeds fair value second step reporting units fair value allocated assets liabilities including unrecognized intangible assets existing technology backlog customer relationships hypothetical analysis calculates implied fair value goodwill manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying value difference recorded impairment loss assumptions used measuring fair value assets liabilities included discount rates customer renewal rates technology obsolescence rates used valuing intangible assets pricing comparable transactions market valuing tangible assets fourth quarter fiscal 2015 elected perform qualitative assessment reporting units qualitative assessment included review certain macroeconomic factors entityspecific qualitative factors determine morelikelythannot fair values reporting units carrying value considered macroeconomic factors including economic growth general macroeconomic trends growth markets reporting units operate changes industry environment performance market competitors addition macroeconomic factors among things considered reporting units’ current results forecasts changes nature business changes cost factors significant legal regulatory contractual business factors changes carrying amount net assets result qualitative assessment concluded morelikelythannot goodwill impaired need perform quantitative assessment refer item 8 part ii note 7 goodwill purchased intangible assets notes consolidated financial statements information • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process stated lower average cost market provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2015 december 31 2014 net inventory balances 750 million 625 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2015 december 31 2014 contract manufacturer liabilities 180 million 253 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence vsoe available thirdparty evidence tpe vsoe available estimated selling price esp neither vsoe tpe available establish vsoe selling price using price charged deliverable sold separately tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s recommended changes numerous longstanding tax principles adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations sell highperformance networking products service offerings across routing switching security two primary markets service provider enterprise determination market particular revenue transaction relates based primarily upon customers industrial classification code may also include subjective factors intended use product service provider market generally includes wireline wireless carriers cable operators well major internet content application providers including provide social networking search engine services enterprise market generally comprised businesses federal state local governments research education institutions financial services following table presents product service net revenues millions except percentages 2015 compared 2014 routing product net revenues increased 2015 compared 2014 result increase cloud providers cable telecom emea apac 2015 saw strong increase demand service provider enterprise markets routing products well overall increase net revenues mx960 mx2020 ptx series products switching product net revenues increased 2015 compared 2014 primarily due data center buildouts telecom cloud providers result enabled significant growth qfx product family additionally saw solid strength switching net revenues americas apac slightly offset decrease emea also saw yearoveryear increase service provider market switching products security product net revenues decreased 2015 compared 2014 primarily due divestiture junos pulse product lines continuing decline screenos products partially offset increase sales srx platform security software yearoveryear additionally also saw decrease security net revenues within enterprise market partially offset slight increase service provider market increase service net revenues 2015 compared 2014 primarily driven new service contracts strong contract renewals service revenues largely correlated product revenues therefore product net revenues decline impact future service revenues 2014 compared 2013 routing product net revenues decreased 2014 compared 2013 result weaker demand core routing products partially offset strong growth ptx series products edge routing net revenues increased result strong demand mx series products partly offset older edge routing platforms yearover year decline driven weakness large us carriers partially offset strength cloud providers switching product net revenues increased 2014 compared 2013 reflecting growth qfabric system ex series products 2014 saw strong adoption qfabric data center switches growing number customers especially strong demand cloud providers americas security product net revenues decreased 2014 compared 2013 primarily due continuing decline legacy screenos products divestiture junos pulse product lines sales srx platform declined slightly yearoveryear due lower demand us carrier customers increase service revenue 2014 compared 2013 primarily driven new service contracts strong contract renewals net revenues geographic region following table presents net revenues geographic region millions except percentages 2015 compared 2014 net revenues americas increased 2015 compared 2014 primarily due strong increase net revenues service provider enterprise markets increase service provider enterprise markets within americas due increase net revenues across routing switching srx product net revenues well service net revenues addition saw strong increase net revenues cloud providers cable enterprise partially offset telecom net revenues emea increased 2015 compared 2014 primarily due increase net revenues telecom cloud providers slightly offset decrease enterprise market net revenues apac increased 2015 compared 2014 primarily due increase net revenues telecom cloud providers experienced significant decline china partially offset increase net revenues japan australia 2014 compared 2013 net revenues americas increased 2014 compared 2013 primarily due increase net revenues service provider markets partially offset decline enterprise market increase net revenues service provider market due strong demand cloud providers cable partially offset decrease demand carriers decline enterprise market resulted decline net revenues due recognition revenue large us federal government contract 2013 net revenues emea slightly increased 2014 compared 2013 primarily due stronger demand service providers partially offset decrease net revenues enterprise market although demand public sector remained strong net revenues apac decreased 2014 compared 2013 primarily due decline net revenues service provider enterprise market net revenues market customer following table presents net revenues market millions except percentages 2015 compared 2014 net revenues service provider market increased 2015 compared 2014 growth cloud providers telecom emea apac cable within service provider market saw strength across routing switching security largest increase net revenues routing revenue net revenues enterprise market increased 2015 compared 2014 primarily due strength service routing lesser extent switching partially offset slight decrease revenue security products net revenues americas enterprise market increased across routing switching srx security 2014 compared 2013 net revenues service provider market increased 2014 compared 2013 growth americas emea increase service provider net revenues americas driven increased revenues cloud providers cable partially offset decreased revenues large carriers increase service provider net revenues emea attributable growth large carriers apac net revenues service provider market declined result lower demand small large carriers addition service provider demand switching products continued strong net revenues enterprise market decreased 2014 compared 2013 primarily due decline sales geographic regions however revenue demand public sector customers higher three regions customer accounted greater 10 net revenues year ended december 31 2015 2014 2013 gross margins following table presents gross margins millions except percentages gross margins continue affected variety factors including mix average selling prices products services new product introductions enhancements manufacturing costs expenses inventory obsolescence warranty obligations cost support service personnel mix distribution channels products sold 2015 compared 2014 product gross margin increased percentage product net revenues 2015 compared 2014 primarily due decrease product cost revenues decrease cost revenues attributable nonrecurrence restructuring charges recorded 2014 asset writedowns charges incurred 2015 excluding components prior year cost sales yearoveryear gross margin would remain relatively consistent service gross margin percentage service net revenues increased 2015 compared 2014 services delivery costs increased slower rate service revenue result better labor efficiency improved product quality 2014 compared 2013 product gross margin decreased percentage product net revenues 2014 compared 2013 primarily due increase cost revenues increase cost revenues primarily due asset writedowns 415 million product rationalizations connection 2014 restructuring plan 207 million connection industrywide memory product quality defect component thirdparty supplier excluding costs restructuring component defect product gross margin percentage net revenues improved slightly primarily due favorability product mix 2014 period service gross margin percentage service net revenues decreased slightly 2014 compared 2013 primarily due increase labor logistics delivery costs support new contracts product introductions operating expenses following table presents operating expenses millions except percentages operating expenses historically driven large part personnelrelated costs including wages commissions bonuses benefits sharebased compensation travel particularly respect rd sales marketing activities facility information technology departmental costs allocated department based usage headcount facility related headcount 412 366 396 december 31 2015 2014 2013 respectively total 9058 8806 9483 employees december 31 2015 2014 2013 respectively 2015 compared 2014 research development research development expense decreased 2015 compared 2014 result lower headcount declined average 3888 2014 3724 2015 leading reduction payroll costs stock based compensation addition outside consulting services decreased due reduced consulting expenses partially offset increase depreciation expense rd equipment bonus expense sales marketing sales marketing expense decreased 2015 compared 2014 average headcount increased 2360 2014 2446 2015 however mix employees hired 2015 significantly different 2014 resulted lower salary bonus expense additionally commissions expense decreased compared 2014 result elimination certain commission programs reduction sales staff general administrative general administrative expense decreased 2015 compared 2014 primarily result higher litigation investigation related costs incurred 2014 connection investigations possible violations us foreign corrupt practices act lesser extent patent litigation case palo alto networks additionally saw decrease general administrative consulting fees slightly offset higher bad debt expense amount restructuring charges restructuring charges decreased 2015 compared 2014 due higher charges recorded 2014 connection 2014 restructuring plan 2014 implemented 2014 restructuring plan incurred restructuring charges 1662 million related workforce reductions contract terminations project cancellations facility closures 2014 restructuring plan substantially completed december 31 2014 year ended december 31 2015 recorded 04 million severance costs benefit 10 million facilities recorded restructuring benefits charges consolidated statements operations connection 2014 restructuring plan see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities impairment goodwill 2014 determined security reporting units carrying value goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations charges recorded 2015 2014 compared 2013 research development research development expense decreased 2014 compared 2013 primarily due lower personnelrelated expenses result restructuring actions divestiture junos pulse product lines rd headcount decreased 8 4135 december 31 2013 3797 december 31 2014 decrease rd personnel expense partially offset higher sharebased compensation expense result acquisition wandl inc first quarter 2014 engineering program costs 2014 compared 2013 sales marketing sales marketing expense decreased 2014 compared 2013 primarily due lower personnelrelated expenses discretionary expenses due cost reduction efforts creating efficiency sales activities decrease personnelrelated expenses primarily due headcount reductions sales marketing headcount decreased 11 2626 december 31 2013 2348 december 31 2014 general administrative general administrative expense increased 2014 compared 2013 primarily due higher litigation investigation related costs incurred current period connection investigation possible violations us foreign corrupt practices act lesser extent patent litigation case palo alto networks well litigation matters increase partially offset personnelrelated expenses result headcount reductions 8 513 december 31 2013 470 december 31 2014 patent litigation palo alto networks settled 2014 restructuring charges restructuring charges increased 2014 compared 2013 due higher charges recorded 2014 connection 2014 restructuring plan 2014 implemented 2014 restructuring plan incurred restructuring charges 1662 million related workforce reductions contract terminations project cancellations facility closures 2014 restructuring plan substantially completed december 31 2014 expect record significant future charges see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities impairment goodwill fourth quarter 2014 began implement new security strategy focused network resiliency performance based srx platform result rationalized security product portfolio including developing new product roadmap exiting certain point products including divestiture junos pulse factors decreased short term near term revenue profitability forecasts security reporting unit fiscal year 2014 annual goodwill impairment test carrying value security reporting units goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations part ii item 8 report see note 7 goodwill purchased intangibles notes consolidated financial statements item 8 part ii report discussion impairment goodwill sharebased compensation sharebased compensation expense associated equity incentive awards include stock options restricted stock units rsus restricted stock awards rsas performance share awards psas well employee stock purchase plan espp recorded following cost expense categories millions except percentages 2015 compared 2014 sharebased compensation expense decreased 2015 compared 2014 decrease expense primarily related decline actual shares vested 2014 compared 2013 sharebased compensation expense remained consistent 2014 compared 2013 increase expense related rsus rsas psas assumed connection acquisition wandl 2014 increase grant date fair values due higher stock prices offset decrease actual shares vested expense income net income tax provision following table presents expense income net income tax provision millions except percentages expense income net interest income primarily includes interest income cash equivalents investments promissory note issued juniper connection sale junos pulse interest expense primarily includes interest net capitalized interest expense payables respect shortterm longterm debt customer financing arrangements typically consists foreign exchange gains losses nonoperational income expense items 2015 compared 2014 interest income interest income increased 2015 compared 2014 primarily due higher balance longer term investments yielding higher interest well full year interest income pulse note receivable interest expense interest expense increased 2015 compared 2014 primarily due issuance 2020 2025 notes first quarter 2015 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2020 2025 notes gain legal settlement year ended december 31 2015 litigationrelated gains recorded 2014 entered settlement agreement palo alto networks resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees gain investments year ended december 31 2015 recorded gain 73 million primarily related sale privately held investments year ended december 31 2014 recorded gain 1630 million primarily related sale investments converted privatelyheld investments publiclytraded equity upon initial public offering ipo subsequently sold 2014 compared 2013 interest income interest income increased 2014 compared 2013 primarily due higher balance longer term investments yielding higher interest expense interest expense increased 2014 compared 2013 primarily due issuance 2024 notes first quarter 2014 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2024 notes gain legal settlement year ended december 31 2014 entered settlement agreement palo alto networks resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees gain investments year ended december 31 2014 recorded gain 1630 million primarily related sale investments converted privatelyheld investments publiclytraded equity upon ipo subsequently sold year ended december 31 2013 net gain investments primarily comprised gain 71 million related companys privatelyheld investments publicly tradedequity investments gain sale junos pulse sale junos pulse product portfolio completed october 1 2014 recorded gain 196 million expense income net consolidated statement operations sale driven product rationalization connection initiative focus projects highest potential growth see note 8 financial information notes consolidated financial statements item 8 part ii report discussion sale junos pulse income tax provision effective rate 2015 lower federal statutory rate 35 primarily due benefit federal rd tax credit change tax treatment sharebased compensation cost sharing arrangement resulted us tax court opinion discussed note 14 income taxes recognition domestic production activities deductions earnings foreign jurisdictions subject lower tax rates passage protecting americans tax hike act 2015 december 18 2015 retroactively permanently reinstated us federal rd tax credit effective january 1 2015 effective rate 2014 differs federal statutory rate 35 primarily due impact nondeductible goodwill charge tax gain sale junos pulse offset benefit release company’s valuation allowance attributable investment losses federal rd tax credit recognition domestic production activities deductions earnings foreign jurisdictions subject lower tax rates passage tax increase prevention act 2014 december 19 2014 retroactively reinstated us federal rd tax credit january 1 2014 december 31 2014 effective tax rate could fluctuate significantly quarterly basis could adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate could also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items see item 1a part ii risk factors report description relevant risks may adversely affect results complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report liquidity capital resources historically funded business primarily operating activities issuance common stock issuance longterm debt following table shows capital resources millions except percentages fiscal year 2015 includes effects adoption accounting standards update 201517 balance sheet classification deferred taxes requiring deferred tax assets liabilities related valuation allowance classified noncurrent consolidated balance sheets amounts prior year retrospectively adjusted conform currentyear presentation significant components working capital cash equivalents shortterm investments accounts receivable reduced shortterm debt accounts payable accrued liabilities shortterm deferred revenue working capital decreased 1867 million year ended december 31 2015 primarily due reclassification longterm debt shortterm debt well dividend payments capital expenditures interest paid debt partially offset issuance 2020 notes 2025 notes march 2015 summary cash flows december 31 2015 cash equivalents decreased 2187 million december 31 2014 primarily due higher capital expenditures dividend payout higher interest paid debt partially offset issuance 2020 2025 notes following table summarizes cash flows consolidated statements cash flows millions except percentages operating activities 2015 compared 2014 net cash provided operating activities 8925 million 2015 compared 7634 million 2014 increase 1291 million primarily due higher revenue improved operating margin 2014 compared 2013 cash flow operations 7634 million 2014 compared 8459 million 2013 decrease 825 million primarily due lower cash collections customers higher payments related restructuring plans higher taxes paid lower prepayments compared prior year investing activities 2015 compared 2014 net cash used investing 5087 million 2015 compared net cash provided investing 4340 million 2014 decrease 9427 million cash flows investing activities primarily due lower proceeds sale availableforsale securities 2015 compared 2014 sale availableforsale securities higher order partially fund accelerated share repurchase program also received higher proceeds sale certain publicly traded equity securities proceeds sale junos pulse 2014 partially offset higher cash payments purchase availableforsale investments 2014 compared 2013 net cash provided investing 4340 million 2014 compared net cash used investing 5610 million 2013 increase net cash provided investing activities primarily due higher proceeds sale investments fewer purchases investments well proceeds received sale junos pulse financing activities 2015 compared 2014 net cash used financing activities 5814 million 2015 compared 18242 million 2014 decrease 12428 million due lower purchases retirement common stock fiscal 2015 2014 compared 2013 net cash used financing activities 18242 million 2014 compared 4017 million 2013 increase 14225 million primarily due higher purchases retirement common stock payment cash dividends partially offset issuance 2024 notes stock repurchase activities february 2014 board directors refer board approved stock repurchase program authorized us repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program 2014 stock repurchase program october 2014 july 2015 board authorized 13 billion 5000 million increase respectively 2014 stock repurchase program total 39 billion december 31 2015 5325 million authorized funds remaining 2014 stock repurchase program following table summarizes stock repurchase activities millions except per share amounts 1 part 2014 stock repurchase program entered two separate accelerated share repurchase agreements collectively asr two financial institutions repurchase 12 billion common stock made upfront payment 12 billion pursuant asr repurchase common stock aggregate number shares ultimately purchased determined based volume weighted average repurchase price less agreed upon discount shares received respect asr retired shares return authorized unissued shares common stock future stock repurchases stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements see note 18 subsequent events notes consolidated financial statements item 8 part ii report discussion stock repurchase activity subsequent december 31 2015 dividends 2015 declared four quarterly cash dividends 010 per share common stock january 27 2015 april 23 2015 july 23 2015 october 22 2015 paid march 24 2015 june 23 2015 september 22 2015 december 22 2015 respectively stockholders record close business march 3 2015 june 2 2015 september 1 2015 december 1 2015 respectively aggregate amount 1563 million 2014 declared two quarterly cash dividends 010 per share common stock 860 million july 22 2014 october 23 2014 paid september 23 2014 december 23 2014 respectively stockholders record close business september 2 2014 december 2 2014 respectively future dividends establishment record payment dates subject approval board authorized committee thereof see note 18 subsequent events notes consolidated financial statements item 8 part ii report discussion dividend declaration subsequent december 31 2015 restructuring december 31 2015 restructuring liability 28 million related facility closures expected paid march 2018 see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring plans deferred revenue deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training following table summarizes deferred product service revenues millions december 31 2015 net deferred product revenue increased 147 million 2403 million compared 2256 million december 31 2014 primarily result increase channel inventory subscription deferrals december 31 2015 increase deferred service revenue 777 million primarily driven timing service contract renewals offbalance sheet arrangements december 31 2015 2014 relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities see guarantees note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2015 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments 2 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt 3the future minimum lease payment related data center lease agreement entered july 10 2015 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report explanation data lease agreement december 31 2015 1873 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility june 27 2014 entered credit agreement certain institutional lenders provides five year 5000 million unsecured revolving credit facility option increase amount credit facility additional 2000 million subject certain conditions proceeds borrowing made credit agreement may used us working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid credit agreement requires us maintain leverage ratio greater 30x interest coverage ratio less 30x term credit facility addition credit agreement contains customary affirmative negative covenants including covenants limit restrict ability company subsidiaries among things grant liens merge consolidate dispose substantially assets change accounting reporting policies change business incur subsidiary indebtedness case subject customary exceptions credit facility size type december 31 2015 company compliance covenants credit agreement amounts outstanding see note 10 debt financing notes consolidated financial statements item 8 part ii report guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products solely combination third party products infringe intellectual property rights thirdparty december 31 2015 recorded 150 million liability indemnification obligations accrued liabilities consolidated balance sheets also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements custom duty guarantees standby letters credit certain lease facilities certain thirdparty customer financing arrangements contain guarantee provisions terms four years liable aggregate unpaid payments thirdparty financing company event customer default december 31 2015 made payments arrangements december 31 2015 december 31 2014 158 million 262 million respectively financing guarantees bank guarantees standby letters credit related financial guarantees 99 million financing guarantees recorded accrued liabilities longterm liabilities consolidated balance sheets december 31 2015 liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships made may make future additionally 2014 indicated intend return 41 billion stockholders form stock repurchases dividends february 2014 end 2016 extent repurchase additional shares common stock repurchase program pay cash dividends common stock liquidity may impacted december 31 2015 94 cash equivalents investment balances held outside us may subject us taxes repatriated august 2013 filed automatic shelf registration statement sec enabling us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions 2020 notes 2025 notes issued pursuant prospectus supplement filed sec february 26 2015 automatic shelf registration statement 2024 notes issued automatic shelf registration statement pursuant prospectus filed sec february 28 2014 offerings securities automatic shelf registration statement made pursuant prospectus addition revolving credit facility also provide additional flexibility future liquidity needs focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant fiscal year 2015 intended target number shares underlying equity awards granted annual basis 250 less common stock outstanding pure share basis option rsu rsa psa granted counted one share based upon shares underlying grants date options rsus rsas psas met target 2015 based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility credit agreement sufficient fund operations planned stock repurchases dividends anticipated growth least next twelve months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including limited • level mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • payment dividends • incurrence repayment debt related interest obligations • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • accounts receivable levels maintain • acquisitions andor funding businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors responses products andor pricing • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated sharebased awards • issuance sharebased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 managements discussion analysis financial condition results operations following discussion read consolidated financial statements related notes item 8 part ii report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles us gaap course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report business market environment juniper networks designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility efficiency value automation focus customers partners across key market verticals view network attributes fundamental business including telecom cable providers cloud providers national government financial services strategic enterprise verticals products sold three geographic regions americas europe middle east africa emea asia pacific apac highperformance routing switching security networking products service offerings sold global service providers cloud providers national governments research public sector organizations enterprises view network critical success believe silicon systems software represent innovations transform economics experience networking helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership addition products offer customers worldwide services including technical support professional services education training programs fiscal 2016 results saw modest net revenue growth primarily driven cloud providers increased 25 2016 compared period 2015 routing revenue slightly ptx family products significant yearoveryear growth switching revenue increased 12 2016 compared period 2015 driven continued data center strength led qfx family products increased 50 yearoveryear security revenues continued decline component business transitioning legacy security products new srx security offerings introduced throughout 2016 expect transition security continue next quarters services business continues strong another year solid yearoveryear revenue growth increasing 13 2016 compared period 2015 reviewing top 10 customers year four cloud providers four telecoms two enterprises customers two located outside us continue operate competitive market expect timing customers’ deployment patterns vary quarter intend manage business 2017 considerations mind continue focus driving shareholder value expect adhere following three financial principles provide insight operating plans 2017 • continue pursue opportunities revenue growth 2017 differentiated product portfolio within target markets focus growth emerging technologies market landscape continues evolve • remain focused earnings expansion longterm consistency remain diligent managing operating expenses also investing product portfolio short longterm • intend maintain healthy balance sheet optimized capital structure balancing internal investments potential valueenhancing expect continued strong cash flow generation intend return approximately 50 free cash flow shareholders free cash flow calculated net cash provided operating activities less capital expenditures focused operational excellence cost discipline targeted growth initiatives well partnerships expect continue evaluate strategic acquisitions 2016 completed three acquisitions expect enhance product portfolio believe allow us accelerate strategy transition cloudbased markets april 2016 acquired optical equipment provider bti systems inc bti expect accelerate ability address data center interconnect dci metro ethernet markets open programmable automated packet optical transport solutions august 2016 acquired aurrion inc aurrion provider fabless silicon photonic technology expect strengthen longterm competitive advantage costeffective highdensity highspeed optical networks lastly december 2016 acquired appformix company focused cloud infrastructure optimization software expect complement analytics capabilities contrail help customers enhance cloud operations expect continue look targeted strategic acquisitions believe complement product portfolio operations rd strategy intent lead area software solutions simplify operation networks allow customers across key verticals deliver real value networks anticipate increased focus software business models result increase software revenue percentage total revenue time 2016 continued execute strategy significant advancements performance automation across number key solution areas announced number new products enhancements hardware software products across routing switching security routing solution wide area ip transport across data center interconnect metro core enhanced introduction newest ptx linecards coupled multilayer optimization controller northstar switching announced two new access switches ex2300 ex3400 2016 introduced juniper networks cloudenabled branch solution allow enterprises managed service providers alike create automate delivery branch office networking services ondemand security announced juniper networks csrx nextgeneration containerized firewall providing advanced security services softwaredefined secure networks sdsn well multicore version juniper networks vsrx also announced junos space security director policy enforcer new srx4100 srx4200 firewalls new enhancements sky advanced threat prevention sky atp build sdsn platform also expanded global alliances nec deliver nfvbased solutions allow service providers enterprises gain greater service agility automation believe entering 2017 competitive product portfolio determination enable customers cloud businesses successfully migrate cloud architectures cloud transformation primary area strategic focus see significant opportunities arising shift towards cloud network automation believe history innovation leader understanding high performance networking technology position us capitalize industry transition financial results key performance metrics overview following table provides overview key financial metrics years ended december 31 2016 2015 2014 millions except per share amounts percentages days sales outstanding dso product booktobill dso product booktobill fourth quarter ended december 31 2016 2015 2014 • net revenues 2016 net revenues increased compared 2015 due strong growth services revenues partially offset slight decline product revenue decline product revenue primarily driven decline revenues mx products well security products addition saw continued competitive pricing pressures partially offset revenue growth new products specifically switching saw continued data center strength • gross margin gross margin percentage net revenues decreased 2016 compared 2015 primarily due elevated pricing pressures product mix charges related expected remediation costs certain products containing defect clocksignal component thirdparty supplier partially offset improvement services margin supply chain cost structure expect continue experience elevated pricing pressures near term • operating income loss 2016 compared 2015 operating income percentage net revenues decreased result higher operating expense primarily due acquisitions completed 2016 well decline gross margin percentage net revenue partially offset savings variable compensation improvements supply chain cost structure • capital return 2016 completed full commitment return 41 billion capital inclusive share repurchases dividends shareholders 2014 end 2016 repurchased 135 million shares common stock aggregate purchase 3129 million paid cash dividends 010 per share quarter aggregate annual amount 1525 million beginning 2017 intend target capital return policy approximately 50 annual free cash flow inclusive share repurchases dividends • operating cash flows cash flow operations increased 2135 million 2016 compared 2015 primarily driven timing differences working capital • dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days dso quarter ended december 31 2016 increased 15 days 28 compared quarter ended december 31 2015 elevated dso primarily due significant increase invoicing services occurred late 2016 resulted higher deferred services revenue well timing product invoicing believe quality receivables strong majority received early first quarter 2017 going forward expect dso 50 60 days range • product booktobill product booktobill represents ratio product orders booked divided product revenues respective period product booktobill greater one quarters ended december 31 2016 2015 2014 believe indicates positive product demand • deferred revenue total deferred revenue increased 3130 million 14811 million december 31 2016 compared 11681 million december 31 2015 primarily due 1 increase deferred service revenue 2304 million driven increase multiyear support agreements billed advance 2 increase product deferred revenue primarily due higher deferrals related software revenue arrangements recognized ratably agreement shipments met revenue recognition criteria circumstances costs deferred product revenue recorded net related costs product revenue february 2017 completed evaluation impact defect clocksignal component contained certain products may begin fail product operation 18 months advised third party component supplier result recorded product cost revenue charge approximately 108 million accrued liabilities consolidated balance sheet december 31 2016 expected remediation costs component defect process working customers component supplier implement remediation critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit reporting units determined based components operating segment constitutes business discrete financial information available segment management regularly review operating results component provisions accounting standard goodwill intangibles allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test various factors considered qualitative assessment including macroeconomic conditions financial performance sustained decrease share price result qualitative assessment deemed likely fair value reporting unit less carrying amount management perform quantitative test quantitative goodwill impairment test necessary involves twostep process identify goodwill impairment measure amount goodwill impairment loss recognized first step tests potential impairment comparing fair value reporting units reporting unit’s net asset values fair value reporting units exceeds carrying value reporting unit’s net assets goodwill impaired testing required fair value reporting units exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill second step requires assignment reporting unit’s fair value reporting unit’s assets liabilities using relevant acquisition accounting guidance determine implied fair value reporting unit’s goodwill implied fair value reporting unit’s goodwill compared carrying amount reporting unit’s goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference first step fair value reporting units determined using income market valuation approaches believe income approach market approach equally representative reporting unit’s fair value income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publiclytraded companies similar lines business application income market valuation approaches required make estimates future operating trends judgments discount rates variables determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results related assumed variables could differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units income approach calculate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimate fair value based market multiples earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units apply control premium determined considering control premiums offered part acquisitions occurred market segments comparable reporting units income approach market approach equally weighted derive fair value reporting unit fourth quarter 2016 performed quantitative assessment reporting units routing switching security quantitative assessment performed determining fair value reporting unit using combination income approach market approach based outcome quantitative assessments determined fair values reporting unit significantly exceeded respective carrying value resulting goodwill impairment refer item 8 part ii note 7 goodwill purchased intangible assets notes consolidated financial statements information • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process stated lower cost market provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2016 december 31 2015 net inventory balances 955 million 750 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2016 december 31 2015 contract manufacturer liabilities 140 million 180 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence vsoe available thirdparty evidence tpe vsoe available estimated selling price esp neither vsoe tpe available establish vsoe selling price using price charged deliverable sold separately tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s recommended changes numerous longstanding tax principles adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations sell highperformance networking products service offerings across routing switching security two primary markets service provider enterprise determination market particular revenue transaction relates based primarily upon customers industrial classification code may also include subjective factors intended use product service provider market generally includes wireline wireless carriers cable operators well major internet content application providers enterprise market generally comprised federal state local governments research education institutions financial services businesses following table presents product service net revenues millions except percentages 2016 compared 2015 routing product net revenues decreased slightly 2016 compared period 2015 primarily due decline revenues mx products resulting lower demand telecom americas emea impacted timing large deployments net revenues legacy series products continued decline expected continue transition nextgeneration ptx series products declines significantly offset strong increase revenues ptx series products due higher sales cloud providers telecom well ramp sales new products expect continue next quarters switching product net revenues increased 2016 compared period 2015 result continued growth data center switching portfolio driven higher net revenues qfx product family increased 50 yearoveryear driven ramp sales new product offerings well increase revenue cloud providers partially offset lower demand ex products transition new ex product portfolio focused growing cloud data center market expect expanded data center switching portfolio continue drive revenue growth switching business foreseeable future security product net revenues decreased 2016 compared period 2015 primarily due lower net revenues srx products undergoing product refresh cycle well continued decline screen os legacy products continue expect screen os legacy products contribute meaningful security product revenue growth continue decline time continuing introduce newer srx products expect transition continue next quarters increase service net revenues 2016 compared period 2015 primarily driven strong attach rates renewals support contracts 2015 compared 2014 routing product net revenues increased 2015 compared 2014 result increase cloud providers cable telecom emea apac 2015 saw strong increase demand service provider enterprise markets routing products well overall increase net revenues mx960 mx2020 ptx series products switching product net revenues increased 2015 compared 2014 primarily due data center buildouts telecom cloud providers result enabled significant growth qfx product family additionally saw switching net revenues growth americas apac slightly offset decrease emea also saw yearoveryear increase service provider market switching products security product net revenues decreased 2015 compared 2014 primarily due divestiture junos pulse product lines continuing decline screenos products partially offset increase sales srx platform security software yearoveryear additionally also saw decrease security net revenues within enterprise market partially offset slight increase service provider market increase service net revenues 2015 compared 2014 primarily driven new service contracts strong contract renewals service revenues largely correlated product revenues therefore product net revenues decline impact future service revenues net revenues geographic region following table presents net revenues geographic region millions except percentages 2016 compared 2015 net revenues americas increased 2016 compared period 2015 primarily driven strong growth cloud providers increased almost 30 yearyearover build data center environments well strong increase service revenues partially offset lower revenues cable providers due lower demand mx products americas continue see opportunities us diversify revenue cloud provider customers continue invest data center networks network automation net revenues emea decreased 2016 compared period 2015 primarily due decrease revenues strategic enterprise vertical timing deployments large telecoms partially offset growth cloud providers lesser extent certain macroeconomic uncertainties region elevated pricing pressures also contributed decline net revenues net revenues apac increased 2016 compared period 2015 increase driven cloud providers partially offset telecom geographically revenue growth primarily driven increase revenues china japan partially offset decline revenues australia 2015 compared 2014 net revenues americas increased 2015 compared 2014 primarily due strong increase net revenues service provider enterprise markets increase service provider enterprise markets within americas due increase net revenues across routing switching srx product net revenues well service net revenues addition saw strong increase net revenues cloud providers cable enterprise partially offset telecom net revenues emea increased 2015 compared 2014 primarily due increase net revenues telecom cloud providers slightly offset decrease enterprise market net revenues apac increased 2015 compared 2014 primarily due increase net revenues telecom cloud providers experienced significant decline china partially offset increase net revenues japan australia net revenues market customer following table presents net revenues market millions except percentages 2016 compared 2015 net revenues service provider market increased 2016 compared 2015 driven strong growth americas lesser extent growth apac partially offset emea services switching growth partially offset decline security net revenues enterprise market slightly decreased 2016 compared 2015 primarily due decline revenues security partially offset growth service revenue net revenue declines enterprise market emea apac partially offset growth americas 2015 compared 2014 net revenues service provider market increased 2015 compared 2014 growth cloud providers telecom emea apac cable within service provider market saw strength across routing switching security largest increase net revenues routing revenue net revenues enterprise market increased 2015 compared 2014 primarily due strength service routing lesser extent switching partially offset slight decrease revenue security products net revenues americas enterprise market increased across routing switching srx security customer accounted greater 10 net revenues years ended december 31 2016 2015 2014 gross margins following table presents gross margins millions except percentages gross margins continue affected variety factors including mix average selling prices products services new product introductions enhancements manufacturing costs expenses inventory obsolescence warranty obligations cost support service personnel mix distribution channels products sold 2016 compared 2015 product gross margin decreased percentage product net revenues 2016 compared 2015 primarily due elevated pricing pressures product mix expected remediation costs 108 million certain products containing defect clocksignal component thirdparty supplier partially offset improvements cost structure expect product gross margin continue vary future due mix products sold competitive pricing pressures believe product gross margins percentage net revenues improve longterm continued expected acceptance new products technologies expected increase software revenues percentage total revenues transition softwarebased business models continue manage costs within supply chain service gross margin percentage service net revenues increased 2016 compared 2015 service gross margin increased yearoveryear due increase support revenue well improvements labor productivity logistics partially offset increased support costs related ramp new products 2015 compared 2014 product gross margin increased percentage product net revenues 2015 compared 2014 primarily due decrease product cost revenues decrease cost revenues attributable nonrecurrence restructuring charges recorded 2014 asset writedowns charges incurred 2015 excluding components prior year cost sales yearoveryear gross margin would remain relatively consistent service gross margin percentage service net revenues increased 2015 compared 2014 services delivery costs increased slower rate service revenue result better labor efficiency improved product quality operating expenses following table presents operating expenses millions except percentages nm percentage meaningful operating expenses historically driven large part personnelrelated costs including wages commissions bonuses benefits sharebased compensation travel facility information technology departmental costs allocated department based usage headcount total 9832 9058 8806 employees december 31 2016 2015 2014 respectively headcount increased 774 employees 9 2016 compared 2015 primarily research development driven 2016 business acquisitions well higher services sales headcount focus delivering new products customers 2016 compared 2015 research development research development expense increased 2016 compared 2015 primarily result increase depreciation amortization expense 178 million driven higher capital expenditures related research development projects also contributing increase research development expense 136 million higher outside service costs consulting higher facilities expense lesser extent personnelrelated expenses increased due higher salaries wages fringe expense partially offset lower bonus expense increase salaries wages driven higher headcount 4054 2016 compared 3723 2015 result 2016 business acquisitions increases partially offset lower costs 141 million related completion development new products sales marketing sales marketing expense increased 2016 compared 2015 primarily due increase personnelrelated expenses 266 million driven higher salaries wages related increase headcount 2590 2016 compared 2464 2015 well increase sharebased compensation expense partially offset lower bonus commissions expense general administrative general administrative expense decreased 2016 compared 2015 primarily result lower personnelrelated expenses includes decline sharebased compensation lower bonus expense partially offset higher salaries wages additionally facilities expense decreased 2016 compared 2015 due consolidation buildings sunnyvale california declines partially offset increase outside services related consulting projects well increase acquisition costs related 2016 business acquisitions restructuring charges benefits restructuring charges benefits increased 2016 compared 2015 related severance costs connection 2016 business combinations 2015 compared 2014 research development research development expense decreased 2015 compared 2014 result lower headcount declined average 3888 2014 3724 2015 leading reduction payroll costs sharebased compensation addition outside consulting services decreased due reduced consulting expenses partially offset increase depreciation expense rd equipment bonus expense sales marketing sales marketing expense decreased 2015 compared 2014 average headcount increased 2360 2014 2464 2015 however mix employees hired 2015 significantly different 2014 resulted lower salary bonus expense additionally commissions expense decreased compared 2014 result elimination certain commission programs reduction sales staff general administrative general administrative expense decreased 2015 compared 2014 primarily result higher litigation investigation related costs incurred 2014 connection investigations possible violations us foreign corrupt practices act lesser extent patent litigation case palo alto networks additionally saw decrease general administrative consulting fees slightly offset higher bad debt expense amount restructuring charges benefits restructuring charges benefits decreased 2015 compared 2014 due higher charges recorded 2014 connection 2014 restructuring plan 2014 implemented 2014 restructuring plan incurred restructuring charges 1662 million related workforce reductions contract terminations project cancellations facility closures 2014 restructuring plan substantially completed december 31 2014 year ended december 31 2015 recorded 04 million severance costs benefit 10 million facilities recorded restructuring charges benefits consolidated statements operations connection 2014 restructuring plan see note 9 restructuring charges benefits notes consolidated financial statements item 8 part ii report discussion restructuring activities impairment goodwill 2014 determined security reporting units carrying value goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations charges recorded 2015 2016 sharebased compensation sharebased compensation expense associated equity incentive awards include stock options restricted stock units rsus restricted stock awards rsas performance share awards psas well employee stock purchase plan espp recorded following cost expense categories millions except percentages 2016 compared 2015 sharebased compensation expense increased 2016 compared 2015 primarily due increase actual shares vested well additional expense related equitybased awards assumed connection 2016 business acquisitions 2015 compared 2014 sharebased compensation expense decreased 2015 compared 2014 decrease expense primarily related decline actual shares vested expense income net following table presents expense income net millions except percentages nm percentage meaningful expense income net interest income primarily includes interest earned cash equivalents investments promissory note issued juniper connection sale junos pulse interest expense primarily includes interest net capitalized interest expense shortterm longterm debt customer financing arrangements loss gain investments net primarily includes gains losses sale investments privatelyheld companies includes impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items 2016 compared 2015 interest income interest income increased 2016 compared 2015 primarily due higher interest income pulse note receivable due increase interest rate well higher yields investment portfolio see note 8 financial information notes consolidated financial statements item 8 part ii report additional information regarding pulse note receivable interest expense interest expense increased 2016 compared 2015 primarily due issuance 2019 2024 notes partially offset repayment debt first quarter 2016 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2019 2024 notes loss gain investments net year ended december 31 2016 recorded net losses investments 18 million primarily driven impairments investments privatelyheld companies whereas year ended december 31 2015 recorded gain investments 73 million related sale investment privatelyheld company partially offset impairments investments privatelyheld companies 2015 compared 2014 interest income interest income increased 2015 compared 2014 primarily due higher balance longer term investments yielding higher interest well full year interest income pulse note receivable interest expense interest expense increased 2015 compared 2014 primarily due issuance 2020 2025 notes first quarter 2015 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2020 2025 notes gain legal settlement net year ended december 31 2015 litigationrelated gains recorded 2014 entered settlement agreement palo alto networks resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees loss gain investments net year ended december 31 2015 recorded gain 73 million primarily related sale privately held investments year ended december 31 2014 recorded gain 1630 million related sale investments converted privatelyheld investments publiclytraded equity upon initial public offering ipo subsequently sold income tax provision following table presents income tax provision millions except percentages 2016 compared 2015 effective tax rate tax year 2016 higher 2015 primarily due change geographic mix earnings effective tax rate tax year 2015 includes benefit 132 million related change tax treatment sharebased compensation cost sharing arrangement result recommendations organisation economic cooperation development oecd base erosion profit shifting beps certain countries emea apac either enacted new corporate tax legislation indicated considering enacting legislation near future expect effect reform measures potentially impact longstanding tax principles particularly regards transfer pricing consequently expect global tax authorities increasingly challenge cost sharing intercompany arrangements related sourcing taxable profits global jurisdictions 2016 entered discussions uk tax authorities australian tax authorities regarding corporate tax reform legislation enacted countries 2015 compared 2014 effective rate tax year 2015 lower 2014 primarily due income tax provided 2014 nondeductible goodwill charge included pretax loss addition 2014 effective tax rate includes 528 million related gain sales junos pulse offset release companys valuation allowance attributable investment losses effective tax rate could fluctuate significantly quarterly basis could adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate could also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items see item 1a part ii risk factors report description relevant risks may adversely affect results complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report liquidity capital resources funded business primarily operating activities issuance common stock issuance longterm debt following table presents capital resources millions except percentages january 1 2016 adopted accounting standards update asu 201503 subtopic 83530 simplifying presentation debt issuance costs shortterm longterm debt december 31 2015 retrospectively adjusted conform currentyear presentation significant components working capital cash equivalents shortterm investments accounts receivable reduced shortterm debt accounts payable accrued liabilities working capital increased 11255 million year ended december 31 2016 primarily due 11060 million cash provided operating activities 4940 million proceeds received issuance longterm debt partially offset 4771 million payments purchases retirement common stock cash dividends payment shortterm debt 3000 million summary cash flows december 31 2016 cash equivalents increased 4123 million december 31 2015 primarily due cash generated operations proceeds issuance 2019 notes 2024 notes partially offset purchases retirement common stock connection stock repurchase program payment 2016 notes capital expenditures dividend payments business acquisitions net purchases availableforsale investments following table summarizes cash flows consolidated statements cash flows millions except percentages operating activities primary source operating cash flows cash collections customers primary uses cash operating activities personnelrelated expenditures general operating expenses well payments related taxes interest facilities 2016 compared 2015 net cash provided operating activities increased 2135 million 2016 compared 2015 increase primarily due increase cash received customers partially offset increase income taxes paid 2015 compared 2014 net cash provided operating activities increased 1291 million 2015 compared 2014 increase primarily due decrease cash payments personnelrelated expenditures income tax paid 2015 increase cash received customers partially offset increase cash payments suppliers investing activities investing cash flows consist primarily capital expenditures investment purchases sales maturities redemptions cash used business combinations 2016 compared 2015 net cash used investing activities decreased 586 million 2016 compared 2015 decrease primary due decrease net purchases availableforsale investments partially offset increase cash used business acquisitions 2016 2015 compared 2014 net cash used investing activities increased 9427 million 2015 compared 2014 increase primary due lower net proceeds availableforsale securities 2015 compared 2014 sale availableforsale securities higher order partially fund accelerated share repurchase program addition completed sale junos pulse 2014 financing activities financing cash flows consist primarily purchases retirement common stock payment cash dividends stockholders issuance repayment shortterm longterm debt proceeds issuance shares common stock employee equity incentive plans 2016 compared 2015 net cash used financing activities decreased 3518 million 2016 compared 2015 decrease primarily due lower purchases retirements common stock 2016 partially offset payment 2016 notes decrease cash proceeds received issuance longterm debt issuance common stock 2016 2015 compared 2014 net cash used financing activities decreased 12428 million 2015 compared 2014 decrease primarily due lower purchases retirement common stock 2015 capital return february 2014 board directors refer board approved stock repurchase program authorized us repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program stock repurchase program october 2014 july 2015 board authorized 13 billion 5000 million increase respectively stock repurchase program total 39 billion december 31 2016 2197 million authorized funds remaining stock repurchase program february 2017 board approved incremental 5000 million stock repurchase authorization stock repurchase program following table summarizes stock repurchase activities millions except per share amounts part stock repurchase program entered two separate accelerated share repurchase agreements collectively asr two financial institutions repurchase 12 billion common stock made upfront payment 12 billion pursuant asr repurchase common stock aggregate number shares ultimately purchased determined based volume weighted average repurchase price less agreed upon discount shares received respect asr retired shares return authorized unissued shares common stock future stock repurchases stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements 2016 2015 paid cash dividends 010 per share quarter totaling 1525 million 1563 million per annum respectively declaration amount future cash dividends discretion board directors authorized committee thereof depend financial performance economic outlook relevant considerations completed full commitment return 41 billion capital inclusive share repurchases dividends stockholders end 2016 beginning 2017 intend return approximately 50 annual free cash flow stockholders inclusive share repurchases dividends free cash flow calculated net cash provided operating activities less capital expenditures deferred revenue deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training following table summarizes deferred product service revenues millions total deferred revenue increased 3130 million 14811 million december 31 2016 compared 11681 million december 31 2015 primarily due 1 increase deferred service revenue 2304 million driven increase multiyear support agreements billed advance 2 increase product deferred revenue primarily due higher deferrals related subscription software revenue arrangements shipments met revenue recognition criteria circumstances costs deferred product revenue recorded net related costs product revenue offbalance sheet arrangements december 31 2016 2015 offbalance sheet arrangements defined item 303 a4ii sec regulation sk business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance standby letters credit certain lease facilities insurance programs see guarantees additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2016 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments 2 lease arrangement related data center lease agreement entered july 10 2015 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report explanation data lease agreement 3 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt december 31 2016 2092 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility june 27 2014 entered credit agreement certain institutional lenders provides five year 5000 million unsecured revolving credit facility option increase amount credit facility additional 2000 million subject certain conditions proceeds borrowing made credit agreement may used us working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid credit agreement requires us maintain leverage ratio greater 30x interest coverage ratio less 30x term credit facility addition credit agreement contains customary affirmative negative covenants including covenants limit restrict ability subsidiaries among things grant liens merge consolidate dispose substantially assets change accounting reporting policies change business incur subsidiary indebtedness case subject customary exceptions credit facility size type december 31 2016 compliance covenants credit agreement amounts outstanding see note 10 debt financing notes consolidated financial statements item 8 part ii report guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products solely combination third party products infringe intellectual property rights thirdparty december 31 2016 recorded 289 million indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs guarantees related thirdparty customerfinancing arrangements 60 million 158 million december 31 2016 december 31 2015 respectively liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships made may make future additionally beginning 2017 intend target capital return policy approximately 50 annual free cash flow inclusive share repurchases dividends extent repurchase additional shares common stock repurchase program pay cash dividends common stock liquidity may impacted december 31 2016 87 cash equivalents investment balances held outside us may subject us taxes repatriated august 2016 filed automatic shelf registration statement sec enabling us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions 2019 notes 2024 notes issued automatic shelf registration statement filed august 2013 pursuant prospectus supplement filed sec february 24 2016 2020 notes 2025 notes issued automatic shelf registration statement pursuant prospectus supplement filed sec february 26 2015 3500 million principal amount 2024 notes form single series fully fungible 2024 notes issued 2016 issued automatic shelf registration statement pursuant prospectus filed sec february 28 2014 offerings securities automatic shelf registration statement made pursuant prospectus addition revolving credit facility also provide additional flexibility future liquidity needs focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant fiscal year 2016 intended target number shares underlying equity awards granted annual basis 240 less common stock outstanding pure share basis option rsu rsa psa granted counted one share psa granted counted based target achievement based upon shares underlying grants date options rsus rsas psas met target 2016 based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility credit agreement sufficient fund operations planned stock repurchases dividends anticipated growth least next twelve months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including limited • level mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • payment dividends • incurrence repayment debt related interest obligations • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • accounts receivable levels maintain • acquisitions andor funding businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors responses products andor pricing • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated sharebased awards • changes us tax policy rates • issuance sharebased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 managements discussion analysis financial condition results operations following discussion read consolidated financial statements related notes item 8 part ii report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles us gaap course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives decisions impact financial results given period information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview includes summary business market environment along financial results key performance metrics overview sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report executive overview business market environment juniper designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility efficiency value automation products sold three geographic regions americas europe middle east africa emea asia pacific apac sell highperformance network products service offerings across routing switching security technologies addition products offer customers services including maintenance support professional services education training programs believe silicon systems software represent innovations transform economics experience networking helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership intent lead area software solutions simplify operation networks allow customers across key verticals deliver value networks anticipate increased focus software business models result increase software revenue percentage total revenue time 2017 began reporting revenue following verticals cloud telecomcable strategic enterprise believe better aligns business model compared previous reporting revenue service provider enterprise summary types customers included verticals follows • cloud companies heavily reliant cloud business model’s success example customers cloud vertical include cloud service providers well enterprises provide softwareasaservice infrastructureasaservice platformasaservice • telecomcable includes wireline wireless carriers cable operators • strategic enterprise includes enterprises included cloud vertical particular industries high performance high agility requirements including financial services national federal state local governments well research educational institutions focused continue see significant opportunities implementation cloud architectures large public private data centers well distributed cloud infrastructure resides multiple distributed data centers order place applications services closer end users enabling security networking service believe network needs customers telecomcable cloud verticals converging strategic enterprises customers recognize need high performance networks leveraging cloud improved agility greater levels operating efficiency customers continue grow believe network architectures continue evolve believe understanding high performance networking technology strategy position us capitalize industry transition automated costefficient scalable networks routing believe certain large cloud customers starting transition wide area networks scaleup scaleout architecture continue add capacity resulted expect may continue result transition customers purchasing mx product family ptx product family architectural shifts led nearterm slowdown net revenues cases pause new architecture ramps well lower average selling prices ptx product family compared mx product family unable predict exact timing duration transition vary customer switching see certain large cloud customers rapidly scale based increased demand process adopting 100gigabit connections 100g resulting certain large deployment delays largest cloud customers prepare adoption despite ongoing deployment delays architectural shifts remain confident competitive position strong relationships strategic customers overall strategy cloud customers changed continue execute innovation roadmap includes plan continue grow relevance business cloud vertical 2017 continued execute product strategy specifically around cloud announced cloudgrade networking expect accelerate agility innovation cloud customers cloudgrade networking builds carriergrade reach reliability enterprisegrade control usability bringing cloudlevel agility operational scale networks everywhere announcement included two new foundational products • junos node slicing converges multiple concurrent network functions physical routing infrastructure letting customers optimize infrastructure offering differentiated services enhanced operational administrative isolation within single chassis • universal chassis breakthrough system allowing customers standardize hardware platform across data center core network edge believe system create significant value customers enhancing return investment reduced costs aligning cloudgrade networking initiative also announced programmable photonic layer solution comprised two main products tcx1000 series programmable roadm pronx optical director solution disaggregated optical line system designed offer greater levels flexibility cost control multilayer visibility packetoptical transport also announced enhancements softwaredefined secure networks sdsn platform expanded public cloud offering introduction vsrx microsoft azure sdsn enhancements deliver pervasive security across multivendor environments public clouds private clouds announced enhancements contrail cloud platform includes appformix integrations prevalidated virtual network functions managed solution professional services offering simplify customers transition telco clouds addition announced cloudbased enhancements security portfolio introduced contrail security product new solution specifically designed allow enterprises softwareasaservice saas cloud providers protect applications running multiple cloud environments also completed acquisition cyphort inc software company provides security analytics advanced threat defense acquisition expected strengthen capabilities cloudbased threat prevention service sky advanced threat prevention sky atp increasing efficiency performance providing additional threat detection functionalities analytics continue look targeted strategic acquisitions believe complement product portfolio operations rd strategy overall business financial results key performance metrics overview following table provides overview financial results key financial metrics millions except per share amounts percentages days sales outstanding dso fourth quarter ended december 31 2017 2016 2015 • net revenues 2017 net revenues increased compared 2016 due growth services business driven strong attach rates renewals support contracts partially offset decline product revenues decline product revenues primarily driven lower revenues routing products result continued architectural shifts cloud vertical automated cost efficient scalable networks decrease highend srx series security business partially offset increase net revenues switching products driven continued growth data center switching portfolio particularly qfx product family grew 25 yearoveryear top ten customers 2017 four cloud five telecomcable one strategic enterprise customers two located outside us • gross margin gross margin percentage net revenues decreased 2017 compared 2016 primarily due lower product net revenues customer mix product mix resulting yearoveryear decline routing revenues including result architectural shifts described partially offset higher service gross margin • operating margin 2017 compared 2016 operating income percentage net revenues decreased primarily due lower gross margin discussed higher operating expenses primarily restructuring charges partially offset higher net revenues driven strength services switching businesses • capital return 2017 repurchased 261 million shares common stock aggregate amount 7197 million paid cash dividends 010 per share quarter aggregate annual amount 1504 million • operating cash flows cash flow operations increased 2017 compared 2016 primarily due increase cash collections customers first half 2017 due higher invoicing activity fourth quarter 2016 partially offset increase payments suppliers higher payments restructuring activities increase cash paid income taxes • dso calculated ratio ending accounts receivable net allowances divided net revenues preceding 90 days dso quarter ended december 31 2017 decreased compared quarter ended december 31 2016 primarily due lower invoicing activities • product deferred revenue product deferred revenue increased december 31 2017 compared december 31 2016 primarily due shipments met certain revenue recognition criteria critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer liabilities assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit reporting units determined based components operating segment constitutes business discrete financial information available segment management regularly review operating results component provisions accounting standard goodwill intangibles allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test various factors considered qualitative assessment including macroeconomic conditions financial performance sustained decrease share price result qualitative assessment deemed likely fair value reporting unit less carrying amount management perform quantitative test quantitative goodwill impairment test necessary involves twostep process identify goodwill impairment measure amount goodwill impairment loss recognized first step tests potential impairment comparing fair value reporting units reporting unit’s carrying values fair value reporting units exceeds carrying value reporting unit’s net assets goodwill impaired testing required fair value reporting units exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill second step requires assignment reporting unit’s fair value reporting unit’s assets liabilities using relevant acquisition accounting guidance determine implied fair value reporting unit’s goodwill implied fair value reporting unit’s goodwill compared carrying amount reporting unit’s goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference first step fair value reporting units determined using income market valuation approaches believe income approach market approach equally representative reporting unit’s fair value income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publiclytraded companies similar lines business application income market valuation approaches required make estimates future operating trends judgments discount rates variables determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results related assumed variables could differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units income approach calculate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimate fair value based market multiples earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units apply control premium determined considering control premiums offered part acquisitions occurred market segments comparable reporting units income approach market approach equally weighted derive fair value reporting unit second step reporting units fair value allocated assets liabilities including unrecognized intangible assets existing technology backlog customer relationships hypothetical analysis calculates implied fair value goodwill manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying value difference recorded impairment loss assumptions used measuring fair value assets liabilities included discount rates customer renewal rates technology obsolescence rates used valuing intangible assets pricing comparable transactions market valuing tangible assets second quarter 2017 concluded sufficient indicators require us perform interim goodwill impairment analysis security reporting unit based analysis determined security reporting unit’s goodwill impaired fourth quarter 2017 performed qualitative assessment reporting units routing switching security qualitative assessment included review certain macroeconomic factors entityspecific qualitative factors determine morelikelythannot fair values reporting units carrying value considered macroeconomic factors including economic growth general macroeconomic trends growth markets reporting units operate changes industry environment performance market competitors addition macroeconomic factors considered reporting units’ current results forecasts changes nature business changes cost factors significant legal regulatory contractual business factors changes carrying values result qualitative assessment concluded morelikelythannot goodwill impaired perform quantitative assessment • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2017 december 31 2016 net inventory balances 978 million 955 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2017 december 31 2016 contract manufacturer liabilities 220 million 140 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence vsoe available thirdparty evidence tpe vsoe available estimated selling price esp neither vsoe tpe available establish vsoe selling price using price charged deliverable sold separately tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made accounted tax effects tax cuts jobs act refer tax act enacted december 22 2017 provisional basis accounting certain income tax effects incomplete determined reasonable estimates effects reasonable estimates included financial statements december 31 2017 expect complete accounting one year measurement period enactment date significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s recommended changes numerous longstanding tax principles adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents net revenues product service customer vertical geographic region millions except percentages 2017 compared 2016 product net revenues decreased 2017 compared 2016 primarily due decrease routing lesser extent security partially offset growth switching lower routing revenues driven cloud customers americas result ongoing architectural shifts cloud vertical automated cost efficient scalable networks routing revenues emea also declined yearoveryear due lower sales telecomcable customers partially offset revenue growth apac telecomcable vertical continue expand footprint certain strategic apac telecom cloud customers particularly australia expect strategic opportunities ultimately help drive revenue growth apac revenues mx legacy routing products declined yearoveryear partially offset increase revenues ptx products continued adoption ptx1000 series products expecting yearoveryear revenue decline routing business 2018 result ongoing architectural shifts cloud vertical security net revenues declined 2017 compared 2016 primarily driven decrease highend srx series undergoing product refresh cycle decline legacy products expecting yearoveryear revenue increase security business 2018 result product refresh decline product net revenues partially offset increase switching net revenues due continued growth data center switching portfolio particularly qfx product family grew 25 yearoveryear growth across public private clouds driven part 100g adoption switching net revenue growth primarily driven cloud vertical americas lesser extent strategic enterprise vertical expect data center switching portfolio continue drive revenue growth switching business expect yearoveryear revenue growth switching business 2018 service net revenues increased 2017 compared 2016 primarily due strong renewal attach rates support contracts additionally saw strong yearoveryear services revenue growth apac emea 2016 compared 2015 product net revenues decreased slightly 2016 compared 2015 primarily due decrease security lesser extent routing partially offset growth switching decrease security driven srx products undergoing product refresh cycle continued decline screen os legacy products continue expect screen os legacy products contribute meaningful security product revenue growth continue decline time decrease security net revenues driven strategic enterprise vertical due competitive pressures routing product net revenues decreased slightly 2016 compared 2015 primarily due decline revenues mx products resulting lower sales telecomcable vertical americas emea impacted timing large deployments revenues legacy products continued decline expected continued transition nextgeneration ptx series products declines significantly offset strong increase revenues ptx series products due higher sales cloud telecomcable customers well ramp sales new products decline product net revenues partially offset increase switching primarily due continued growth data center switching portfolio particularly qfx product family increased 50 yearoveryear driven ramp sales new product offerings well increase revenues cloud customers americas partially offset lower demand ex products transitioned new ex product portfolio focused growing cloud data center market expect expanded data center switching portfolio continue drive revenue growth switching business foreseeable future service net revenues increased 2016 compared 2015 primarily driven strong attach rates renewals support contracts customer accounted greater 10 net revenues years ended december 31 2017 2016 2015 gross margins following table presents gross margins millions except percentages gross margins percentage net revenues continue affected variety factors including mix average selling prices products services new product introductions enhancements manufacturing component costs expenses inventory obsolescence warranty obligations cost support service personnel customer mix continue expand footprint certain strategic customers certain geographic regions mix distribution channels products services sold 2017 compared 2016 product gross margin product gross margin percentage product revenues decreased 2017 compared 2016 primarily due lower product net revenues customer mix product mix resulting yearoveryear decline routing revenues customers architectural shifts partially offset improvements cost structure nearterm expect product gross margin continue affected lower revenues product mix including customers architectural shifts undertaking specific efforts address certain factors impacting product gross margin efforts include cost reductions performance quality improvements engineering increase value across products optimizing supply chain pricing management increasing software solution sales however guarantee efforts successful realized time frame anticipate expect product gross margin continue vary future due mix products sold geographic mix competitive pricing pressures service gross margin service gross margin percentage service net revenues increased 2017 compared 2016 due higher service revenues partially offset higher material higher delivery costs 2016 compared 2015 product gross margin product gross margin decreased percentage product net revenues 2016 compared 2015 primarily due elevated pricing pressures product mix remediation costs 108 million certain products containing defect clocksignal component thirdparty supplier partially offset improvements cost structure expect product gross margin continue vary future due mix products sold competitive pricing pressures service gross margin service gross margin percentage service net revenues increased 2016 compared 2015 due increase support revenue well improvements labor productivity logistics partially offset increased support costs related ramp new products operating expenses following table presents operating expenses millions except percentages nm percentage meaningful operating expenses historically driven large part personnelrelated costs including salaries wages commissions bonuses refer collectively variable compensation benefits sharebased compensation travel facility information technology departmental costs allocated department based usage headcount total 9381 9832 9058 employees december 31 2017 2016 2015 respectively headcount decreased 451 employees 5 2017 compared 2016 primarily due restructuring plan initiated first quarter 2017 realign workforce increase operational efficiency refer 2017 restructuring plan headcount increased 774 employees 9 2016 compared 2015 primarily research development driven 2016 business acquisitions well higher services sales headcount focus delivering new products customers 2017 compared 2016 research development research development expense rd decreased 2017 compared 2016 primarily due decline personnelrelated costs including lower sharebased compensation 398 million primarily driven lower expense certain performance share awards psas whose vesting contingent upon achievement financial performance metrics certain performance milestones lower variable compensation 137 million decrease partially offset higher costs related certain rd project cancellations 114 million higher prototype costs 104 million sales marketing sales marketing expense decreased 2017 compared 2016 primarily due decline personnelrelated costs 205 million including lower variable compensation 155 million primarily result lower commissions expense lower salaries wages driven decrease headcount result 2017 restructuring plan general administrative general administrative expense increased 2017 compared 2016 primarily due litigation settlement charges pursuant litigation settlement reached november 2017 connection legal proceeding approximately 130 million partially offset decline legal costs 64 million restructuring charges benefits restructuring charges benefits increased 2017 compared 2016 primarily due severance contract termination costs recorded 2017 restructuring plan 2016 compared 2015 research development research development expense increased 2016 compared 2015 primarily result increase depreciation amortization expense 178 million driven higher capital expenditures related research development projects also contributing increase research development expense 136 million higher outside service costs consulting higher facilities expense lesser extent personnelrelated expenses increased due higher salaries wages fringe expense partially offset lower variable compensation expense increase salaries wages driven higher headcount 331 3723 end 2015 4054 end 2016 result 2016 business acquisitions increases partially offset lower costs 141 million related completion development new products sales marketing sales marketing expense increased 2016 compared 2015 primarily due increase personnelrelated expenses 266 million driven higher salaries wages related increase headcount 126 2464 end 2015 2590 end 2016 well increase sharebased compensation expense partially offset lower variable compensation expense general administrative general administrative expense decreased 2016 compared 2015 primarily result lower personnelrelated expenses includes decline sharebased compensation lower variable compensation expense partially offset higher salaries wages additionally facilities expense decreased 2016 compared 2015 due consolidation buildings sunnyvale california declines partially offset increase outside services related consulting projects well increase acquisition costs related 2016 business acquisitions restructuring charges benefits restructuring charges benefits increased 2016 compared 2015 due severance costs connection 2016 business combinations expense net following table presents expense net millions except percentages nm percentage meaningful expense net interest income primarily includes interest earned cash equivalents investments promissory note issued us connection sale junos pulse interest expense primarily includes interest net capitalized interest expense long term debt customer financing arrangements gain loss investments net primarily includes gains sale investments public privatelyheld companies impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items 2017 compared 2016 interest income interest income increased 2017 compared 2016 primarily due increase interest income related investment portfolio result higher yields larger balance portfolio interest expense interest expense increased 2017 compared 2016 primarily due fullyear effect interest expense issuance 2019 2024 notes first quarter 2016 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2019 2024 notes gain loss investments net year ended december 31 2017 saw increase gains equity investments primarily related sale investments public privatelyheld companies addition recorded impairment charges certain investments privatelyheld companies 2016 charges recorded 2017 2016 compared 2015 interest income interest income increased 2016 compared 2015 primarily due higher interest income promissory note issued us connection previously completed sale junos pulse refer pulse note due increase interest rate well higher yields investment portfolio see note 8 financial information notes consolidated financial statements item 8 part ii report additional information regarding pulse note interest expense interest expense increased 2016 compared 2015 primarily due issuance 2019 2024 notes partially offset repayment debt first quarter 2016 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2019 2024 notes gain loss investments net year ended december 31 2016 recorded net losses investments 18 million primarily driven impairments investments privatelyheld companies whereas year ended december 31 2015 recorded gain investments 73 million related sale investment privatelyheld company partially offset impairments investments privatelyheld companies income tax provision following table presents income tax provision millions except percentages 2017 compared 2016 effective tax rate fiscal year 2017 higher 2016 primarily due estimated 2895 million net income tax expense related changes imposed tax act enacted december 22 2017 effective january 1 2018 tax act provides significant changes us income tax law including reduction us federal corporate income tax rate 35 21 creation minimum tax foreign earnings addition tax act imposed onetime transition tax accumulated foreign earnings december 31 2017 2895 million income tax expense includes estimated tax charge 4312 million company’s accumulated foreign earnings company elected pay eight years described note 14 income taxes notes consolidated financial statements item 1 part report expect future effective rate trend toward newly enacted us statutory rate exception impacts stock based compensation onetime items addition effective tax rate could fluctuate significantly quarterly basis could adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate could also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items see item 1a part ii risk factors report description relevant risks may adversely affect results 2016 compared 2015 effective tax rate fiscal year 2016 higher 2015 primarily due change geographic mix earnings effective tax rate fiscal year 2015 includes benefit 132 million related change tax treatment sharebased compensation cost sharing arrangement result recommendations organisation economic cooperation development oecd base erosion profit shifting certain countries emea apac either enacted new corporate tax legislation considering enacting legislation near future expect effect reform measures potentially impact longstanding tax principles particularly regards transfer pricing consequently expect global tax authorities increasingly challenge company’s cost sharing intercompany arrangements related sourcing taxable profits global jurisdictions 2017 discussions held tax authorities including uk australia regarding corporate tax reform legislation enacted countries liquidity capital resources following sections discuss effects changes balance sheet capital return strategy including stock repurchase program dividends contractual obligations certain commitments activities liquidity capital resources funded business primarily operating activities issuance longterm debt following table presents capital resources millions except percentages summary cash flows following table summarizes cash flows consolidated statements cash flows millions except percentages january 1 2017 adopted new accounting pronouncement improvements employee sharebased payment accounting requiring excess tax benefits presented operating activity consolidated statements cash flows applied provision retrospective basis 2016 2015 67 million 123 million excess tax benefits reclassified financing operating activities conform currentyear presentation operating activities primary source operating cash flows cash collections customers primary uses cash operating activities personnelrelated expenditures general operating expenses well payments related taxes interest facilities 2017 compared 2016 net cash provided operating activities increased 2017 compared 2016 primarily due increase cash collections customers first half 2017 due higher invoicing activity fourth quarter 2016 partially offset increase payments suppliers higher payments restructuring activities increase cash paid income taxes 2016 compared 2015 net cash provided operating activities increased 2016 compared 2015 primarily due increase cash collections customers 2016 due higher invoicing activity fourth quarter 2015 partially offset increase income taxes paid investing activities investing cash flows consist primarily capital expenditures investment purchases sales maturities redemptions cash used business combinations 2017 compared 2016 net cash used investing activities decreased 2017 compared 2016 primarily due lower payments business combinations capital expenditures receipt 750 million proceeds pulse note partially offset higher net purchases availableforsale securities 2016 compared 2015 net cash used investing activities decreased 2016 compared 2015 decrease primary due decrease net purchases availableforsale investments partially offset increase cash used business acquisitions 2016 financing activities financing cash flows consist primarily repurchases retirement common stock payment cash dividends stockholders issuance repayment longterm debt proceeds issuance shares common stock employee equity incentive plans 2017 compared 2016 net cash used financing activities increased 2017 compared 2016 primarily due increase repurchases retirement common stock 2017 2016 raised 4940 million 2019 notes 2024 notes repaid 3000 million 2016 notes 2016 compared 2015 net cash used financing activities decreased 2016 compared 2015 decrease primarily due lower purchases retirements common stock 2016 partially offset payment 2016 notes decrease cash proceeds received issuance longterm debt issuance common stock 2016 capital return following table summarizes dividends paid stock repurchase activities millions except per share amounts 2014 2015 board directors refer board approved stock repurchase program authorized us repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program asr subsequent increases authorization totaling 18 billion stock repurchase program february 2017 board authorized 500 million increase stock repurchase program total 44 billion december 31 2017 utilized authorized funds stock repurchase program january 2018 board approved new 20 billion share repurchase authorization 2018 stock repurchase program replaces previous authorization board also authorized us enter asr amount 750 million 2018 stock repurchase program expect opportunistic share repurchases 2018 february 2018 entered asr agreements two financial institutions repurchase aggregate 750 million common stock company made upfront payment 750 million pursuant asr received retired initial 233 million shares common stock aggregate price 6000 million based market value common stock date transaction aggregate 13 billion authorized funds remaining 2018 stock repurchase program filing date annual report form 10k addition board declared quarterly cash dividend 018 per common stock paid march 22 2018 stockholders records close business march 1 2018 reflects increase 80 compared previous quarterly dividends intend grow dividend time future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements 2018 stock repurchase program may discontinued time additionally declaration amount future cash dividends discretion board directors authorized committee thereof depend financial performance economic outlook relevant considerations offbalance sheet arrangements december 31 2017 2016 offbalance sheet arrangements defined item 303 a4ii sec regulation sk business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance standby letters credit certain lease facilities insurance programs see guarantees additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2017 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments 2 lease arrangement related data center lease agreement entered july 2015 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report explanation lease agreement 3 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt 4 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding tax liability related tax act december 31 2017 2566 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility december 31 2017 borrowed funds compliance covenants unsecured revolving credit facility expire 2019 enables borrowings 5000 million option increase amount credit facility additional 2000 million see note 10 debt financing notes consolidated financial statements item 8 part ii report information credit facility guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products solely combination third party products infringe intellectual property rights thirdparty december 31 2017 recorded 204 million indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs 230 million 60 million december 31 2017 december 31 2016 respectively liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships repurchases additional shares common stock payment cash dividends common stock december 31 2017 91 cash equivalents investment balances held outside us following enactment tax act plan repatriate approximately 30 billion expect new territorial tax system provide us lower cost access nearly global free cash flow ongoing basis free cash flow calculated net cash provided operating activities less capital expenditures intend use repatriated cash invest business support valueenhancing merger acquisitions fund return capital stockholders august 2016 filed automatic shelf registration statement sec enabling us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions 2019 notes 2024 notes issued automatic shelf registration statement filed august 2013 pursuant prospectus supplement filed sec february 24 2016 2020 notes 2025 notes issued automatic shelf registration statement pursuant prospectus supplement filed sec february 26 2015 3500 million principal amount 2024 notes form single series fully fungible 2024 notes issued 2016 issued automatic shelf registration statement pursuant prospectus filed sec february 28 2014 offerings securities automatic shelf registration statement made pursuant prospectus addition revolving credit facility also provide additional flexibility future liquidity needs based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility sufficient fund operations planned stock repurchases dividends capital expenditures commitments liquidity requirements anticipated growth least next twelve months however future liquidity capital requirements may vary materially planned depending many factors including limited growth rate timing amount spend support development efforts expansion sales marketing activities introduction new enhanced products services costs acquire invest businesses technologies risks uncertainties detailed “risk factors” section item 1a part report item 7aitem 7 managements discussion analysis financial condition results operations following discussion read consolidated financial statements related notes item 8 part ii report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles us gaap course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives decisions impact financial results given period information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview includes summary business market environment along financial results key performance metrics overview sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report executive overview business market environment juniper designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility improved operating efficiency automation products sold three geographic regions americas europe middle east africa emea asia pacific apac sell highperformance network products service offerings across routing switching security technologies addition products offer customers services including maintenance support professional services education training programs products services address highperformance network requirements customers within verticals cloud service provider enterprise view network critical success believe silicon systems software represent innovations transform economics experience networking helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership intent expand software business introducing new software solutions product portfolio simplify operation networks allow customers across key verticals flexibility consumption deployment believe software revenues percentage total revenues increase time introduce new software product offerings business models designed better monetize value software offerings believe network needs customers cloud service provider enterprise verticals converging customers recognize need high performance networks adopting cloud architectures infrastructure service delivery large public private data centers service provider edge data centers improved agility greater levels operating efficiency 2018 continued experience weakness within cloud service provider verticals cloud vertical certain large cloud customers transitioning network architecture continued add capacity resulted customers transitioning purchasing mx product family ptx product family contributed decline net revenues ptx product family lower average selling price compared mx product family believe mx ptx transition largely behind us however pace deployments portion cloud customer’s networks slower expected nevertheless focused cloud vertical well transition 400gig ethernet 400g believe present opportunities juniper across portfolio cloud customers value highperformance highly compact power efficient infrastructures support continue develop service provider vertical changes business models increase industry consolidation acquisitions mergers partnerships may continue impact service provider investment buildout networks nearterm however believe service provider customers need invest buildout high performance networks transformation existing legacy infrastructure distributed cloud environments committed transformation refer telco cloud transformation service provider customers rearchitect infrastructure enable among things next generation mobile network buildouts 5g well positioned capitalize 5g carrier deployments refresh mx 5g product contrail solutions well new partnership ericsson accelerate 5g initiatives leveraging company’s complementary portfolios drive competitive advantage marketplace believe products partnership position juniper improved service provider spending late 2019 remain confident strategy executing innovation roadmap industry verticals transitions cloud architectures believe understanding highperformance networking technology cloud architecture strategy position us capitalize industry transition automated costefficient scalable networks 2018 continued execute product solutions strategy announced several new innovations including new 400g optimized routing platform new highperformance mx series 5g universal routing platform new programmable silicon upgrade highend srx firewall offering spc3 advanced security acceleration line card multicloud orchestration telemetry platform including contrail edge cloud contrail enterprise multicloud believe help strengthen position across core markets also announced new initiatives existing partnership nutanix expect help strengthen ability capitalize multicloud contrail enterprise multicloud integration nutanix’s application programming interface apis provide enhanced network visibility late 2018 completed acquisition htbase software company developed unique disruptive platform softwaredefined enterprise multicloud expect accelerate leadership multicloud function compute orchestration capabilities contrail enterprise multicloud continue look targeted strategic acquisitions believe complement portfolio operations rd strategy overall business 2019 believe continue experience weakness cloud customers nearterm deployment cycles remain difficult predict however remain confident competitive position strategic cloud customers taking number actions believe help juniper achieve yearoveryear revenue growth point second half 2019 1 new product offerings include new mx line cards capitalize 5g carrier initiatives 400g platforms capture data center footprint new enhancements contrail enterprise multicloud platform make simpler cost effective 2 transitioning sales organization better align sales strategy 3 monetizing software offerings subscriptions believe 400g upgrade cycle 5g deployments enterprise multicloud initiatives represent large opportunities well positioned benefit next several years financial results key performance metrics overview january 1 2018 adopted financial accounting standards board fasb accounting standards update asu 201409 topic 606 revenue contracts customers refer topic 606 standard provides guidance revenue recognition superseded revenue recognition requirements accounting standards codification topic 605 revenue recognition refer topic 605 industry specific guidance see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report discussion adoption topic 606 results reporting periods beginning january 1 2018 presented topic 606 prior period amounts adjusted continue reported accordance historic accounting topic 605 following table provides overview financial results key financial metrics millions except per share amounts percentages days sales outstanding dso fourth quarter ended december 31 2018 2017 2016 • net revenues 2018 net revenues decreased compared 2017 primarily due lower routing product revenues cloud service provider verticals americas experienced ongoing networking architectural transitions slower expected pace deployments certain large cloud customers well decline service provider business due timing deployments yearoveryear decline product net revenues partially offset broadbased revenue growth enterprise vertical excluding impact topic 606 service net revenues would increased 2018 compared 2017 primarily due strong renewal attach rates support contracts top ten customers 2018 five cloud four service provider one enterprise 2018 adoption topic 606 resulted decrease revenue recognition 226 million due lower service revenues partially offset higher product revenues service revenues 2018 lower 1229 million topic 606 compared topic 605 primarily due impact revenue allocation products services product revenues 2018 higher 1003 million topic 606 compared topic 605 primarily due impact revenue allocation products services timing revenue recognition certain contracts precluded topic 605 partially offset variable consideration product revenues increase topic 606 primarily allocated routing switching • gross margin gross margin percentage net revenues decreased 2018 compared 2017 primarily due lower net revenues product mix resulting yearoveryear decline routing revenues cloud service provider verticals lesser extent impact topic 606 partially offset improvements cost structure • operating margin 2018 compared 2017 operating income percentage net revenues decreased primarily due drivers described gross margin discussion partially offset net decrease operating expenses 2018 compared 2017 result lower restructuring charges • net income 2018 net income increased compared 2017 primarily driven lower statutory tax rate due tax act tax benefits related items unique 2018 see note 14 income taxes notes consolidated financial statements item 8 part ii report discussion • operating cash flows net cash provided operations decreased 2018 compared 2017 primarily due higher cash collections customers 2017 related service renewals invoiced fourth quarter 2016 partially offset decline cash paid personnelrelated costs principally result reduction headcount lower incentive compensation decrease payments suppliers • capital return 2018 repurchased 293 million shares common stock aggregate amount 7500 million completion 7500 million accelerated share repurchase program asr 2018 also paid quarterly cash dividend 018 per share aggregate amount 2493 million • dso calculated ratio ending accounts receivable net allowances divided net revenues preceding 90 days dso quarter ended december 31 2018 decreased compared quarter ended december 31 2017 primarily due lower overall invoicing volume partially offset lower revenues • deferred revenue total deferred revenue decreased december 31 2018 compared december 31 2017 due impact adoption topic 606 see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report discussion critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer liabilities assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit reporting units determined based components operating segment constitutes business discrete financial information available segment management regularly review operating results component provisions accounting standard goodwill intangibles allow us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test various factors considered qualitative assessment including macroeconomic conditions financial performance sustained decrease share price result qualitative assessment deemed likely fair value reporting unit less carrying amount management perform quantitative test quantitative goodwill impairment test necessary involves twostep process identify goodwill impairment measure amount goodwill impairment loss recognized first step tests potential impairment comparing fair value reporting unit reporting unit’s carrying value fair value reporting unit exceeds carrying value reporting unit’s net assets goodwill impaired testing required fair value reporting unit exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill second step requires assignment reporting unit’s fair value reporting unit’s assets liabilities using relevant acquisition accounting guidance determine implied fair value reporting unit’s goodwill implied fair value reporting unit’s goodwill compared carrying amount reporting unit’s goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference first step fair value reporting units determined using income market valuation approaches believe income approach market approach equally representative reporting unit’s fair value income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publiclytraded companies similar lines business application income market valuation approaches required make estimates future operating trends judgments discount rates variables determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results related assumed variables could differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units income approach calculate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimate fair value based market multiples earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units apply control premium determined considering control premiums offered part acquisitions occurred market segments comparable reporting units income approach market approach equally weighted derive fair value reporting unit fourth quarter 2018 performed quantitative assessment reporting units routing switching security quantitative assessment performed determining fair value reporting unit using combination income approach market approach based results quantitative assessments determined fair value reporting unit significantly exceeded respective carrying value resulting goodwill impairment • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2018 december 31 2017 net inventory balances 820 million 978 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2018 december 31 2017 contract manufacturer liabilities 304 million 220 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition enter contracts sell products services sales agreements contain standard terms conditions agreements contain nonstandard terms conditions include promises transfer multiple goods services result significant interpretation judgment sometimes required determine appropriate accounting transactions including 1 whether performance obligations considered distinct accounted separately versus together price allocated among performance obligations recognize revenue performance obligation 2 developing estimate standalone selling price ssp distinct performance obligation 3 combining contracts may impact allocation transaction price product services 4 estimating accounting variable consideration including rights return rebates price protection expected penalties price concessions reduction transaction price estimates ssp performance obligation require judgment considers multiple factors including limited historical discounting trends products services pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles estimates rights return rebates price protection based historical sales returns price protection credits specific criteria outlined customer contracts rebate agreements factors known time estimates expected penalties price concessions based historical trends expectations regarding future incurrence changes judgments respect assumptions estimates could impact timing amount revenue recognition • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s recommended changes numerous longstanding tax principles adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies involved various lawsuits claims investigations proceedings including involving ip commercial securities employment matters arise ordinary course business use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations revenues following table presents net revenues product service customer vertical geographic region millions except percentages certain priorperiod amounts reclassified conform currentperiod classifications 2018 compared 2017 product net revenues decreased 2018 compared 2017 primarily due cloud service provider impacting routing switching americas decrease product revenues partially offset impact topic 606 growth enterprise decrease routing switching revenues americas driven networking architectural transitions certain large cloud customers due timing deployments decline service provider business resulting lower net revenues mx ptx qfx product families ptx decline primarily due pace deployments certain large cloud customers believe ptx sales increase incremental capacity requirements eventually drive improved demand decline partially offset broadbased revenue growth enterprise across technologies geographies given strength enterprise vertical strong customer interest new platforms contrail enterprise multicloud mx10003 investments making enterprise sales strategy believe enterprise vertical continue contribute revenue growth 2019 also saw strength emea driven aforementioned revenue growth enterprise well higher revenues service provider customers resulting solutions based sales strategy enable telco cloud transformation enterprise multicloud initiatives experienced growth revenues security business 2018 compared 2017 across verticals customers transitioned newer product offerings expect security business see yearoveryear growth full year 2019 service net revenues decreased 2018 compared 2017 due impact topic 606 excluding impact topic 606 service net revenues would increased yearoveryear driven primarily strong renewal attach rates support contracts 2017 compared 2016 product net revenues decreased 2017 compared 2016 primarily due decrease routing lesser extent security partially offset growth switching lower routing revenues driven cloud customers americas result ongoing architectural shifts cloud vertical automated cost efficient scalable networks routing revenues emea also declined yearoveryear due lower sales service provider customers partially offset revenue growth apac service provider vertical continue expand footprint certain strategic apac service provider cloud customers expect strategic opportunities ultimately help drive revenue growth apac however timing difficult predict revenues mx legacy routing products declined yearoveryear partially offset increase revenues ptx products continued adoption ptx1000 series products security net revenues declined 2017 compared 2016 primarily driven decrease highend srx series undergoing product refresh cycle decline legacy products decline product net revenues partially offset increase switching net revenues due continued growth data center switching portfolio particularly qfx product family grew 25 yearoveryear growth across public private clouds driven part 100g adoption switching net revenue growth primarily driven cloud vertical americas lesser extent enterprise vertical service net revenues increased 2017 compared 2016 primarily due strong renewal attach rates support contracts additionally saw strong yearoveryear services revenue growth apac emea customer accounted greater 10 net revenues years ended december 31 2018 2017 2016 gross margins following table presents gross margins millions except percentages gross margins percentage net revenues continue affected variety factors including mix average selling prices products services new product introductions enhancements manufacturing component logistics costs expenses inventory obsolescence warranty obligations cost support service personnel customer mix continue expand footprint certain strategic customers mix distribution channels products services sold import tariffs example united states recently imposed tariff networking products imported china includes certain products import sell within united states import tariffs could significant impact gross margins event unable meaningfully mitigate impact information potential impact tariffs business see “risk factors” section item 1a part ii report 2018 compared 2017 product gross margin product gross margin percentage product revenues decreased 2018 compared 2017 primarily due lower net revenues product mix resulting yearoveryear decline routing revenues cloud service provider verticals partially offset impact topic 606 improvements cost structure continue undertake specific efforts address certain factors impacting product gross margin efforts include performance quality improvements engineering increase value across products optimizing supply chain service business pricing management increasing software solution sales however guarantee efforts successful realized time frame anticipate service gross margin service gross margin percentage service net revenues decreased 2018 compared 2017 due lower revenues impact topic 606 increased professional services costs support software deployments higher service delivery costs partially offset lower personnelrelated costs 2017 compared 2016 product gross margin product gross margin percentage product revenues decreased 2017 compared 2016 primarily due lower product net revenues customer mix product mix resulting yearoveryear decline routing revenues customers architectural shifts partially offset improvements cost structure service gross margin service gross margin percentage service net revenues increased 2017 compared 2016 due higher service revenues partially offset higher material higher delivery costs operating expenses following table presents operating expenses millions except percentages nm percentage meaningful operating expenses historically driven large part personnelrelated costs including salaries wages commissions bonuses refer collectively variable compensation benefits sharebased compensation travel facility information technology departmental costs allocated department based usage headcount total 9283 9381 9832 employees december 31 2018 2017 2016 respectively headcount decreased 98 employees 1 2018 compared 2017 primarily due restructuring plan initiated third quarter 2018 realign workforce result organizational leadership changes refer 2018 restructuring plan headcount decreased 451 employees 5 2017 compared 2016 primarily due restructuring plan initiated first quarter 2017 realign workforce increase operational efficiency refer 2017 restructuring plan 2018 compared 2017 research development research development expense rd increased 2018 compared 2017 primarily due higher personnelrelated costs including increase sharebased compensation expense 344 million driven higher expense modification certain performance share awards psas whose vesting contingent upon achievement certain performance milestones higher variable compensation expense 178 million increase partially offset lower salaries wages 267 million due geographic shift headcount lower cost regions well reduction headcount restructuring actions sales marketing sales marketing expense decreased 2018 compared 2017 due lower personnelrelated costs 109 million primarily resulting decline headcount 49 employees driven restructuring actions lower costs 93 million decrease number marketing events held 2018 compared 2017 decrease partially offset higher outside service costs 71 million related consulting projects general administrative general administrative expense increased 2018 compared 2017 primarily due higher acquisition costs related 2018 business acquisition htbase partially offset decline outside service costs resulting fewer consulting projects lower legal costs restructuring charges restructuring charges decreased 2018 compared 2017 primarily due lower restructuring charges 2018 restructuring plan compared 2017 restructuring plan see note 18 subsequent events notes consolidated financial statements item 8 part ii report discussion restructuring plan initiated subsequent december 31 2018 2017 compared 2016 research development research development expense decreased 2017 compared 2016 primarily due decline personnelrelated costs including lower sharebased compensation 398 million primarily driven lower expense certain psas whose vesting contingent upon achievement financial performance metrics certain performance milestones lower variable compensation 137 million decrease partially offset higher costs related certain rd project cancellations 114 million higher prototype costs 104 million sales marketing sales marketing expense decreased 2017 compared 2016 primarily due decline personnelrelated costs 205 million including lower variable compensation 155 million primarily result lower commissions expense lower salaries wages driven decrease headcount result 2017 restructuring plan general administrative general administrative expense increased 2017 compared 2016 primarily due litigation settlement charges pursuant litigation settlement reached november 2017 connection legal proceeding approximately 130 million partially offset decline legal costs 64 million restructuring charges restructuring charges increased 2017 compared 2016 primarily due severance contract termination costs recorded 2017 restructuring plan expense net following table presents expense net millions except percentages nm percentage meaningful expense net interest income primarily includes interest earned cash equivalents investments promissory note issued us connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements loss gain investments net primarily includes gains sale investments public privatelyheld companies observable changes fair value impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items 2018 compared 2017 interest income interest income increased 2018 compared 2017 primarily due higher interest income related fixed income investment portfolio result higher yields investments partially offset lower average investment balances interest expense interest expense increased 2018 compared 2017 primarily due distributor financing arrangements extended payment terms financing loss gain investments net year ended december 31 2018 losses related sale certain equity investments privatelyheld companies compared gains sales 2017 addition recorded impairment charges certain equity investment privatelyheld company 2018 charges recorded 2017 compared 2016 interest income interest income increased 2017 compared 2016 primarily due increase interest income related investment portfolio result higher yields larger balance portfolio interest expense interest expense increased 2017 compared 2016 primarily due fullyear effect interest expense issuance 2019 2024 notes first quarter 2016 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2019 2024 notes gain loss investments net 2017 gains equity investments increased primarily related sale investments public privatelyheld companies compared 2016 addition recorded impairment charges certain investments privatelyheld companies 2016 charges recorded 2017 income tax benefit provision following table presents income tax benefit provision millions except percentages 2018 compared 2017 effective tax rate fiscal year 2018 lower 2017 primarily due lower statutory tax rate result tax act enacted december 22 2017 676 million related lapse federal statute limitations relative tax years 2010 2014 including interest 332 million benefit result filing change tax accounting method recognition deferred product revenue us better align financial statement recognition revenue 322 million resulting tax accounting method change related foreign deferred service revenue favorable change geographic mix earnings discrete taxes approximately 2895 million accrued accumulated foreign earnings tax act fourth quarter ended december 31 2017 tax act introduced significant changes us income tax law effective january 1 2018 tax act reduced us federal corporate income tax rate 35 21 created minimum tax foreign earnings imposed onetime transition tax accumulated foreign earnings december 31 2017 recorded provisional amounts effects tax act 2895 million primarily related net taxes accumulated foreign earnings remeasurement deferred tax assets revised us statutory rate fourth quarter 2018 completed analysis determine effect tax act recorded immaterial adjustments december 31 2018 elected pay transition tax net applicable tax refunds eightyear period provided tax act complete reconciliation effective tax rate us federal statutory rate 21 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report july 24 2018 ninth circuit court appeals court issued opinion altera corp v commissioner requiring related parties intercompany costsharing arrangement share expenses related sharebased compensation august 7 2018 court withdrew opinion allow time reconstituted panel confer continue monitor ongoing developments potential impacts financial statements ninth circuit withdrawn opinion effective tax rate 2018 would higher effective tax rate may fluctuate significantly quarterly basis may adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate may also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items see item 1a part risk factors report description relevant risks may adversely affect results 2017 compared 2016 effective tax rate fiscal year 2017 higher 2016 primarily due estimated 2895 million net income tax expense related changes imposed tax act enacted december 22 2017 effective january 1 2018 tax act provided significant changes us income tax law including reduction us federal corporate income tax rate 35 21 creation minimum tax foreign earnings addition tax act imposed onetime transition tax accumulated foreign earnings december 31 2017 2895 million income tax expense included estimated tax charge 4312 million accumulated foreign earnings elected pay eight years result recommendations organisation economic cooperation development oecd base erosion profit shifting certain countries emea apac either enacted new corporate tax legislation considering enacting legislation near future expect effect reform measures potentially impact longstanding tax principles particularly regards transfer pricing consequently expect global tax authorities increasingly challenge cost sharing intercompany arrangements related sourcing taxable profits global jurisdictions liquidity capital resources following sections discuss effects changes balance sheet capital return strategy including stock repurchase program dividends contractual obligations certain commitments activities liquidity capital resources funded business primarily operating activities issuance longterm debt following table presents capital resources millions except percentages nm percentage meaningful summary cash flows following table summarizes cash flow activity consolidated statements cash flows millions except percentages january 1 2018 adopted new accounting pronouncement statement cash flows restricted cash applied provision retrospective basis conform currentperiod presentation adoption material impact cash flow activity presented consolidated statement cash flows fiscal years ended 2017 2016 operating activities primary source operating cash flows cash collections customers primary uses cash operating activities personnelrelated expenditures general operating expenses well payments related taxes interest facilities 2018 compared 2017 net cash provided operations decreased 2018 compared 2017 primarily due higher cash collections customers 2017 related service renewals invoiced fourth quarter 2016 partially offset decline cash paid personnelrelated costs principally result reduction headcount lower incentive compensation decrease payments suppliers 2017 compared 2016 net cash provided operating activities increased 2017 compared 2016 primarily due increase cash collections customers first half 2017 due higher invoicing activity fourth quarter 2016 partially offset increase payments suppliers higher payments restructuring activities increase cash paid income taxes investing activities investing cash flows consist primarily capital expenditures purchases sales maturities redemptions investments cash used business combinations 2018 compared 2017 net cash provided investing activities increased 2018 compared 2017 primarily due liquidation repatriated offshore investments fund accelerated share repurchase program discussed 2017 compared 2016 net cash used investing activities decreased 2017 compared 2016 primarily due lower payments business combinations capital expenditures receipt 750 million proceeds pulse note partially offset higher net purchases availableforsale debt securities financing activities financing cash flows consist primarily repurchases retirement common stock payment cash dividends stockholders issuance repayment longterm debt proceeds issuance shares common stock employee equity incentive plans 2018 compared 2017 net cash used financing activities increased 2018 compared 2017 primarily due increase payments cash dividends higher repurchases common stock result accelerated share repurchase program asr described 2017 compared 2016 net cash used financing activities increased 2017 compared 2016 primarily due increase repurchases retirement common stock 2017 2016 raised 4940 million 2019 notes 2024 notes repaid 3000 million 2016 notes capital return following table summarizes dividends paid stock repurchase activities millions except per share amounts january 2018 board directors refer board approved 20 billion share repurchase program refer 2018 stock repurchase program 2018 stock repurchase program replaces previous authorization approved board 2014 part 2018 stock repurchase program entered asr repurchase 7500 million common stock made upfront payment 7500 million pursuant asr repurchase common stock aggregate number shares ultimately repurchased 293 million shares common stock determined based volume weighted average repurchase price less agreed upon discount 2562 per share december 31 2018 13 billion authorized funds remaining 2018 stock repurchase program filing date report future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements 2018 stock repurchase program may discontinued time see note 11 equity notes consolidated financial statements item 8 part ii report discussion share purchase program addition future dividends establishment record payment dates subject approval board authorized committee thereof see note 18 subsequent event notes consolidated financial statements item 8 part ii report discussion dividend declaration subsequent december 31 2018 offbalance sheet arrangements december 31 2018 2017 offbalance sheet arrangements defined item 303 a4ii sec regulation sk business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance standby letters credit certain lease facilities insurance programs see guarantees additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2018 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments 2 lease arrangement related data center lease agreement entered july 2015 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report explanation lease agreement 3 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt 4 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding tax liability related tax act december 31 2018 1592 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility december 31 2018 borrowed funds compliance covenants unsecured revolving credit facility expire 2019 enables borrowings 5000 million option increase amount credit facility additional 2000 million see note 10 debt financing notes consolidated financial statements item 8 part ii report information credit facility guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products solely combination third party products infringe intellectual property rights thirdparty december 31 2018 recorded 119 million indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs 231 million 230 million december 31 2018 december 31 2017 respectively liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships repurchases additional shares common stock payment cash dividends common stock following enactment tax act repatriated approximately 28 billion cash equivalents investments balance outside us december 31 2018 expect new territorial tax system provide us lower cost access nearly global free cash flow ongoing basis free cash flow calculated net cash provided operating activities less capital expenditures intend use repatriated cash invest business support valueenhancing merger acquisitions fund return capital stockholders august 2016 filed automatic shelf registration statement sec enabling us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions 2019 notes 2024 notes issued automatic shelf registration statement filed august 2013 pursuant prospectus supplement filed sec february 24 2016 2020 notes 2025 notes issued automatic shelf registration statement pursuant prospectus supplement filed sec february 26 2015 3500 million principal amount 2024 notes form single series fully fungible 2024 notes issued 2016 issued automatic shelf registration statement pursuant prospectus filed sec february 28 2014 offerings securities automatic shelf registration statement made pursuant prospectus addition revolving credit facility also provide additional flexibility future liquidity needs based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility sufficient fund operations planned stock repurchases dividends capital expenditures commitments liquidity requirements anticipated growth least next twelve months however future liquidity capital requirements may vary materially planned depending many factors including limited growth rate timing amount spend support development efforts expansion sales marketing activities introduction new enhanced products services costs acquire invest businesses technologies increase manufacturing component costs risks uncertainties detailed “risk factors” section item 1a part report item 7aitem 7 managements discussion analysis financial condition results operations following discussion read business item 1 part consolidated financial statements related notes item 8 part ii report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles us gaap course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives decisions impact financial results given period information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview includes summary business market environment along financial results key performance metrics overview sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report executive overview financial results key performance metrics overview following table provides overview financial results key financial metrics millions except per share amounts percentages days sales outstanding dso fourth quarter ended december 31 2019 2018 • net revenues net revenues decreased primarily due service provider vertical partially offset growth enterprise cloud believe decline service provider vertical due continued business challenges facing largest service provider customers cloud vertical returned yearoveryear growth certain large cloud customers transitioning network architecture continued add capacity transition purchasing mx product family ptx product family contributed decline net revenues ptx product family lower average selling price compared mx product family believe mx ptx transition largely behind us nevertheless focused cloud vertical well transition 400gig ethernet 400g believe present opportunities juniper across portfolio cloud customers value highperformance highly compact power efficient infrastructures support continue develop enterprise vertical grew yearoveryear primarily due services lesser extent routing security partially offset decline switching service net revenues increased primarily due strong renewal attach rates support contracts • gross margin gross margin percentage net revenues decreased primarily due lower product revenues higher amortization intangible assets associated acquisition mist customer product mix lesser extent china tariffs partially offset higher service revenues lower service delivery costs • operating margin operating income percentage net revenues decreased primarily due drivers described gross margin discussion higher restructuring costs first half 2019 incur period 2018 decrease operating margin partially offset lower personnelrelated sharebased compensation expenses • operating cash flows net cash provided operations decreased primarily due lower invoicing activity partially offset decrease cash paid income taxes decrease payments suppliers • capital return continue return capital stockholders second quarter 2019 entered accelerated share repurchase program asr 3000 million asr resulted total settlement 116 million shares fourth quarter 2019 entered another asr repurchase aggregate 2000 million shares asr made upfront payment 2000 million received initial delivery 64 million shares aggregate price 1600 million upon completion asr first quarter 2020 received additional 18 million shares financial institution 18 million shares retired first quarter 2020 completion asr resulted total settlement 82 million shares common stock volume weighted average repurchase price less agreed upon discount 2444 per share 2019 also paid quarterly dividends 019 per share aggregate amount 2601 million • dso calculated ratio ending accounts receivable net allowances divided average daily net revenues preceding 90 days dso increased primarily due higher accounts receivable resulting higher overall invoicing volume • deferred revenue total deferred revenue increased primarily due timing delivery contractual commitments critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer liabilities assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill purchased intangible assets make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis purchase price acquired entity allocated intangible assets net tangible assets acquired business residual purchase price recorded goodwill determination value intangible assets acquired involves certain judgments estimates critical estimates include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets estimates based upon number factors including historical experience market conditions information obtained management acquired company judgments include limited cash flows asset expected generate future periods appropriate weighted average cost capital goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment first performing qualitative assessment determine whether likely fair value reporting unit less carrying value reporting unit pass qualitative assessment reporting units carrying value compared fair value fair value reporting unit exceeds carrying value reporting unit goodwill impaired testing required fair value reporting unit exceed carrying value perform second step impairment test goodwill considered impaired carrying value reporting unit exceeds fair value fair values reporting units estimated using market discounted cash flow approaches discounted cash flow approach uses expected future operating results market approach uses comparable company information determine revenue earnings multiples value reporting units failure achieve expected results market multiples may cause future impairment goodwill reporting units conducted annual impairment test goodwill fourth quarters 2019 2018 december 31 2019 determined impairment carrying value goodwill reporting units required see note 7 goodwill purchased intangible assets notes consolidated financial statements item 8 part ii report additional information regarding goodwill purchased intangible assets • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2019 december 31 2018 net inventory balances 942 million 820 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2019 december 31 2018 contract manufacturer liabilities 286 million 304 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition enter contracts sell products services sales agreements contain standard terms conditions agreements contain nonstandard terms conditions include promises transfer multiple goods services result significant interpretation judgment sometimes required determine appropriate accounting transactions including 1 whether performance obligations considered distinct accounted separately versus together price allocated among performance obligations recognize revenue performance obligation 2 developing estimate standalone selling price ssp distinct performance obligation 3 combining contracts may impact allocation transaction price product services 4 estimating accounting variable consideration including rights return rebates price protection expected penalties price concessions reduction transaction price estimates ssp performance obligation require judgment considers multiple factors including limited historical discounting trends products services pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles estimates rights return rebates price protection based historical sales returns price protection credits specific criteria outlined customer contracts rebate agreements factors known time estimates expected penalties price concessions based historical trends expectations regarding future incurrence changes judgments respect assumptions estimates could impact timing amount revenue recognition • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses research development rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s recommended changes numerous longstanding tax principles adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies involved various lawsuits claims investigations proceedings including involving ip commercial securities employment matters arise ordinary course business use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations discussion regarding financial condition results operations fiscal year ended december 31 2019 compared 2018 presented discussion regarding financial condition results operations fiscal year ended december 31 2018 compared 2017 found item 7 annual report form 10k fiscal year ended december 31 2018 filed sec february 22 2019 available sec’s website wwwsecgov investor relations website httpinvestorjunipernet revenues following table presents net revenues product service customer vertical geographic region millions except percentages product net revenues decreased primarily due lower routing revenues service provider vertical lesser extent cloud partially offset growth enterprise routing revenue decreased primarily driven service provider cloud verticals lower net revenues mx product family partially offset growth ptx product family result mx ptx transition primarily cloud vertical switching revenue decreased primarily driven service provider lesser extent enterprise partially offset cloud decrease result lower net revenues qfx ex product families security revenue increased primarily driven service provider lesser extent enterprise partially offset cloud yearoveryear growth primarily driven growth midrange srx service net revenues increased primarily due strong renewal attach rates support contracts customer accounted greater 10 net revenues years ended december 31 2019 2018 gross margins following table presents gross margins millions except percentages gross margins percentage net revenues continue affected variety factors including mix average selling prices products services new product introductions enhancements manufacturing component logistics costs expenses inventory obsolescence warranty obligations cost support service personnel customer mix continue expand footprint certain strategic customers mix distribution channels products services sold import tariffs example united states imposed tariff networking products imported china includes certain products import sell within united states information potential impact tariffs business see “risk factors” section item 1a part report product gross margin product gross margin percentage product revenues decreased primarily due higher amortization intangible assets associated acquisition mist customer product mix lesser extent china tariffs partially offset improvements cost structure continue undertake specific efforts address certain factors impacting product gross margin efforts include performance quality improvements engineering increase value across products optimizing supply chain service business pricing management increasing software solution sales service gross margin service gross margin percentage service net revenues increased primarily due higher revenue lower service delivery costs operating expenses following table presents operating expenses millions except percentages operating expenses historically driven large part personnelrelated costs including salaries wages commissions bonuses refer collectively variable compensation benefits sharebased compensation travel facility information technology departmental costs allocated department based usage headcount total 9419 9283 employees december 31 2019 2018 respectively headcount increased 136 employees 1 primarily due acquisition mist hiring sales transformation efforts earlier year headcount increase partially offset restructuring plan initiated first quarter 2019 designed realign workforce sales strategy improve productivity enhance cost efficiencies refer 2019 restructuring plan second quarter 2019 amended 2019 restructuring plan undertook certain actions resulted additional severance additional facility consolidation contract termination costs research development research development expense rd decreased 475 million primarily due lower personnelrelated costs including decrease sharebased compensation expense 269 million mainly driven lower expense certain performance share awards psas vesting contingent upon achievement certain performance milestones decrease also driven lower facilities expense 115 million due facility closure third quarter 2018 decrease partially offset higher engineering costs 73 million due increased investments certain rd projects sales marketing sales marketing expense increased 119 million primarily due higher outside service costs 76 million related consulting projects higher sharebased compensation 48 million primarily acquisition mist 2019 higher facilities expense 48 million increase partially offset lower personnelrelated costs 162 million restructuring actions first half year general administrative general administrative expense increased 132 million primarily costs related acquisition mist systems 166 million higher sharebased compensation 83 million 2018 established accrual 120 million fcpa matter sec subsequently settled 2019 118 million restructuring charges restructuring charges increased 280 million primarily due additional severance costs related workforce reductions contract termination costs recorded 2019 restructuring plan expense net following table presents expense net millions except percentages nm percentage meaningful interest income primarily includes interest earned cash equivalents investments promissory note issued us connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements loss extinguishment debt resulted early repayment senior notes due 2020 2021 loss investments net primarily includes losses sale investments public privatelyheld companies observable changes fair value impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items interest income interest income increased 64 million primarily due higher interest income related fixed income investment portfolio result higher yields interest expense interest expense decreased 145 million primarily due reduction total debt primarily repayment february 2019 3125 senior notes aggregate principal amount 3500 million repayment august 2019 3300 4600 senior notes due 2020 2021 respectively aggregate principal amount 6000 million decrease interest expense partially offset issuance 375 senior notes due 2029 aggregate principal amount 5000 million august 2019 loss extinguishment debt year ended december 31 2019 incurred call premium related early repayment 2020 2021 senior notes conversely charges recorded 2018 loss investments net year ended december 31 2019 loss investments decreased primarily related certain equity investments privatelyheld companies income tax provision benefit following table presents income tax provision benefit millions except percentages effective tax rate fiscal year 2019 higher 2018 primarily due net difference discrete items unique fiscal year 2019 compared fiscal year 2018 2019 effective rate included 254 million benefit including interest related recognition previously unrecognized tax benefits pursuant resolution tax audit 75 million benefit including interest lapse statute limitations 2018 rate reflected 676 million benefit including interest related lapse statute limitations 332 million benefit result filing change tax accounting method recognition deferred product revenue 322 million benefit resulting tax accounting method change related foreign deferred service revenue complete reconciliation effective tax rate us federal statutory rate 21 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report june 7 2019 ninth circuit court appeals court issued opinion altera corp v commissioner requiring related parties intercompany costsharing arrangement share expenses related sharebased compensation altera appealed decision us supreme court february 10 2020 pending final resolution altera case company’s position costsharing sharebased compensation remains unchanged continue monitor ongoing developments potential financial statement impacts judicial decision altera finalized reporting period effective tax rate 2019 would higher effective tax rate may fluctuate significantly quarterly basis may adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate may also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items see item 1a part risk factors report description relevant risks may adversely affect results result recommendations oecd base erosion profit shifting certain countries emea apac either enacted new corporate tax legislation considering enacting legislation near future expect effect reform measures potentially impact longstanding tax principles particularly regards transfer pricing consequently expect global tax authorities increasingly challenge cost sharing intercompany arrangements related sourcing taxable profits global jurisdictions liquidity capital resources following sections discuss effects changes balance sheet capital return strategy including stock repurchase program dividends contractual obligations certain commitments activities liquidity capital resources funded business primarily operating activities issuance longterm debt following table presents capital resources millions except percentages summary cash flows following table summarizes cash flow activity consolidated statements cash flows millions except percentages operating activities primary source operating cash flows cash collections customers primary uses cash operating activities personnelrelated expenditures payments suppliers general operating expenses well payments related taxes interest facilities net cash provided operations decreased primarily due lower revenues lower collections partially offset lower cash payments income taxes suppliers investing activities investing cash flows consist primarily capital expenditures purchases sales maturities redemptions investments cash used business combinations net cash used investing activities 5282 million 2019 compared net cash provided investing activities 5648 million 2018 2019 payment acquisition mist 2709 million net purchases investments 1404 million 2018 net proceeds sales maturities redemptions investments 7713 million primarily fund stock repurchases discussed financing activities financing cash flows consist primarily repurchases retirement common stock payment cash dividends stockholders issuance repayment longterm debt proceeds issuance shares common stock employee equity incentive plans net cash used financing activities increased 2019 compared 2018 2019 payments primarily comprised 4548 million net repayments debt payments 5500 million 2018 stock repurchase program 2601 million payments dividends 2018 payments primarily comprised 7500 million 2018 stock repurchase program 2493 million payments dividends capital return following table summarizes dividends paid stock repurchase activities millions except per share amounts 1 2536 average price per share 2019 excludes 400 million covered forward contract discussed january 2018 board directors refer board approved 20 billion share repurchase program refer 2018 stock repurchase program october 2019 board authorized 10 billion increase 2018 stock repurchase program total 30 billion part 2018 stock repurchase program february 2018 april 2019 entered two accelerated share repurchase programs asr repurchased 7500 million 3000 million common stock respectively aggregate number shares ultimately repurchased 293 million 116 million shares common stock respectively determined based volume weighted average repurchase price less agreed upon discount 2562 2579 per share respectively shares received retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share part 2018 stock repurchase program october 28 2019 entered additional asr financial institution repurchase aggregate 2000 million outstanding common stock made upfront payment 2000 million pursuant asr received retired initial 64 million shares common stock aggregate price 1600 million based market price 2515 per share common stock date transaction initial shares received us retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share forward contract remaining 400 million considered indexed common stock met applicable criteria equity classification first quarter 2020 asr completed received additional 18 million shares financial institution 18 million shares retired first quarter 2020 completion asr resulted total settlement 82 million shares common stock volume weighted average repurchase price less agreed upon discount 2444 per share fiscal year ended december 31 2019 also repurchased 21 million shares common stock open market aggregate purchase price 500 million average price 2363 per share 2018 stock repurchase program december 31 2019 17 billion authorized funds remaining 2018 stock repurchase program future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements 2018 stock repurchase program may discontinued time see note 11 equity notes consolidated financial statements item 8 part ii report discussion share purchase program addition future dividends establishment record payment dates subject approval board authorized committee thereof see note 18 subsequent event notes consolidated financial statements item 8 part ii report discussion dividend declaration subsequent december 31 2019 offbalance sheet arrangements december 31 2019 2018 offbalance sheet arrangements defined item 303 a4ii sec regulation sk business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance standby letters credit certain lease facilities insurance programs see guarantees additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2019 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding leases contractual commitments 2 see note 10 debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt 3 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding tax liability related tax cuts jobs act 2017 “tax act” december 31 2019 1274 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility unsecured revolving credit facility due expire june 2019 “prior revolving credit facility” enabled borrowings 5000 million option increase amount credit facility additional 2000 million subject lenders approval april 2019 entered new credit agreement certain institutional lenders provides fiveyear 5000 million unsecured revolving credit facility “revolving credit facility” option increase revolving credit facility additional 2000 million subject lenders approval prior revolving credit facility terminated concurrently entering revolving credit facility revolving credit facility terminate april 2024 subject two oneyear maturity extension options terms conditions set forth credit agreement “credit agreement” december 31 2019 compliance covenants credit agreement amounts outstanding guarantees financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs 306 million 231 million december 31 2019 december 31 2018 respectively liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships repurchases additional shares common stock payment cash dividends common stock since enactment tax act repatriated significant amount cash equivalents investments outside us plan continue repatriate ongoing basis intend use repatriated cash invest business support valueenhancing merger acquisitions fund return capital stockholders august 2019 filed automatic shelf registration statement sec enabling us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions offerings securities automatic shelf registration statement made pursuant prospectus addition revolving credit facility also provide additional flexibility future liquidity needs based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility sufficient fund operations planned stock repurchases dividends capital expenditures commitments liquidity requirements anticipated growth least next twelve months however future liquidity capital requirements may vary materially planned depending many factors including limited growth rate timing amount spend support development efforts expansion sales marketing activities introduction new enhanced products services costs acquire invest businesses technologies increase manufacturing component costs risks uncertainties detailed “risk factors” section item 1a part report item 7aitem 7 managements discussion analysis financial condition results operations following discussion read business item 1 part consolidated financial statements related notes item 8 part ii report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles us gaap course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives decisions impact financial results given period information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview includes summary business market environment along financial results key performance metrics overview sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report executive overview financial results key performance metrics overview following table provides overview financial results key financial metrics millions except per share amounts percentages days sales outstanding dso fourth quarter ended december 31 2020 2019 •net revenues net revenues flat 2020 compared 2019 experienced growth enterprise cloud verticals offset decline service provider vertical growth enterprise vertical primarily driven switching growth cloud vertical primarily driven routing believe decline service provider vertical partially due covid19 related supply constraints service net revenues increased primarily due strong renewals support contracts •gross margin gross margin percentage net revenues decreased primarily due increased logistics supply chainrelated costs related covid19 pandemic customer product mix intangible amortization associated acquisition mist partially offset impact associated higher service revenues •operating margin operating income percentage net revenues decreased primarily due drivers described gross margin discussion higher restructuring charges higher personnelrelated costs decrease operating margin partially offset lower travel costs due covid19 pandemic •operating cash flows net cash provided operations increased primarily due higher invoicing activity working capital differences related customer collections partially offset higher payments indirect suppliers employee compensation •capital return continue return capital stockholders fourth quarter 2019 entered accelerated share repurchase program asr repurchase aggregate 2000 million shares asr made upfront payment 2000 million received retired 64 million shares common stock fourth quarter 2019 first quarter 2020 asr completed received retired additional 18 million shares total repurchase 82 million shares common stock 2020 repurchased total 161 million shares common stock open market average price 2336 per share aggregate purchase price 3750 million 2020 paid quarterly dividends 020 per share aggregate amount 2641 million •dso calculated ratio ending accounts receivable net allowances divided average daily net revenues preceding 90 days dso increased primarily due higher accounts receivable resulting higher overall invoicing volume •deferred revenue total deferred revenue increased primarily due timing maintenance service renewals covid19 pandemic update covid19 pandemic containment measures taken governments businesses expected continue substantial negative impact businesses around world global regional national economies result pandemic may continue negatively affect operations including result external factors beyond control restrictions physical movement employees contract manufacturers partners customers limit spread covid19 availability acceptance covid19 vaccine since march 2020 majority global workforce working remotely due shelterinplace requirements travel restrictions continue follow guidance local national governments including monitoring health employees returned offices limiting gathering size employee groups indoor spaces continue support healthy customer demand products working suppliers distributors address supply chain disruptions well travel restrictions impacted operations global supply chain footprint primary manufacturing partners located china taiwan malaysia mexico united states component suppliers geographically distributed vendors many countries throughout world 2020 supply constraints experienced due constrained manufacturing capacity well component parts shortages component vendors also facing manufacturing challenges resulted extended leadtimes customers increased logistics costs impacted volume products able deliver negatively impacted ability recognize revenue decreased gross margins challenges supply chain due impact pandemic remain dynamic including ongoing shortages component parts increased logistics costs due air travel transport restrictions limited availability flights able ship products fourth quarter however saw improvements manufacturing capacity second half 2020 also believe robust fairly flexible supply chain supply chain team working meet customer needs executing strong risk mitigation plan including multisourcing preordering components transforming logistics network prioritizing critical customers working local government agencies understand challenges partnering solutions limit disruptions operations ensuring safety employees partners suppliers pandemic substantial net impact consolidated operating results liquidity position 2020 continue generate operating cash flows meet shortterm liquidity needs expect continue maintain access capital markets enabled strong credit ratings 2020 observe material impairments assets significant change fair value assets due pandemic enter first quarter fiscal year 2021 healthy backlog cloud service provider verticals intend continue work government authorities implement safety measures ensure able continue manufacturing distributing products pandemic may continue experience constrained supply increased logistics costs could experience curtailed customer demand could adversely impact business results operations overall financial performance future periods critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer liabilities assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 1 description business basis presentation significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected •goodwill purchased intangible assets make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis purchase price acquired entity allocated intangible assets net tangible assets acquired business residual purchase price recorded goodwill determination value intangible assets acquired involves certain judgments estimates critical estimates include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets estimates based upon number factors including historical experience market conditions information obtained management acquired company judgments include limited cash flows asset expected generate future periods appropriate weighted average cost capital goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment first performing qualitative assessment determine whether likely fair value reporting unit less carrying value initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed determining fair value reporting unit using combination discounted cash flow market approaches discounted cash flow approach uses expected future operating results market approach uses comparable company information determine revenue earnings multiples value reporting units failure achieve expected results market multiples may cause future impairment goodwill reporting units goodwill considered impaired carrying value reporting unit exceeds fair value goodwill impairment loss recognized amount carrying amount reporting unit including goodwill exceeds fair value limited total amount goodwill allocated reporting unit conducted annual impairment test goodwill fourth quarters 2020 2019 years ended december 31 2020 2019 determined impairment carrying value goodwill reporting units exists see note 6 goodwill purchased intangible assets notes consolidated financial statements item 8 part ii report additional information regarding goodwill purchased intangible assets •inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2020 december 31 2019 net inventory balances 2219 million 942 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2020 december 31 2019 contract manufacturer liabilities 152 million 286 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times •revenue recognition enter contracts sell products services sales agreements contain standard terms conditions agreements contain nonstandard terms conditions include promises transfer multiple goods services result significant interpretation judgment sometimes required determine appropriate accounting transactions including 1 whether performance obligations considered distinct accounted separately versus together price allocated among performance obligations recognize revenue performance obligation 2 developing estimate standalone selling price ssp distinct performance obligation 3 combining contracts may impact allocation transaction price product services 4 estimating accounting variable consideration including rights return rebates price protection expected penalties price concessions reduction transaction price estimates ssp performance obligation require judgment considers multiple factors including limited historical discounting trends products services pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles estimates rights return rebates price protection based historical sales returns price protection credits specific criteria outlined customer contracts rebate agreements factors known time estimates expected penalties price concessions based historical trends expectations regarding future incurrence changes judgments respect assumptions estimates could impact timing amount revenue recognition •income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses research development rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s recommended changes numerous longstanding tax principles adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition •loss contingencies involved various lawsuits claims investigations proceedings including involving ip commercial securities employment matters arise ordinary course business use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 1 description business basis presentation significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations discussion regarding financial condition results operations fiscal year ended december 31 2020 compared 2019 presented discussion regarding financial condition results operations fiscal year ended december 31 2019 compared 2018 found item 7 annual report form 10k fiscal year ended december 31 2019 filed sec february 20 2020 available sec’s website wwwsecgov investor relations website httpinvestorjunipernet revenues following table presents net revenues product service customer vertical geographic region millions except percentages product net revenues decreased due decreases security routing offset switching security revenue decreased primarily driven enterprise lower net revenues srx product family routing revenue decreased primarily driven service provider lesser extent enterprise lower net revenues mx product family decrease partially offset strength cloud switching revenue increased primarily driven enterprise service provider higher net revenues mist product family service net revenues increased primarily due strong renewals support contracts gross margins following table presents gross margins millions except percentages gross margins percentage net revenues continue affected variety factors including mix average selling prices products services new product introductions enhancements manufacturing component logistics costs expenses inventory obsolescence warranty obligations cost support service personnel customer mix continue expand footprint certain strategic customers mix distribution channels products services sold import tariffs example subject tariffs networking components imported china included products import sell within united states addition logistics supply chainrelated costs increased due covid19 pandemic information potential impact tariffs covid19 business see “risk factors” section item 1a part report product gross margin product gross margin percentage product revenues decreased primarily due increased logistics supply chainrelated costs related covid19 pandemic customer product mix higher amortization intangible assets associated acquisition mist acquired second quarter 2019 continue undertake specific efforts address certain factors impacting product gross margin efforts include performance quality improvements engineering increase value across products optimizing supply chain service business pricing management increasing software solution sales service gross margin service gross margin percentage service net revenues increased primarily due higher revenue lower delivery costs operating expenses following table presents operating expenses millions except percentages operating expenses historically driven large part personnelrelated costs including salaries wages commissions bonuses refer collectively variable compensation benefits sharebased compensation travel facility information technology departmental costs allocated department based usage headcount total 9950 9419 employees december 31 2020 2019 respectively headcount increased 531 employees 6 primarily hiring research development sales organizations lesser extent acquisitions 2020 research development research development expense rd increased 27 million primarily due higher personnelrelated costs 263 million driven increase headcount higher professional services spending 124 million increase partially offset decrease sharebased compensation expense 152 million lower engineering costs 143 million due decreased investments certain rd projects lower travel costs 40 million due covid19 pandemic general administrative general administrative expense increased 111 million primarily due higher acquisitionrelated costs 105 million mainly acquisitions fourth quarter 2020 restructuring charges restructuring charges increased 327 million primarily due higher severance costs related voluntary involuntary workforce reductions recorded 2020 restructuring plan loss extinguishment debt following table presents loss extinguishment debt millions except percentages 2020 incurred loss extinguishment debt 550 million related early repayment portion 2024 2025 senior notes loss primarily consists premium tender offer acceleration unamortized debt discount fees redeemed debt 2019 incurred loss extinguishment debt 153 million related early repayment 2020 2021 senior notes expense net following table presents expense net millions except percentages nm percentage meaningful interest income primarily includes interest earned cash equivalents investments promissory note issued us connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements gain loss investments net primarily includes losses sale investments public privatelyheld companies observable changes fair value impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items interest income interest income decreased 428 million primarily due lower yields fixed income investment portfolio result lower interest rates lower average portfolio balance lesser extent lower interest income result collection promissory note receivable connection previously completed sale junos pulse interest expense interest expense decreased 116 million primarily due lower interest rates savings interest rate swap contracts gain loss investments net 2020 gains related certain equity investments isolated transactions compared losses certain equity investments 2019 income tax provision following table presents income tax provision benefit millions except percentages effective tax rate fiscal year 2020 lower 2019 primarily due net difference discrete items unique fiscal year 2020 compared fiscal year 2019 2020 effective rate included 637 million benefit including interest penalties related multiyear recognition previously unrecognized tax benefits 201 million charge including interest cumulative impact cost sharing sharebased compensation 2019 effective rate included 254 million benefit including interest related recognition previously unrecognized tax benefits pursuant resolution tax audit 75 million benefit including interest lapse statute limitations complete reconciliation effective tax rate us federal statutory rate 21 explanation income tax provision see note 13 income taxes notes consolidated financial statements item 8 part ii report effective tax rate may fluctuate significantly quarterly basis may adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate may also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items see item 1a part risk factors report description relevant risks may adversely affect results result recommendations oecd base erosion profit shifting certain countries emea apac either enacted new corporate tax legislation considering enacting legislation near future expect effect reform measures potentially impact longstanding tax principles particularly regards transfer pricing consequently expect global tax authorities increasingly challenge cost sharing intercompany arrangements related sourcing taxable profits global jurisdictions liquidity capital resources following sections discuss effects changes balance sheet capital return strategy including stock repurchase program dividends contractual obligations certain commitments activities liquidity capital resources funded business primarily operating activities issuance longterm debt following table presents capital resources millions except percentages summary cash flows following table summarizes cash flow activity consolidated statements cash flows millions except percentages operating activities primary source operating cash flows cash collections customers primary uses cash operating activities personnelrelated expenditures payments suppliers general operating expenses well payments related taxes interest facilities net cash provided operations increased primarily due higher invoicing activity working capital differences related customer collections partially offset higher payments indirect suppliers employee compensation investing activities investing cash flows consist primarily capital expenditures purchases sales maturities redemptions investments cash used business combinations net cash used investing activities decreased 2020 compared 2019 2020 net payment acquisitions 4381 million net proceeds sales maturities redemptions investments 2507 million 2019 net payment acquisition mist 2709 million net purchase investments 1404 million financing activities financing cash flows consist primarily repurchases retirement common stock payment cash dividends stockholders issuance repayment longterm debt proceeds issuance shares common stock employee equity incentive plans net cash used financing activities decreased 2020 compared 2019 primarily due 4162 million net issuance debt 2020 compared 4548 million net repayment debt 2019 175 million decrease stock repurchases discussed capital return following table summarizes dividends paid stock repurchase activities millions except per share amounts 2020 2347 average price per share includes 3750 million open market purchases settlement forward contract 400 million accelerated share repurchase program asr initiated fourth quarter 2019 2536 average price per share excludes forward contract 400 million asr january 2018 board directors refer board approved 20 billion share repurchase program refer 2018 stock repurchase program october 2019 board authorized 10 billion increase 2018 stock repurchase program total 30 billion part 2018 stock repurchase program february 2018 april 2019 entered two asrs repurchased 7500 million 3000 million common stock respectively aggregate number shares ultimately repurchased 293 million 116 million shares common stock respectively determined based volume weighted average repurchase price less agreed upon discount 2562 2579 per share respectively shares received retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share part 2018 stock repurchase program october 28 2019 entered additional asr financial institution repurchase aggregate 2000 million outstanding common stock made upfront payment 2000 million pursuant asr received retired initial 64 million shares common stock aggregate price 1600 million based market price 2515 per share common stock date transaction january 2020 asr completed additional 18 million shares received total repurchase 82 million shares common stock volume weighted average repurchase price less agreed upon discount 2444 per share shares received us retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share fiscal year ended december 31 2020 repurchased 161 million shares common stock open market aggregate purchase price 3750 million average price 2336 per share 2018 stock repurchase program december 31 2020 13 billion authorized funds remaining 2018 stock repurchase program future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements 2018 stock repurchase program may discontinued time see note 10 equity notes consolidated financial statements item 8 part ii report discussion share purchase program addition future dividends establishment record payment dates subject approval board authorized committee thereof see note 17 subsequent events notes consolidated financial statements item 8 part ii report discussion dividend declaration subsequent december 31 2020 offbalance sheet arrangements december 31 2020 2019 offbalance sheet arrangements defined item 303 a4ii sec regulation sk business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance standby letters credit certain lease facilities insurance programs see guarantees additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2020 effect obligations expected liquidity cash flow future periods millions 1 see note 15 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding leases contractual commitments 2 see note 9 debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt 3 see note 15 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding tax liability related tax cuts jobs act 2017 “tax act” december 31 2020 619 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility unsecured revolving credit facility enables borrowings 5000 million option increase amount credit facility additional 2000 million subject lenders approval credit facility terminate april 2024 subject oneyear maturity extension option december 31 2020 compliance covenants amounts outstanding credit facility guarantees financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs customs 290 million 306 million december 31 2020 december 31 2019 respectively liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships repurchases additional shares common stock payment cash dividends common stock since enactment tax act repatriated significant amount cash equivalents investments outside us plan continue repatriate ongoing basis intend use repatriated cash invest business support valueenhancing merger acquisitions fund return capital stockholders based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility sufficient fund operations planned stock repurchases dividends capital expenditures commitments liquidity requirements anticipated growth least next twelve months however future liquidity capital requirements may vary materially planned depending many factors including limited growth rate timing amount spend support development efforts expansion sales marketing activities introduction new enhanced products services costs acquire invest businesses technologies increase manufacturing component costs risks uncertainties detailed “risk factors” section item 1a part report item 7aitem 7 managements discussion analysis financial condition results operations following discussion read consolidated financial statements related notes item 8 report following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles “us gaap” course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives information critical accounting policies estimates see “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report business market environment juniper networks design develop sell products services highperformance networks enable customers build highly scalable reliable secure costeffective networks businesses achieving agility efficiency value automation focus customers partners across key verticals view network attributes fundamental business including global service providers enterprises financial services cloud hosting providers governments research public sector organizations product solution differentiation relentless customer focus allow us achieve primary goal growing revenue faster market sell products 100 countries three geographic regions americas europe middle east africa emea asia pacific apac sell highperformance routing switching security network products service offerings service provider enterprise markets silicon systems software represent innovations transform economics experience networking helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership addition products offer technical support professional services well education training programs customers together highperformance product service offerings help customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers 2014 saw slight decline net revenues yearoveryear primarily due reduced spending us carriers however diversity business across verticals cloud cable providers helped partially offset decline expect overall revenue environment challenging next several quarters market dynamics including consolidation impacting demand largest us service provider customers believe product gross margins may continue vary future due competitive pricing pressures may offset additional operational efficiencies nevertheless focused executing strategy focused designing developing selling products services highperformance networks believe product portfolio continues strong remain focused operational excellence cost discipline targeted growth initiatives 2014 continued invest innovation strengthening product portfolio resulted new product offerings across routing switching security routing announced virtualized version flagship mx series 3d universal edge routing platform vmx 3d universal edge router deliver industrys first fullfeatured carriergrade virtualized router giving service providers enterprises ability seamlessly leverage benefits virtual physical networking switching address networking requirements large cloud providers enterprise customers build large massive scale data centers announced ocx1100 first switch combine open compute project ocp hardware design carrierclass network operating system junos os also announced new line ex4600 ethernet switches fulfill increasing demands highly available access cloud services applications across enterprise campus networks additionally expanded sdn portfolio new software hardware including northstar controller new trafficengineering controller leveraging open industrystandard protocols built optimize service providers’ transport networks well junos fusion software controls thousands independent network elements single management plane key strategic technology partnerships also delivered new solutions address highperformance network requirements service provider enterprise customers integration gainspeed’s technology mx series 3d universal edge routers ex series switches announced virtual converged cable access platform allowing cable operators better automate scale edgeaccess infrastructure creating platform new cloudbased services additionally partnered nokia advance telco cloud mobile broadband accelerate service creation bringing together nokias leading liquid core solution juniper networks metafabric™ data center architecture including contrail furthermore signed go market agreement aruba deliver open converged enterprise network solution integrating aruba mobility solutions juniper enterprise switches routers delivering ongoing product innovation enterprise customers security announced firefly perimeter virtual version srx series service gateway new advancements spotlight secure threat intelligence platform junos space virtual director application automates management deployment firefly perimeter well juniper argon secure advanced antimalware service due recent underperformance security products efforts refocus security offerings recorded goodwill impairment charge 8500 million fourth quarter 2014 intend focus stabilizing revenues security reporting unit 2015 result pivoting security strategy focus building integrated solutions focus network resiliency business continuity across cloud data center branch campus service provider mobile infrastructure taking advantage existing ongoing innovation junosbased srx platform 2014 implemented series initiatives designed streamline organization improve operational efficiencies rationalize product portfolios return capital shareholders actions largely completed end 2014 first quarter 2014 realigned organization onejuniper structure included consolidating research development rd gotomarket functions reduce complexity increase clarity responsibilities improve efficiency improve operational efficiency 2014 implemented various restructuring activities structural cost saving actions across research development sales marketing general administrative expenses completed 2014 restructuring plan workforce reductions facility consolidations closures asset writedowns contract terminations actions result recorded total restructuring charge 2077 million cost sales restructuring charges connection rationalization product portfolio completed sale junos pulse total consideration 2307 million resulted gain 196 million income expense net consolidated statement operations result cost management actions achieved total annualized operating expense savings commitment 2600 million compared fourth quarter 2013 addition cost reduction activities introduced capital allocation program return capital stockholders share repurchases dividends 2014 returned 23 billion capital stockholders completion 12 billion accelerated share repurchase program asr repurchase 11 billion common stock subsequent asr also paid two quarterly cash dividends 010 per share aggregate amount 860 million issued 3500 million aggregate principal amount 450 senior notes due 2024 notes allowed us partially fund asr intend return 10 billion aggregate share repurchases end second quarter 2015 subject raising additional debt financing financial results key performance metrics overview following table provides overview key financial metrics years ended december 31 2014 2013 2012 millions except per share amounts percentages days sales outstanding dso booktobill dso booktobill fourth quarter ended december 31 2014 2013 2012 • net revenues 2014 net revenues slightly compared 2013 result decline net revenues us carriers partially offset growing demand cloud providers americas well improving demand among service provider emea yearoveryear decline net revenues primarily due decrease net revenues routing security products partially offset increase switching products revenue service revenue 2013 compared 2012 experienced net revenue growth americas service provider enterprise offset decline revenue apac emea yearoveryear increase net revenues 2013 primarily due increases edge routing switching service revenue partially offset decline security products revenue • gross margin gross margin percentage net revenues decreased 2014 compared 2013 result higher inventory charges driven product rationalizations connection 2014 restructuring plan charges related industrywide memory product quality defect component third party supplier 2013 compared 2012 gross margin percentage net revenues increased primarily due higher restructuring charges recorded 2012 partially offset higher inventory provisions 2013 legacy platforms • operating loss income 2014 compared 2013 experienced decline operating loss income percentage net revenues primarily due 8500 million goodwill impairment charge related security reporting unit recorded fourth quarter 2014 restructuring charges 2077 million related severance facility consolidations closures assetwriteoffs contract terminations connection 2014 restructuring plan well component remediation charge 207 million relating memory product quality defect operating income percentage revenues increased 2013 compared 2012 primarily due growth net revenues also contributing increase operating income lower restructuring charges 522 million compared 2012 • cash dividends declared per common stock 2014 declared two quarterly cash dividends 010 per share payable september 23 2014 december 23 2014 stockholders record close business september 2 2014 december 2 2014 respectively aggregate amount 860 million previously paid cash dividends • stock repurchase plan activity stock repurchase program repurchased approximately 961 million shares common stock open market average price 2341 per share aggregate purchase 22500 million year ended december 31 2014 • operating cash flows operating cash flows decreased 2014 compared 2013 primarily due lower cash collections customers higher payments primarily related 2014 restructuring plans higher taxes paid lower prepayments compared prior year operating cash flows increased 2013 compared 2012 primarily due timing payments vendors higher deferred revenue lower taxes paid partially offset timing payments incentive compensation employees timing receipts customers • dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days dso quarter ended december 31 2014 increased 8 days 20 compared quarter ended december 31 2013 2014 transitioned certain distribution partners third party financing program junipers commercial payment terms going forward expect dso range 45 55 days dso increased 6 days 17 quarter ended december 31 2013 compared quarter ended december 31 2012 increase primarily due large multiyear service renewals end period increased outstanding receivables compared period 2012 • booktobill represents ratio product orders booked divided product revenues respective period booktobill greater one quarters ended december 31 2014 2013 2012 indicating strong product demand • deferred revenue total deferred revenue increased slightly 64 million 10757 million december 31 2014 compared 10693 million december 31 2013 primarily due increase deferred service revenue 258 million primarily driven execution several multiyear support agreements annual agreement renewals increase deferred service revenue partially offset decrease deferred product revenue 194 million result lower distributor inventory multiple revenue releases relation previously deferred product revenue december 31 2013 compared december 31 2012 total deferred revenue increased 1459 million primarily due increase deferred service revenue driven execution several multiyear support agreements lesser extent increase annual agreement renewals slightly offset decrease deferred product revenue critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information significant accounting policies see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • goodwill make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense goodwill represents future economic benefits arising assets acquired business combination acquisition individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill evaluate goodwill impairment annual basis november 1st frequently event occurs facts circumstances change would likely reduce fair value reporting units carrying amount goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit reporting units determined based components operating segment constitutes business discrete financial information available segment management regularly review operating results component provisions accounting standard goodwill intangibles allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test permitted conduct qualitative assessment determine whether necessary perform twostep quantitative goodwill impairment test annual goodwill impairment test fourth quarter fiscal 2014 performed quantitative test reporting units goodwill impairment test involves twostep process identify goodwill impairment measure amount goodwill impairment loss recognized first step tests potential impairment comparing fair value reporting units reporting unit’s net asset values fair value reporting units exceeds carrying value reporting unit’s net assets goodwill impaired testing required fair value reporting units exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill second step requires assignment reporting unit’s fair value reporting unit’s assets liabilities using relevant acquisition accounting guidance determine implied fair value reporting unit’s goodwill implied fair value reporting unit’s goodwill compared carrying amount reporting unit’s goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference first step fair value reporting units determined using income market valuation approaches believe income approach market approach equally representative reporting unit’s fair value income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publiclytraded companies similar lines business application income market valuation approaches required make estimates future operating trends judgments discount rates variables determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results related assumed variables could differ estimates addition make certain judgments assumptions allocating shared assets liabilities determine carrying values reporting units income approach calculate fair value reporting unit based present value estimated future cash flows cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rate used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related businesss ability execute projected cash flows market approach estimate fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units apply control premium determined considering control premiums offered part acquisitions occurred market segments comparable reporting units income approach market approach equally weighted derive fair value reporting unit prior second step longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group needed impairment charge recognized amount carrying amount asset group exceeds fair value second step reporting units fair value allocated assets liabilities including unrecognized intangible assets existing technology backlog customer relationships hypothetical analysis calculates implied fair value goodwill manner reporting unit acquired business combination implied fair value reporting units goodwill less carrying value difference recorded impairment loss assumptions used measuring fair value assets liabilities included discount rates customer renewal rates technology obsolescence rates used valuing intangible assets pricing comparable transactions market valuing tangible assets fiscal year 2014 annual goodwill impairment test reporting units routing switching security fair value routing switching reporting units significantly exceeded carrying value however fair value security reporting unit exceed carrying value therefore determined security reporting unit’s goodwill impaired 2014 realigned gotomarket research development resources projects highest potential growth continued leverage engineering efforts across routing switching security products fourth quarter 2014 began implement new security strategy focused network resiliency performance based srx platform result rationalized security product portfolio including developing new product roadmap exiting certain point products including divestiture junos pulse factors decreased shortterm nearterm revenue profitability forecasts security reporting unit result carrying value security reporting units goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations refer item 8 part ii note 7 goodwill purchased intangible assets notes consolidated financial statements information • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process stated lower average cost market provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2014 december 31 2013 inventory balances 625 million 527 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2014 december 31 2013 contract manufacturer liabilities 253 million 229 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures perform detailed analysis review data used establishing demand forecasts actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence tpe vsoe available estimated selling price “esp” neither vsoe tpe available establish vsoe selling price using price charged deliverable sold separately tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules addition oecd’s contemplated changes numerous longstanding tax principles finalized adopted countries increase tax uncertainty may adversely affect provision income taxes significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns irs tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents product service net revenues millions except percentages 2014 compared 2013 routing product net revenues decreased 2014 compared 2013 result weaker demand core routing partially offset strong growth ptx series products edge routing net revenues increased result strong demand mx series products partly offset older edge routing platforms yearover year decline driven weakness large us carriers partially offset strength cloud providers switching product net revenues increased 2014 compared 2013 reflecting growth qfabric system ex series products year saw strong adoption qfabric data center switches growing number customers especially strong demand cloud providers americas security product net revenues decreased 2014 compared 2013 primarily due continuing decline legacy screen os products divestiture junos pulse product lines sales srx platform declined slightly yearoveryear due lower demand us carrier customers increase service revenue 2014 compared 2013 primarily driven new service contracts strong contract renewals service revenues largely correlated product revenues therefore product net revenues decline impact future service revenues 2013 compared 2012 routing product net revenues increased 2013 compared 2012 due increase volume sales edge routing products service provider enterprise customers reflecting customer demand mx platform particular switching product net revenues increased 2013 compared 2012 result increase ex qfabric product lines service provider enterprise markets also contributing increase net revenues new product introductions enterprise campus data center infrastructure security product net revenues decreased 2013 compared 2012 primarily due decline legacy screen os srx platform increase service revenue 2013 compared 2012 primarily driven strong contract renewals installed base across routing switching security products net revenues geographic region following table presents net revenues geographic region millions except percentages 2014 compared 2013 increase net revenues americas 2014 compared 2013 primarily due increase net revenues service provider markets partially offset decline enterprise market increase net revenues service provider market due strong demand cloud cable providers partially offset decrease demand carriers decline enterprise market resulted decline net revenues due recognition revenue large us federal government contract 2013 net revenues emea slightly increased 2014 compared 2013 primarily due stronger demand service providers partially offset decrease net revenues enterprise market although demand public sector remained strong net revenues apac decreased 2014 compared 2013 primarily due decline net revenues service provider enterprise market 2013 compared 2012 net revenues americas increased 2013 compared 2012 primarily due increase revenues service provider enterprise markets increase service provider revenues due increase sales cloud providers cable providers partially offset slight decrease sales carriers increase enterprise revenues 2013 compared 2012 primarily attributable broadbased improvement customer demand well recognition large us federal government contract net revenues emea decreased 2013 compared 2012 primarily due decline revenues enterprise market attributable certain large sales 2012 net revenues apac decreased 2013 compared 2012 primarily due lower revenues enterprise resulting weaker conditions china enterprise market service provider revenues relatively flat decline sales certain large service providers japan offset higher revenue certain large carriers china additionally recognition revenue large service provider singapore offset declines revenues service providers apac net revenues market customer following table presents net revenues market millions except percentages sell highperformance routing switching security network products service offerings two primary markets service provider enterprise determination market particular revenue transaction relates based primarily upon customers industrial classification code may also include subjective factors intended use product service provider market generally includes wireline wireless carriers cable operators well major internet content application providers including provide social networking search engine services enterprise market generally comprised businesses federal state local governments research education institutions financial services 2014 compared 2013 net revenues sales service provider market increased 2014 compared 2013 growth americas emea increase service provider net revenues americas driven increased revenues cloud cable providers partially offset decreased revenues large carriers increase service provider net revenues emea attributable growth large carriers apac net revenues service provider market declined result lower demand small large carriers addition service provider demand switching products continued strong net revenues sales enterprise market decreased 2014 compared 2013 primarily due decline sales geographic regions however revenue demand public sector customers higher three regions 2013 compared 2012 net revenues sales service provider market increased 2013 compared 2012 primarily due increase sales cloud providers cable providers americas partially offset slight decrease sales wireless carriers service provider market emea apac relatively flat addition service provider demand switching data center solutions 2013 stronger 2012 net revenues enterprise market increased 2013 compared 2012 primarily due broadbased growth americas enterprise market well recognition large us federal government contract partially offset weaker demand apac emea customer accounted greater 10 net revenues year ended december 31 2014 2013 year ended december 31 2012 verizon accounted 103 net revenues gross margins following table presents gross margins millions except percentages 2014 compared 2013 product gross margin decreased percentage product net revenues 2014 compared 2013 primarily due increase cost revenues increase cost revenues primarily due asset writedowns 415 million product rationalizations connection 2014 restructuring plan 207 million connection industrywide memory product quality defect component thirdparty supplier excluding costs restructuring component defect product gross margin percentage net revenues improved slightly primarily due favorability product mix 2014 period service gross margin percentage service net revenues decreased slightly 2014 compared 2013 primarily due increase labor logistics delivery costs support new contracts product introductions 2013 compared 2012 product gross margin percentage increased slightly 2013 compared 2012 primarily due higher restructuring charges recorded 2012 partially offset higher inventory provisions 2013 legacy platforms product gross margin benefited cost reductions supply chain 2013 offset impact higher pricing discounts service gross margin percentage service net revenues increased 2013 compared 2012 primarily due higher service revenues greater efficiency delivery services operating expenses following table presents operating expenses millions except percentages operating expenses historically driven large part personnelrelated costs including wages commissions bonuses benefits sharebased compensation travel particularly respect research development sales marketing activities facility information technology “it” departmental costs allocated department based usage headcount facility related headcount 366 396 368 december 31 2014 2013 2012 respectively total 8806 9483 9234 employees december 31 2014 2013 2012 respectively 2014 compared 2013 research development research development expense decreased 2014 compared 2013 primarily due lower personnelrelated expenses result restructuring actions divestiture junos pulse product lines research development headcount decreased 8 4135 december 31 2013 3797 december 31 2014 decrease research development personnel expense partially offset higher sharebased compensation expense result acquisition wandl inc first quarter engineering program costs 2014 compared 2013 sales marketing sales marketing expense decreased 2014 compared 2013 primarily due lower personnelrelated expenses discretionary expenses due cost reduction efforts creating efficiency sales activities decrease personnelrelated expenses primarily due headcount reductions sales marketing headcount decreased 11 2626 december 31 2013 2348 december 31 2014 general administrative general administrative expense increased 2014 compared 2013 primarily due higher litigation investigation related costs incurred current period connection investigation possible violations us foreign corrupt practices act lesser extent patent litigation case palo alto networks inc pan well litigation matters increase partially offset personnelrelated expenses result headcount reductions 8 513 december 31 2013 470 december 31 2014 patent litigation pan settled 2014 restructuring charges restructuring charges increased 2014 compared 2013 due higher charges recorded 2014 connection 2014 restructuring plan 2014 implemented 2014 restructuring plan incurred restructuring charges 1662 million related workforce reductions contract terminations project cancellations facility closures 2014 restructuring plan substantially completed december 31 2014 expect record significant future charges see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities impairment goodwill fourth quarter 2014 began implement new security strategy focused network resiliency performance based srx platform result rationalized security product portfolio including developing new product roadmap exiting certain point products including divestiture junos pulse factors decreased short term near term revenue profitability forecasts security reporting unit fiscal year 2014 annual goodwill impairment test carrying value security reporting units goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations part ii item 8 report see note 7 goodwill purchased intangibles notes consolidated financial statements item 8 part ii report discussion impairment goodwill 2013 compared 2012 research development research development expense decreased 2013 compared 2012 primarily due lower depreciation expense 283 million attributable extended useful lives computers equipment 2013 well lower prototype development costs 186 million addition outside services facilities costs decreased related cancellation certain projects facility closures decrease research development expense partially offset increases personnelrelated expenses primarily attributable higher sharebased compensation expense lesser extent higher variable compensation research development headcount increased 1 4081 december 31 2012 4135 december 31 2013 additionally continued shift headcount lower cost regions sales marketing sales marketing expense increased 2013 compared 2012 primarily due higher personnelrelated expenses related increase commission expense driven improved sales achievement partially offset lower sharebased compensation expense lower outside service travel due cost reduction efforts creating efficiency sales activities sales marketing headcount decreased 2 2680 december 31 2012 2626 december 31 2013 result restructuring activities general administrative general administrative expense increased 2013 compared 2012 primarily due higher litigation costs increase general administrative expense partially offset lower personnelrelated expenses primarily sharebased compensation expense general administrative headcount increased 6 486 december 31 2012 513 december 31 2013 support financerelated initiatives including erp implementation restructuring charges restructuring charges decreased 2013 compared 2012 due higher charges recorded 2012 connection 2012 restructuring plan 2013 implemented 2013 restructuring plan incurred restructuring charges 391 million related workforce reductions contract terminations project cancellations facility closures connection plans see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities sharebased compensation sharebased compensation expense associated equity incentive awards include stock options restricted stock units rsus restricted stock awards rsas performance share awards psas well employee stock purchase plan espp recorded following cost expense categories millions except percentages 2014 compared 2013 sharebased compensation expense remained consistent 2014 compared 2013 increase expense related rsus rsas psas assumed connection acquisition wandl 2014 increase grant date fair values due higher stock prices offset decrease actual shares vested 2013 compared 2012 sharebased compensation expense remained consistent 2013 compared 2012 offsetting increases expense related rsas assumed connection acquisition contrail end 2012 decreases actual shares vested decline grant date fair values due lower stock prices income expense net income tax provision following table presents income expense net income tax provision millions except percentages income expense net interest income primarily includes interest income cash equivalents investments interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements typically consists foreign exchange gains losses nonoperational income expense items 2014 compared 2013 interest income interest income increased 2014 compared 2013 primarily due higher balance longer term investments yielding higher interest expense interest expense increased 2014 compared 2013 primarily due issuance 2024 notes first quarter 2014 see note 10 longterm debt financing notes consolidated financial statements item 8 part ii report additional information regarding 2024 notes gain legal settlement year ended december 31 2014 entered settlement agreement pan resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees gain investments year ended december 31 2014 recorded gain 1630 million primarily related sale investments converted privatelyheld investments publiclytraded equity upon ipo subsequently sold year ended december 31 2013 net gain investments primarily comprised gain 71 million related companys privatelyheld investments publicly tradedequity investments gain sale junos pulse sale junos pulse product portfolio completed october 1 2014 recorded gain 196 million income expense net consolidated statement operations sale driven product rationalization connection initiative focus projects highest potential growth see note 8 financial information notes consolidated financial statements item 8 part ii report discussion sale junos pulse 2013 compared 2012 interest income interest income decreased 2013 compared 2012 due lower cash balances interest rates well shift certain investments yielding lower interest expense interest expense increased 2013 compared 2012 primarily due higher capitalized interest 2012 resulting phased sunnyvale campus buildout gain investments gain investments decreased 2013 compared 2012 due higher net gains recorded 2012 related privatelyheld investments included 147 million gain acquisition privatelyheld investment contrail income tax provision effective rate 2014 differs federal statutory rate 35 primarily due impact nondeductible goodwill charge tax gain sale junos pulse offset benefit release company’s valuation allowance attributable investment losses federal rd credit recognition domestic production activities deductions earnings foreign jurisdictions subject lower tax rates passage tax increase prevention act 2014 december 19 2014 retroactively reinstated us federal rd tax credit january 1 2014 december 31 2014 effective rate 2013 lower federal statutory rate 35 primarily due benefit federal rd credit tax settlement irs recognition domestic production activities deductions earnings foreign jurisdictions subject lower tax rates effective tax rate 2012 substantially similar federal statutory rate 35 effective rate 2012 reflect benefit federal rd credit expired december 31 2011 effective tax rate could fluctuate significantly quarterly basis could adversely affected extent earnings lower anticipated countries lower statutory rates higher anticipated countries higher statutory rates effective tax rate could also fluctuate due changes valuation deferred tax assets liabilities changes tax laws regulations accounting principles well certain discrete items result expiration federal research development credit december 31 2014 expect effective tax rate increase 2015 see item1a part risk factors report description relevant risks may adversely affect results complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report liquidity capital resources historically funded business primarily operating activities issuance common stock issuance longterm debt following table shows capital resources millions except percentages significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities shortterm deferred revenue working capital decreased 8183 million year ended december 31 2014 primarily due decrease cash equivalents result stock repurchase activities tax payments dividends purchase capital equipment well decline short term investments summary cash flows december 31 2014 cash equivalents decreased 6444 million december 31 2013 primarily due purchases retirement common stock connection stock repurchase program capital expenditures federal estimated tax payment dividend payout higher payments related restructuring plans partially offset issuance 2024 notes february 2014 cash received sale certain equity investments cash received patent litigation settlement proceeds sale junos pulse following table summarizes cash flows consolidated statements cash flows millions except percentages operating activities 2014 compared 2013 cash flow operations decreased 825 million 2014 compared 2013 primarily due lower cash collections customers higher payments related restructuring plans higher taxes paid lower prepayments compared prior year 2013 compared 2012 cash flows operations increased 2082 million 2013 compared 2012 primarily due higher net income timing payments vendors higher deferred revenue lower taxes paid partially offset timing payments incentive compensation employees timing collections outstanding receivables investing activities 2014 compared 2013 net cash provided investing 4340 million 2014 compared net cash used investing 5610 million 2013 increase net cash provided investing activities primarily due higher proceeds sale investments fewer purchases investments well proceeds received sale junos pulse 2013 compared 2012 net cash used investing activities decreased 346 million 2013 compared 2012 primarily due lower spending acquisitions asset purchases well lower capital expenditures completed phased sunnyvale campus buildout partially offset higher purchases investments financing activities 2014 compared 2013 net cash used financing activities increased 14225 million 2014 compared 2013 primarily due purchases retirement common stock payment cash dividends partially offset issuance 2024 notes 2013 compared 2012 net cash used financing activities decreased 1466 million 2013 compared 2012 primarily due lower purchases retirement common stock partially offset increase proceeds employee stock option exercises well proceeds customer financing arrangements stock repurchase activities february 2014 board approved stock repurchase program authorized us repurchase 21 billion common stock 2014 stock repurchase program october 2014 board authorized 13 billion increase 2014 stock repurchase program total 34 billion december 31 2014 12 billion authorized funds remaining 2014 stock repurchase program intend repurchase 10 billion common stock end second quarter 2015 part three year capital return program subject raising additional debt financing future share repurchases subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements stock repurchase programs may discontinued time following table summarizes stock repurchase activities millions except per share amounts 1 part 2014 stock repurchase program entered two separate accelerated share repurchase agreements collectively asr two financial institutions repurchase 12 billion common stock made upfront payment 12 billion pursuant asr repurchase common stock aggregate number shares ultimately purchased determined based volume weighted average repurchase price less agreed upon discount shares received respect asr retired shares return authorized unissued shares common stock dividends july 22 2014 declared quarterly cash dividend 010 per share common stock 438 million aggregate stockholders record september 2 2014 paid september 23 2014 october 23 2014 declared cash dividend 010 per share common stock 422 million december 23 2014 stockholders record close business december 2 2014 future dividends establishment record payment dates subject approval board authorized committee thereof see note 18 subsequent events notes consolidated financial statements item 8 part ii report discussion dividend declaration subsequent december 31 2014 restructuring december 31 2014 restructuring liability 170 million 94 million related severance expected paid full first quarter 2015 74 million related facility closures expected paid march 2018 02 million related contract charges see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring plans deferred revenue deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training following table summarizes deferred product service revenues millions december 31 2014 net deferred product revenue decreased 194 million 2256 million compared 2450 million december 31 2013 result lower distributor inventory multiple revenue releases relation previously deferred product revenue december 31 2014 increase deferred service revenue 258 million attributed execution several multiyear support agreements increase annual agreement renewals offbalance sheet arrangements december 31 2014 2013 relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities see guarantees note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations following table summarizes principal contractual obligations december 31 2014 effect obligations expected liquidity cash flow future periods millions 1 see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments 2 see note 10 longterm debt financing notes consolidated financial statements item 8 part ii report additional information regarding debt december 31 2014 1775 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes result amount included table revolving credit facility june 27 2014 entered credit agreement certain institutional lenders provides five year 5000 million unsecured revolving credit facility option increase amount credit facility additional 2000 million subject certain conditions proceeds borrowing made credit agreement may used us working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid pay lender facility fee quarterly basis based amount lenders commitment make loans 0100 0250 depending public debt rating revolving loans may prepaid without penalty subject customary breakage costs loans bearing interest eurocurrency rate also obligated pay customary fees credit facility size type credit agreement includes customary events default include among things nonpayment principal interest fees inaccuracy representations warranties violation covenants cross default certain indebtedness bankruptcy insolvency events involving company material subsidiaries material judgments change control certain erisa events occurrence event default could result acceleration obligations credit agreement default interest rate shall apply request required lenders obligations payment event default credit agreement rate per annum equal 2000 applicable interest rate credit agreement requires us maintain leverage ratio greater 30x interest coverage ratio less 30x term credit facility addition credit agreement contains customary affirmative negative covenants including covenants limit restrict ability company subsidiaries among things grant liens merge consolidate dispose substantially assets change accounting reporting policies change business incur subsidiary indebtedness case subject customary exceptions credit facility size type december 31 2014 company compliance covenants credit agreement amounts outstanding see note 10 longterm debt financing notes consolidated financial statements item 8 part ii report guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products infringe intellectual property rights thirdparty also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements custom duty guarantees standby letters credit certain lease facilities certain thirdparty customer financing arrangements contain guarantee provisions terms four years liable aggregate unpaid payments thirdparty financing company event customer default december 31 2014 made payments arrangements december 31 2014 december 31 2013 262 million 401 million respectively financing guarantees bank guarantees standby letters credit related financial guarantees 222 million financing guarantees recorded accrued liabilities longterm liabilities consolidated balance sheets december 31 2014 liquidity capital resources liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships made may make future additionally 2014 indicated intend return 41 billion stockholders form stock repurchases dividends february 2014 end 2016 extent repurchase additional shares common stock repurchase program pay cash dividends common stock liquidity may impacted august 2013 filed automatic shelf registration statement sec enabling us offer sale time unspecified amount securities one offerings intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions 2024 notes issued automatic shelf registration statement issued pursuant prospectus filed sec february 28 2014 offerings securities automatic shelf registration statement made pursuant prospectus addition revolving credit facility credit agreement also provide additional flexibility future liquidity needs focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant intention 2014 target number shares underlying equity awards granted annual basis 250 less common stock outstanding pure share basis option rsu rsa psa granted counted one share based upon shares underlying options rsus rsas psas granted 2014 target based past performance current expectations believe existing cash equivalents shortterm longterm investments together cash generated operations access capital markets revolving credit facility credit agreement sufficient fund operations planned stock repurchases dividends anticipated growth least next twelve months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including limited • level mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • payment dividends • incurrence repayment debt related interest obligations • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • accounts receivable levels maintain • acquisitions andor funding businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors responses products andor pricing • relationships suppliers partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated sharebased awards • issuance sharebased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7aitem 7 management’s discussion analysis financial condition results operations annual report form 10k “report” including “management’s discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results company based current expectations estimates forecasts projections industry operate beliefs assumptions management words ‘expects’ ‘anticipates’ ‘targets’ ‘goals’ ‘projects’ ‘intends’ ‘plans’ ‘believes’ ‘seeks’ ‘estimates’ variations words similar expressions intended identify forwardlooking statements forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file securities exchange commission “sec” specifically recent reports form 10q undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements prepared accordance us generally accepted accounting principles preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related revenue recognition sales returns warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges tax litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions overview results operations aid understanding operating results three years period ended december 31 2005 believe overview significant events affected periods discussion nature operating expenses helpful significant events business acquisitions completed total six acquisitions three years ended december 31 2005 main purposes acquisitions expand product portfolio customer base results following acquisitions included consolidated statements operations beginning respective acquisition dates following summary acquisitions year ended december 31 2005 • funk software inc “funk” acquired december 1 2005 developed sold products designed protect integrity network verifying users devices meet organization’s security policies granting network access • acorn packet solutions inc “acorn” acquired october 20 2005 developed sold products enable migration circuit based networks flexible costeffective ip networks • peribit networks inc “peribit” acquired july 1 2005 developed sold products enhance widearea network “wan” optimization application delivery • redline networks inc “redline” acquired may 2 2005 developed sold application front end platforms enterprise data centers public web sites • kagoor networks inc “kagoor” acquired may 1 2005 developed sold session border control products enhance voiceoverinternet protocol networking communication carriers year ended december 31 2004 • netscreen technologies inc “netscreen” acquired april 16 2004 developed sold broad array integrated network security solutions enterprises carriers government entities acquisition related liabilities connection acquisitions recorded liabilities associated severance future lease obligations initial liabilities recorded part acquisitions impact statements operations following summary liabilities segments result six acquisitions offer two categories products well services organized following three operating segments • infrastructure products consist original juniper networks router portfolio acorn products • service layer technologies “slt” products include funk peribit redline kagoor netscreen products • service delivers worldwide services customers infrastructure slt segments acceleration unvested “outofthemoney” employee stock options december 16 2005 board directors approved acceleration vesting certain unvested “outofthemoney” stock options exercise price per share equal greater 2200 previously granted stock option plans outstanding december 16 2005 options purchase approximately 212 million shares common stock 493 total outstanding unvested options december 16 2005 accelerated options accelerated excluded options previously granted certain employees including executive officers directors addition acceleration unvested “outofthemoney” options accompanied restrictions imposed shares purchased exercise accelerated options restrictions prevent sale shares prior date shares would originally vested optionee employed date whether optionee actually employee time purpose acceleration enable us avoid recognizing compensation expense associated options future periods statements operations pursuant financial accounting standards board statement 123r “sfas 123r” sfas 123r apply expense recognition provisions relating stock options beginning first quarter fiscal 2006 approving acceleration board considered impact future financial results stockholder value employee retention believe acceleration unvested “outofthemoney” options best interest stockholders reduce reported compensation expense future periods light accounting regulations result acceleration expect reduce pretax stock option expense otherwise would required record approximately 153 million subsequent adoption sfas 123r beginning 2006 acceleration vesting options result charge results operations 2005 rules regarding option expensing relatively recent possible changes existing rules adoption new rules promulgation rulings interpretations securities exchange commission bodies could cause ultimate accounting treatment options vary current expectations applied periods prior changes rulings could result changes historically reported financial information restructuring related charges restructuring reserves initiated restructuring plans eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions following summary restructuring plans charged operating expenses statements operations • 2004 implemented restructuring plan time acquisition netscreen initially recorded charge approximately 04 million primarily related workforce reduction costs completely paid december 31 2005 • 2003 implemented restructuring plan announced would longer develop gseries cmts products recorded charge comprised workforce reduction costs noninventory asset impairment costs associated vacating facilities terminating contracts related costs initially recorded charge approximately 140 million comprised workforce reduction costs noninventory asset impairment vacating facilities costs associated termination contracts related costs december 31 2005 approximately 14 million remained unpaid primarily facility lease extends july 2008 • 2002 implemented restructuring plan time unisphere acquisition initially recorded charge 149 million approximately 07 million remained unpaid december 31 2005 primarily facility leases extend april 2009 2005 2004 adjusted restructuring reserves primarily due changes lease sublease assumptions needs changed result recent acquisitions real estate markets changed see note 5 item 8 complete description restructuring charges amounts remained paid impairment charges evaluate longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds undiscounted future net cash flow asset expected generate asset considered impaired impairment charge recognized measured amount carrying amount asset exceeds estimated fair value assess recoverability longlived intangible assets determining whether unamortized balances recovered undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows december 2005 recorded impairment charge 59 million related certain kagoor purchased intangibles result significant reduction forecasted revenue associated kagoor products debt retirement december 31 2004 paid total 9370 million retire remaining 475 convertible subordinated notes due march 15 2007 “subordinated notes” transactions affected cash equivalents investments interest income interest expense tax repatriation repatriated 2250 million american jobs creation act “jobs act” 2005 recorded net tax benefit 2005 197 million related repatriation dividend net tax benefit consists federal state tax provision net federal benefit 97 million offset tax benefit 294 million related adjustment deferred tax liabilities unrepatriated earnings nature expenses extensive distribution channel place use target new customers increase sales made substantial investments distribution channel 2005 2004 manufacturing repair supply chain operations outsourced independent contract manufacturers accordingly cost revenues consists payments independent contract manufacturers standard product costs independent contract manufacturers produce products using design specifications quality assurance programs standards establish controls around manufacturing engineering documentation conducted facilities sunnyvale california westford massachusetts independent contract manufacturers facilities primarily canada china malaysia united states generally components title products transfers contract manufacturers us immediately customers upon shipment contract manufacturers procure components based build forecasts actual component usage lower forecasts may past liable carrying obsolete material charges employee related costs historically primary driver operating expenses expect trend continue employee related costs include items wages commissions bonuses vacation benefits travel added 420 900 employees 2005 2004 respectively across functions result acquisitions 4145 2948 1553 employees december 31 2005 2004 2003 respectively facility information technology departmental costs allocated departments based headcount departmental costs increased last two years due increases headcount facility leases resulting acquisitions additional infrastructure systems support growth expect costs stabilize 2006 research development expenses include • costs developing products components prototypes finished products • outside services certifications new products • expenditures associated equipment used testing several components research development effort require significant expenditures development new components purchase prototype equipment timing cause quarterly variability expenses expense research development costs incurred plan increase investment research development 2006 compared 2005 advance competitive advantage sales marketing expenses include costs promoting products services demonstration equipment advertisements costs vary quartertoquarter depending revenues product launches marketing initiatives plan develop distribution channel 2006 effort expand grow presence new markets serving private public networks full portfolio networking products general administrative expenses include professional fees bad debt provisions corporate expenses professional fees include legal audit tax accounting certain corporate strategic services critical accounting policies estimates preparation financial statements accordance us generally accepted accounting principles requires us make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts net revenue expenses reporting period regularly evaluate estimates assumptions base estimates assumptions current facts historical experience various factors believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results experienced us may differ materially adversely management’s estimates extent material differences estimates actual results future results operations affected believe following critical accounting policies require us make significant judgments estimates preparation consolidated financial statements • revenue recognition recognize revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectibility reasonably assured evidence arrangement generally consists customer purchase orders certain instances sales contracts agreements shipping terms related documents written evidence customer acceptance applicable used verify delivery performance assess whether sales price fixed determinable based payment terms whether sales price subject refund adjustment assess collectibility based creditworthiness customer determined credit checks customer’s payment history us arrangements products services bundled determine whether deliverables separable multiple units accounting allocate total fee arrangements individual deliverables either based relative fair values using residual method circumstances dictate recognize revenue deliverable accordance policies product service revenue recognition ability recognize revenue future may affected actual selling prices significantly less fair value addition ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers recognize product revenue upon transfer title risk loss generally upon shipment practice identify enduser prior shipment valueadded reseller endusers valueadded resellers significant obligations future performance rights return pricing credits portion sales made distributors agreements allowing pricing credits andor rights return recognize product revenue sales made distributors upon sellthrough reported us distributors recognize revenue service contracts services completed ratably period obligation record reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time additional reductions revenue would result actual product returns pricing adjustments exceed estimates • allowance doubtful accounts maintain allowance doubtful accounts estimated losses resulting inability customers make required payments financial condition customers deteriorate resulting impairment ability make payments additional allowances could required • contract manufacturer liabilities outsource manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture products based demand forecasts based estimates future demand products turn based historical trends analysis sales marketing organizations adjusted overall market conditions establish reserves carrying charges obsolete material charges excess components purchased based historical trends actual component usage product demand significantly lower forecast may caused factors outside control contractual liabilities exposures independent contract manufacturers carrying costs obsolete material exposures would adverse impact gross margins profitability • warranty reserve generally offer oneyear warranty hardware products 90day warranty media contains software embedded products establish reserves estimated product warranty costs time revenue recognized although engage extensive product quality programs processes warranty obligation affected product failure rates use materials technical labor costs associated overhead incurred correcting product failure actual product failure rates use materials service delivery costs differ estimates additional warranty reserves could required could reduce gross margins • goodwill purchased intangible assets goodwill recorded difference aggregate consideration paid acquisition fair value net tangible intangible assets acquired amounts useful lives assigned intangible assets impact amount timing future amortization amount assigned inprocess research development expensed immediately value intangible assets including goodwill could impacted future adverse changes future declines operating results ii decline valuation technology company stocks including valuation common stock iii significant slowdown worldwide economy networking industry iv failure meet performance projections included forecasts future operating results evaluate assets annual basis november 1 frequently believe indicators impairment exist process annual impairment review use income approach methodology valuation includes discounted cash flow method well market approach determine fair value intangible assets significant management judgment required forecasts future operating results used discounted cash flow method valuation estimates used consistent plans estimates use manage business possible however plans estimates used may incorrect actual results plans estimates used future impairment analyses lower original estimates used assess recoverability assets could incur additional impairment charges • income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled deferred tax assets attributable tax deductions related stock options considered realizable prior utilization tax returns point current tax savings results equity credited savings regularly assess likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 “accounting income taxes” record valuation allowance reduce deferred tax assets amount believe likely realizable believe likely forecasted income together tax effects deferred tax liabilities sufficient fully recover remaining deferred tax assets event part net deferred tax assets determined realizable future adjustment valuation allowance would charged earnings period determination made similarly subsequently realize deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations recognize potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period determine liabilities longer necessary estimate tax liabilities less amount ultimately assessed charge expense would result • litigation settlement costs time involved disputes litigation legal actions aggressively defending current litigation matters however many uncertainties associated litigation cannot assure actions third party claims us resolved without costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require us make royalty payments could adversely impact gross margins future periods events occur business financial condition results operations could materially adversely affected record charge equal least minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated however actual liability litigation may materially different estimates could result need record additional expenses • loss contingencies subject possibility various loss contingencies arising ordinary course business consider likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required results operations increases revenues cost expenses operating expenses 2005 compared 2004 attributable certain extent inclusion results operations funk acorn peribit redline kagoor part 2005 netscreen full year 2005 revenues cost revenues operating expenses significantly greater 2004 compared 2003 due netscreen acquisition net revenues following table shows net revenues net revenues percentage total net revenues millions except percentages total net revenues increased 20640 million 2005 represents growth 54 2004 total net revenues increased 13360 million 2004 represents growth 90 2003 product net revenues 6081 million 52 increase net product revenue 2004 2005 primarily result adoption expansion ip networks customers order reduce total operating costs able offer multiple services single network result expansion product portfolio acquisitions internal development 2005 recognized 327 million product revenue product shipments made endusers valueadded resellers deferred december 31 2004 infrastructure products accounted 13678 million 77 total product net revenues 2005 infrastructure product net revenue grew 40 2004 2005 primarily due increase revenues service providers enterprises slt products accounted 4032 million 23 total product net revenues 2005 slt product revenue primarily driven increased demand enterprise market higher net revenues 2005 compared 2004 primarily due revenue growth security products additionally acquisitions made 2005 enabled us cross sell infrastructure security application acceleration products existing customer bases analysis change revenue infrastructure slt segments change units found section titled “segment information” net product revenue increased 2003 2004 primarily result increase infrastructure product shipments meet customers’ capital expenditures demands lesser extent due slt net revenue related netscreen acquisition service net revenues net service revenues increased 1199 million 69 2004 2005 primarily due growth support services lesser degree growth professional services growth support services largely due improved renewal rates growing installed base recognize revenue service contracts services completed ratably period obligation majority service revenue earned customers purchase products enter service contracts typically oneyear renewable periods net service revenues increased 2003 2004 primarily result increase installed base customers products total net revenues following table shows net revenue geographic region millions except percentages continue experience varying distribution revenue among three geographic theaters expect trend continue net revenue united states percentage total net revenue increased 2005 compared 2004 primarily due growth driven increased demand within service provider enterprise markets net revenue emea percentage total net revenue increased 2005 compared 2004 primarily due strength across region including finland greece italy poland united kingdom net revenue japan percentage total net revenue decreased 2005 compared 2004 primarily due completion customers several network expansion projects pause build next generation network ngn net revenue asia pacific countries percentage total net revenue remained fairly consistent prior years 2004 net revenue americas region grew percentage total net revenue due improvement customer spending united states siemens accounted greater 10 net product service revenues years ended december 31 2005 2004 2003 ericsson accounted greater 10 net revenues year ended december 31 2003 expect largest customers well key strategic partners continue account substantial portion net revenue 2006 foreseeable future cost revenues following table shows cost product service revenues related gross margin “gm” percentages millions except percentages reclassifications made product costs 2004 2003 include related stock compensation expense conform current year presentation two percentage points decrease product gross margins 2004 2005 primarily due increasing competition certain products become mature product cycles expanded market share entered markets since 2004 begun experience increased price competition price competition limited date evidenced increase revenue dollars compared yearago period well relatively comparable product gross margins year expect see increasing price competition downward pressure product gross margins future nevertheless higher product revenue volume contributed increased gross margin 4201 million 50 2005 compared 2004 six percentage points increase product gross margins 2003 2004 primarily due costcutting initiatives resulted standard costs manufacturing support costs increasing lesser rate product net revenues terms absolute dollars periods addition standard margins original netscreen products favorable standard margins infrastructure products netscreen’s acquisition 2004 contributed increases compared prior year improvement gross margins also result 160 million reduction carrying obsolescence charges 2003 2004 historical charges paid contract manufacturers decreased increase gross margins partially offset acquisition charges related netscreen acquisition increased cost product revenues 55 million inventory fair value adjustment amortization order backlog intangible asset service gross margins increased five percentage points 2004 2005 primarily attributable larger revenue increase compared increase headcount outside services spares purchases needed support growing installed base total employee related expenses percentage service revenue 2005 decreased 22 compared 26 2004 nevertheless absolute dollars total service related costs increased 2005 compared 2004 employee related expenses increased 202 million outside service expenses increased 175 million result increased headcount 2005 addition expense associated spares increased 71 million service gross margins increased two percentage points 2003 2004 result improved efficiencies economies scale direct result larger installed base thus leveraged service organization increased leverage evidenced fact total employee related expenses decreased percentage service revenue 26 2004 27 2003 however absolute dollars employee related expenses increased 185 million 2003 2004 increases absolute dollars due netscreen acquisition addition absolute dollars outside services costs increased 93 million 2003 2004 primarily due netscreen acquisition finally costs associated spare parts decreased percent service revenue 2003 2004 remained approximately terms absolute dollars research development sales marketing general administrative expenses following table shows research development sales marketing general administrative expenses amounts percentage total net revenues millions except percentages reclassifications made 2004 2003 amounts include related stock compensation expense conform current year presentation research development expenses increased 955 million 2005 compared 2004 decreased percent total net revenues increase absolute dollars primarily due increases personnel related expenses 664 million facility related expenses 141 million engineering testing expenses 126 million equipment related expenses 85 million depreciation 51 million increases personnel related expenses 2005 primarily due additional hires engineering organization including five acquisitions increase partially offset decrease stock compensation expense 116 million compared 2004 result forfeitures unvested options 2005 continue invest standalone well integrated products order satisfy customer needs addition invested expanded global research development efforts specifically china india research development expenses increased 819 million 2004 compared 2003 decreased percent total net revenues increase absolute dollars primarily due employee related expenses increasing 424 million yearoveryear result netscreen acquisition increase research development expenses also result 65 million increase expensed equipment primarily used test activities 56 million increase prototype expense increase expensed equipment due additional research development requirements resulting netscreen acquisition prototype expenses closely tied product launches testing certification needed product offered public amounts reported given period vary depending product developed timing release stock compensation expense increased 196 million due additional amortization stock options assumed netscreen acquisition sales marketing expenses increased 1196 million 2005 compared 2004 decreased percent total net revenues increase absolute dollars primarily due increases personnel related expenses 973 million increases marketing related activities 109 million increases equipment related expenses 26 million personnel related expenses increased 2005 primarily due additional hires including acquisitions support expansion distribution channels customer base well support larger portfolio products marketing related activities increased primarily result specific activities designed expand improve distribution channels introduction new products increase awareness existing products broader range customers increase partially offset decrease stock compensation expense 129 million compared 2004 due primarily forfeitures unvested options 2005 sales marketing expenses increased 1740 million 2004 compared 2003 increased percent total net revenues increase absolute dollars primarily due employee related expenses increasing 1047 million yearoveryear result netscreen acquisition increase revenue marketing related expenses increased 223 million due netscreen acquisition branding combined companies development distribution channel sales outside services increased 70 million due professional services related marketing activities addition demonstration equipment increased 64 million due netscreen acquisition related purchase security demonstration products direct sales force resellers demonstration equipment expensed immediately closely tied product launches stock compensation expense increased 175 million due additional amortization stock options assumed netscreen acquisition general administrative expenses increased 196 million 2005 compared 2004 remained 4 total net revenues increase absolute dollars driven increases personnel related expenses 106 million 100 million patent related expense 100 million patent expense pertained agreement entered thirdparty avoid future disputes increase partially offset decrease stock compensation expense 09 million compared 2004 due primarily forfeitures unvested options 2005 general administrative expenses increased 268 million 2004 compared 2003 remained 4 total net revenues increase absolute dollars driven 136 million increase professional services 93 million increase employee related expenses stock compensation expense increased 20 million due additional amortization stock options assumed netscreen acquisition operating expenses following table shows operating expenses millions amortization purchased intangibles amortization expense intangible assets increased 284 million 2005 compared 2004 primarily due additional intangible assets five acquisitions completed 2005 addition recognized less full year amortization expense intangible assets associated netscreen acquisition 2004 amortization expense intangible assets increased 361 million 2004 compared 2003 due intangible assets purchased netscreen acquisition see note 3 item 8 information purchased intangible assets inprocess research development 2005 total 110 million charged iprd expense connection three five acquisitions year total funk purchase price 53 million allocated inprocess research development “iprd” total peribit purchase price 38 million allocated iprd total kagoor purchase price 19 million allocated iprd none acorn redline purchase prices allocated iprd 2004 275 million allocated iprd netscreen acquisition expensed year projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition funk peribit kagoor netscreen multiple iprd efforts way certain current future product lines funk efforts included development new versions steelbelted radius “sbr” sbr high availability “ha” mobile ip module “mim” ii products related radius product offering iprd acquisition date also included development new versions endpoint assurance proxy remote control odyssey product families time funk acquisition estimated development efforts completed next four months estimated cost approximately 09 million peribit efforts included development next versions software sequence reducer “sr” family sequence mirror “sm” family central management system “cms” products well hardware program sr sm families time peribit acquisition estimated development efforts would completed next twelve months estimated cost approximately 23 million kagoor efforts included variety signaling protocols next generation products operating systems time kagoor acquisition estimated development efforts would completed next eight months estimated cost approximately 08 million december 31 2005 estimated costs complete research development efforts approximately 20 million netscreen efforts included integrating secure routers embedded encryption chips well functions features next generation internet protocol “ip” wireless digital subscriber line connectivity voice ip capability utilized discounted cash flow “dcf” method value iprd using rates ranging 20 25 depending estimated useful life technology applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time netscreen acquisition estimated development efforts would completed next eighteen months estimated cost approximately 25 million december 31 2005 remaining costs associated research development efforts restructuring impairments special charges implemented several restructuring plans 2002 2004 result product discontinuation acquisitions unisphere netscreen restructuring impairments special charges 2005 included adjustments 66 million primarily related restructuring accruals reoccupied portion former netscreen facility previously included acquisition related reserve credit partially offset 59 million charge associated impairment purchased intangible assets related kagoor integration costs incurred immaterial integration expenses five 2005 acquisitions approximately 51 million netscreen acquisition 2004 integration expenses incremental costs directly related integration two companies integration expenses consisted principally facility related expenses workforce related expenses professional fees estimate majority integration costs related 2005 2004 acquisitions incurred immaterial amount additional integration costs acquisitions foreseeable future income expenses following table shows income expenses millions interest income increased 309 million 2004 2005 result higher cash equivalents investment balances increase rates return realized investments interest income decreased 52 million 2003 2004 decreases result lower rates return realized investments less realized gains interest expenses decreased 15 million 2004 2005 primarily due retirement subordinated notes 2004 resulting savings 25 million partially offset foreign exchange related losses balance sheet revaluation bank fees interest expense decreased 337 million 2003 2004 almost entirely due interest saved retirement subordinated notes certain minority equity investments privately held companies carried cost adjusted impairment controlling interest ability exercise significant influence companies wrotedown investments 04 million 29 million 2005 2004 respectively changes market value believed temporary 2005 recorded gain 17 million connection business combination transaction privately held company investment portfolio cost basis equity investment 10 million 2003 sold marketable equity securities classified availableforsale cost basis 43 million recognized gains 87 million spent 1450 million 7920 million 2004 2003 respectively retire subordinated notes recognized net losses 41 million 11 million 2004 2003 respectively losses result difference carrying value subordinated notes time retirement including unamortized debt costs amount paid extinguish notes provision income taxes provision income taxes increased 1482 million 2005 833 million 2004 2005 effective rate 295 differs federal statutory rate 35 due primarily benefit tax credits reduction deferred tax liabilities related repatriation dividend american jobs creation act 2004 repatriated 2250 million 2005 recorded net tax benefit 2005 197 million related repatriation dividend net tax benefit consists federal state tax provision net federal benefit 97 million offset tax benefit 294 million related adjustment deferred tax liabilities unrepatriated earnings provision income taxes increased 833 million 2004 198 million 2003 2004 effective rate 38 reflects taxes payable certain foreign jurisdictions benefit tax credits inability benefit certain charges losses segment information description products services segment found note 12 consolidated financial statements began track financial information three operating segments 2005 management structure responsibilities began measure business based management operating income included segment financial data three years period ended december 31 2005 comparative purposes financial information operating segment used management make financial decisions allocate resources follows millions infrastructure operating segment infrastructure segment net revenues increased 2004 2005 2003 2004 due adoption expansion ip networks customers order reduce total operating costs able offer multiple services single network following table shows infrastructure revenue units recognized ports shipped track infrastructure revenue units recognized ports shipped analyze customer trends indicate areas potential network growth infrastructure product platforms essentially modular chassis serving base platform chassis certain number slots available populated components refer modules interfaces modules components router receives incoming packets data variety transmission media physical connection transmission medium module referred port number ports module varies widely depending functionality throughput offered module chassis revenue units represent number chassis revenue recognized period management operating income increased 2004 2005 2003 2004 primarily due increases revenue evident increase chassis revenue units increase partially offset higher personnel related costs primarily related support product innovation expansion sales channels service layer technologies operating segment slt segment net revenues increased 2004 2005 2003 2004 primarily due netscreen acquisition 2004 lesser extent funk peribit redline kagoor acquisitions increases sales firewall products 2005 management operating income increased 2004 2005 2003 2004 primarily due increases net revenue partially offset increased expenses primarily related product innovation expansion sales channels additionally purchase accounting adjustments related netscreen acquisition negatively impacted revenue management operating results 2004 service operating segment net service revenues increased 2005 compared 2004 primarily due growth support services lesser degree growth professional services growth support services largely due improved renewal rates growing installed base service management operating income increased result revenue growth experienced infrastructure segment slt segment partially offset increases operating costs primarily due personnel related costs however absolute dollars employee related expenses increased result increased headcounts expenses associated spares also increased result revenue growth liquidity capital resources overview funded business issuing securities operating activities following table shows capital resources millions working capital increased 2735 million 2004 2005 due cash provided operations 6429 million partially offset net cash used investing activities significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities deferred revenue based past performance current expectations believe cash equivalents shortterm investments cash generated operations satisfy working capital needs capital expenditures commitments liquidity requirements associated existing operations least next 12 months addition transactions arrangements relationships unconsolidated entities persons reasonably likely materially affect liquidity availability requirements capital resources cash requirements contractual obligations following table summarizes principal contractual obligations december 31 2005 effect obligations expected liquidity cash flow future periods millions occupy approximately 14 million square feet world wide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires may 2014 b principal commitment december 31 2005 outstanding zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes issued june 2003 senior unsecured obligations rank parity right payment existing future senior unsecured debt rank senior existing future debt expressly provides subordinated notes senior notes bear interest convertible shares common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances carrying value senior notes december 31 2005 4000 million c firm purchase commitments contract manufacturers order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders valued 781 million december 31 2005 based build forecasts take ownership components ncnr orders represent firm purchase commitments pursuant agreements contract manufacturers components used contract manufacturers build products based purchase orders received customers incur liability products built contract manufacturer fulfills customer’s order ships however components go unused may assessed carrying charges obsolete charges december 31 2005 accrued 216 million based estimate charges contractual obligations consist following • escrow amount 122 million related funk acquisition indemnity obligations onehalf indemnity obligations expire january 2007 remaining onehalf expire june 2007 also included contingent bonus payable based certain milestones 5 million earned period one year • escrow amount 15 million related acorn acquisition indemnity obligations indemnity obligations expire may 2007 also included contingent earnout payable former acorn stockholders based certain milestones 22 million bonus payable employees related continued employment 10 million earnout bonuses earned period two years • escrow amount related redline kagoor acquisitions 132 million 68 million respectively indemnity obligations indemnity obligations expire may 2006 connection peribit acquisition 16 million shares common stock fair value 352 million acquisition date held escrow indemnity obligations include obligation table since noncash item onehalf indemnity obligations expire july 2006 remaining onehalf expire january 2007 operating activities net cash provided operating activities 6429 million 4394 million 1786 million years ended december 31 2005 2004 2003 respectively cash provided operating activities period due net income adjusted • noncash charges 3040 million 2465 million 768 million 2005 2004 2003 respectively primarily depreciation amortization expenses stockbased compensation tax benefit employee stock option plans inprocess research development acquisitions debt issuance costs loss disposal property equipment restructuring expense impairment charges associated kagoor’s purchased intangible assets noncash charges 2005 also included benefit reversal netscreen’s acquisition related liabilities loss due impairment equity investment partially offset gains associated availableforsale investments 2004 noncash charges also included loss redemption subordinated notes loss due writedown equity investments 2003 noncash charges also included loss redemption subordinated notes offset gain sale equity investment investing activities net cash used investing activities 5837 million year ended december 31 2005 net cash used investing activities 585 million year ended december 31 2004 net cash provided investing activities 3001 million year ended december 31 2003 investing activities included capital expenditures purchases sale maturities availableforsale securities purchase sale equity investments acquisitions businesses capital expenditures increased 2004 2005 mainly due new product developments overseas expansions business acquisitions capital expenditures increased 2003 2004 due business growth investing activities include financing activities net cash provided financing activities 1460 million year ended december 31 2005 net cash used financing activities 334 million 3075 million years ended december 31 2004 2003 respectively cash provided periods issuance common stock related employee option exercises stock purchase plans spent 1450 million 7920 million 2004 2003 respectively retire subordinated notes spent 636 million 2004 retire 29 million shares common stock 2003 received net proceeds 3928 million issuance senior notes january february 2006 repurchased 10071000 shares common stock average price 1851 per share part common stock repurchase program repurchase material impact liquidity recent accounting pronouncements december 16 2004 financial accounting standards board fasb issued fasb statement 123 revised 2004 “sfas 123r” sharebased payment revision fasb statement 123 “sfas 123” accounting stock issued employees sfas 123r supersedes apb opinion 25 “apb 25” accounting stock issued employees amends fasb statement 95 statement cash flows generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees including grants employee stock options recognized income statement based fair values pro forma disclosure longer alternative adopted sfas 123r january 1 2006 sfas 123r permits public companies adopt requirements using one two methods modified prospective method modified retrospective method plan adopt sfas 123r using modified prospective method compensation cost recognized beginning effective date based requirements sfas 123r sharebased payments granted effective date b based requirements sfas 123 awards granted employees prior effective date sfas 123r remain unvested effective date recognize results operations compensation cost stockbased awards issued december 31 2005 straightline basis requisite service period entire award stockbased awards issued prior january 1 2006 amortize related compensation costs using gradedvesting method permitted sfas 123 currently account sharebased payments employees using apb 25 intrinsic value method generally recognize compensation cost employee stock options adoption sfas 123r fair value method significant adverse impact reported results operations stockbased compensation expense charged directly reported earnings pretax balance unearned stockbased compensation expensed period 2006 2010 related sharebased awards unvested december 31 2005 previously calculated disclosureonly requirements sfas 123 approximately 98 million modifications cancellations underlying unvested securities may required accelerate increase cancel remaining unearned stockbased compensation expense extent grant additional equity securities employees assume unvested securities connection acquisitions stockbased compensation expense increased additional unearned compensation resulting additional grants acquisitions anticipate grant additional employee stock options restricted stock units 2006 fair value grants included amount impact grants cannot predicted time depends number sharebased payments granted current fair values sfas 123r also requires benefits tax deductions excess recognized compensation cost reported financing cash flow rather operating cash flow required current standard requirement likely reduce net operating cash flow increase net financing cash flows periods adoption cannot estimate amounts future depend among things employees exercise stock options amount operating cash flows recognized prior periods excess tax deductions 1295 million 660 million 108 million 2005 2004 2003 respectively november 2005 fasb issued fsp fas 123r3 transition election accounting tax effects guidance provides simplified method calculate additional paidin capital apic pool beginning balance excess tax benefits method determining subsequent impact pool option awards outstanding fully partially vested upon adoption sfas 123r sharebased payment beginning january 1 2006 addition fsp addresses alternative apic pool calculation used tax benefits related certain employee awards included cash flow financing activities cash outflow operating activities within statements cash flows fsp allows companies one year later adoption date sfas 123r november 10 2005 evaluate available transition alternatives make onetime election process evaluating impact new method provided guidance item 7aitem 7 managements discussion analysis financial condition results operations annual report form 10k “report” including “managements discussion analysis financial condition results operations” contains forwardlooking statements regarding future events future results juniper networks inc us “company” based current expectations estimates forecasts projections business results operations industry operate beliefs assumptions management words “expects” “anticipates” “targets” “goals” “projects” “would” “could” “intends” “plans” “believes” “seeks” “estimates” variations words similar expressions intended identify forwardlooking statements forwardlooking statements nature address matters different degrees uncertain forwardlooking statements predictions subject risks uncertainties assumptions difficult predict therefore actual results may differ materially adversely expressed forwardlooking statements factors might cause contribute differences include limited discussed report section entitled “risk factors” item 1a part elsewhere reports file sec forwardlooking statements based reasonable expectations management time made rely undertake obligation revise update publicly forwardlooking statements reason following discussion based upon consolidated financial statements included elsewhere report prepared accordance us generally accepted accounting principles “us gaap” course operating business routinely make decisions timing payment invoices collection receivables manufacturing shipment products fulfillment orders purchase supplies building inventory spare parts among matters decisions impact financial results given period making decisions consider various factors including contractual obligations customer satisfaction competition internal external financial targets expectations financial planning objectives preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingencies ongoing basis evaluate estimates including related sales returns pricing credits warranty costs allowance doubtful accounts impairment longterm assets especially goodwill intangible assets contract manufacturer exposures carrying obsolete material charges assumptions used valuation sharebased compensation litigation base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources information critical accounting policies estimates see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report “critical accounting policies estimates” section included “managements discussion analysis financial condition results operations” actual results may differ estimates different assumptions conditions aid understanding operating results periods covered report provided executive overview summary business market environment sections read conjunction detailed discussion analysis consolidated financial condition results operations item 7 “risk factors” section included item 1a part consolidated financial statements notes thereto included item 8 part ii report business market environment juniper networks design develop sell products services together provide customers highperformance network infrastructure built simplicity security openness scale serve highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success core competencies hardware systems silicon design network architecture open crossnetwork software platform helping customers achieve superior performance greater choice flexibility reducing overall total cost ownership business three geographic regions americas emea apac beginning first quarter 2012 aligned organizational structure focus platform software strategy resulted two business segments organized principally product families psd ssd psd segment primarily offers scalable routing switching products used service provider enterprise public sector networks control direct network traffic data centers core edge aggregation campus wans branch consumer business devices ssd segment offers software solutions focused network security network services applications service providers enterprise customers segments offer worldwide services including technical support professional services well educational training programs customers remain focused common vision new network believe organizational structure place effectively drive innovative portfolio support customers nextgeneration network requirements together highperformance product service offerings help customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers remain dedicated uncovering new ideas innovations serve exponentially increasing demands networked world endeavor continue build solutions center simplification automation open innovation 2012 saw moderate growth primary markets continued experience uncertain global macroeconomic environment customers exercised care conservatism investment prioritization project deployments expect customers continue remain cautious capital spending near term also continued experience declining product gross margins pricing pressures competitors believe product gross margins may continue decline future offset operational improvements cost efficiencies nevertheless focused executing strategy address market trends mobile internet cloud computing continue see positive longterm fundamentals highperformance networking continue invest innovation strengthening product portfolio resulted new product offerings 2012 including smaller version qfabric solutions latest qfx3000m qfabric system t4000 core routers ptx series packet transport switches additionally experienced new customer wins contributing growth ex series mx series srx series launched new acx series router support ethernet accessaggregation mpls extends network intelligence closer subscriber features open standardsbased management system software development kit sdkenabled programmability enable rapid thirdparty innovation also announced new products features simply connected portfolio including srx series services gateways wla series wireless lan access points simplify secure mobile device access enterprise networks furthermore acquired mykonos web security software february 2012 complement network security applications portfolio additionally announced innovative products enable service providers rapidly deliver expand new consumer business services products include mx2020 mx2010 3d universal edge routers new junosv app engine enable service providers transform network edge platform rapid service deployment also launched junos content encore mx application services modular line card enables delivery premium content services broadband connections across multiple device types furthermore announced technology partnership riverbed technology inc riverbed provides us new capabilities application delivery control exchange juniper providing wan acceleration technology riverbed along promoting riverbed wan optimization provider choice going forward throughout 2012 focused improved operational execution continued innovation prudent capital allocation continue believe underlying trends driving network investment around cloud mobility intact remain strong 2012 also initiated variety actions ensure positioned future resulting restructuring plan 2012 restructuring plan bring cost structure line desired longterm financial strategic model 2012 restructuring plan consists workforce reductions facility consolidations closures supply chain procurement efficiencies connection 2012 restructuring plan recorded costs 404 million workforce reductions facility consolidations closures charges 2012 also recorded certain inventory charges intangible asset impairment charges contract termination costs 529 million expect incur charges related 2012 restructuring plan end fiscal 2013 continue anticipate restructuring cost reduction activities result approximately 1500 million cost reduction savings primarily operating expenses lesser extent product service cost revenues full year 2013 comparison 2012 full year levels see note 9 restructuring charges notes consolidated financial statements item 8 part ii report discussion restructuring activities january 24 2013 communicated following five principles provide insight operating plans 2013 • expect macroeconomic environment remain uncertain • expect overall modest growth markets serve • expect take share routing switching stabilize share enterprise security • expect expand 2013 operating margins 2012 • expect continue generate strong cash flows prudently allocate capital five principles based managements plans assumptions expectations date report although believe prudent plans expectations assumptions known unknown risks uncertainties materialize underlying assumptions prove inaccurate actual results could vary materially financial results key performance metrics overview following table provides overview key financial metrics years ended december 31 2012 2011 2010 millions except per share amounts percentages day sales outstanding booktobill dso booktobill fourth quarter ended 2012 2011 2010 • net revenues net revenue decreased emea apac regions offset increase americas region 2012 compared 2011 market experienced declines service provider enterprise markets 2012 compared 2011 yearoveryear decrease net revenues 2012 primarily due decline sales core edge legacy routing products firewall products partially offset increases service revenue switching products highend srx products • gross margin gross margin percentage revenues decreased 2012 compared 2011 due lower product margin 443 million inventory charges related component inventory held excess forecasted demand intangible asset impairment charge 161 million lesser extent due increase size number strategic contracts lower margins shift product mix lower margin products decrease partially offset increase service margin • operating income operating income percentage revenues decreased 2012 compared 2011 primarily due slower revenue growth relative sales marketing research development expense continue invest innovative portfolio bring new products market addition restructuring associated charges 997 million recorded 2012 related workforce reduction activities facility closures asset impairment charges contract terminations • net income attributable juniper networks net income per share attributable juniper networks common stockholders decrease net income attributable juniper networks 2012 compared 2011 reflects lower operating income discussed • operating cash flows operating cash flows decreased 2012 compared 2011 primarily due lower net income higher taxes paid timing payments vendors decrease deferred revenue offset collections outstanding receivables • deferred revenue total deferred revenue decreased 436 million 9234 million december 31 2012 compared 9670 million december 31 2011 due decline deferred service revenue partially offset increase deferred product revenue • dso calculated ratio ending accounts receivable net allowances divided average daily net sales preceding 90 days dso quarter ended december 31 2012 decreased 11 days 24 compared quarter ended december 31 2011 decrease primarily due shipment linearity resulting greater proportion periods shipments converted cash end period increase collections outstanding receivables • booktobill represents ratio product orders booked divided product revenues respective period booktobill greater one quarter ended december 31 2012 one quarter ended december 31 2011 • stock repurchase plan activity stock repurchase program repurchased approximately 358 million shares common stock average price 1805 per share aggregate purchase price 6456 million year ended december 31 2012 critical accounting policies estimates preparation financial statements related disclosures conformity us gaap requires us make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes base estimates assumptions current facts historical experience various factors believe reasonable circumstances determine carrying values assets liabilities readily apparent sources note 2 significant accounting policies notes consolidated financial statements item 8 part ii report describes significant accounting policies methods used preparation consolidated financial statements critical accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected • inventory valuation contract manufacturer liabilities inventory consists primarily component parts used manufacturing process stated lower average cost market provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value determining provision also consider estimated recovery rates based nature inventory december 31 2012 2011 inventory balances 625 million 691 million respectively establish liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet demand forecasts customer orders also take estimated recoveries aged inventory consideration determining liability december 31 2012 2011 contract manufacturer liabilities 277 million 148 million respectively significant judgment used establishing forecasts future demand recovery rates based nature age inventory obsolete material exposures actual component usage product demand significantly lower forecast may caused factors within outside control higher incidence inventory obsolescence rapidly changing technology customer requirements may required increase inventory writedowns contract manufacturer liabilities could adverse impact gross margins profitability regularly evaluate exposure inventory writedowns adequacy contract manufacturer liabilities inventory supply chain management remains area focus balance risk material obsolescence supply chain flexibility order reduce lead times • goodwill longlived assets make significant estimates assumptions judgments valuing goodwill intangible assets connection initial purchase price allocation acquired entity well evaluating impairment goodwill intangible assets ongoing basis estimates based upon number factors including historical experience market conditions information obtained management acquired company critical estimates valuing certain intangible assets include limited historical projected customer retention rates anticipated growth revenue acquired customer product base expected use acquired assets factors also considered determining useful life acquired intangible assets amounts useful lives assigned identified intangible assets impacts amount timing future amortization expense value goodwill intangible assets could impacted future adverse changes limited significant adverse change legal factors business climate b substantial decline market capitalization c adverse action assessment regulator unanticipated competition e loss key personnel f likelythannot expectation sale disposal reporting unit significant portion thereof g realignment resources restructuring existing businesses response changes industry market conditions h testing recoverability significant asset group within reporting unit higher discount rate used impairment analysis impacted increase interest rates evaluate goodwill annual basis november 1st frequently believe impairment indicators exist goodwill tested impairment reporting unit level one level operating segment level comparing reporting units carrying value including goodwill fair value reporting unit fair values reporting units estimated using significant judgment based combination income market approaches income approach estimate fair value reporting unit based present value forecasted future cash flows reporting unit expected generate remaining life market approach estimate fair value reporting units based analysis compares value reporting units values publiclytraded companies similar lines business fair value reporting unit exceed carrying value net assets assigned reporting unit perform second step impairment test order determine implied fair value reporting units goodwill carrying value reporting units goodwill exceeds implied fair value record impairment loss equal difference determining fair value reporting unit highly judgmental nature involves use significant estimates assumptions estimates assumptions include revenue growth rates operating margins used calculate projected future cash flows operating trends riskadjusted discount rates future economic market conditions determination appropriate market comparables base fair value estimates assumptions believe reasonable unpredictable inherently uncertain actual future results may differ estimates addition make certain judgments assumptions allocated shared assets liabilities determine carrying values reporting units december 31 2012 goodwill recorded psd segment ssd segment 18663 million 21915 million respectively fair value reporting units particular ssd sensitive events changes circumstances adverse changes operating results macroeconomic conditions changes managements business strategy declines stock price hypothetical 5 decrease estimated fair value reporting units would result fair value ssd segment carrying value approximately 1 fair value psd segment excess carrying value approximately 80 see item 1a part risk factors information evaluate longlived assets property plant equipment purchased intangible assets impairment whenever events changes circumstances indicate carrying amount assets may recoverable events changes circumstances include limited significant decrease fair value underlying asset group significant decrease benefits realized acquired assets difficulty delays integrating business significant change operations acquired assets use asset longlived asset considered impaired carrying amount exceeds estimated future undiscounted cash flows asset group expected generate longlived asset considered impaired impairment recognized amount carrying amount asset exceeds fair value asset group • warranty reserves generally offer oneyear warranty hardware products 90day warranty media contains software embedded products use judgment estimates determining warranty costs part cost sales based associated material costs labor costs troubleshooting repair overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead cost estimated primarily based upon historical trends cost support customer cases within warranty period although engage extensive product quality programs processes actual product failure rates use materials service delivery costs differ estimates additional warranty costs may incurred could reduce gross margin december 31 2012 2011 warranty reserves 297 million 283 million respectively • revenue recognition revenue recognized following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 sales price fixed determinable 4 collectability reasonably assured enter contracts sell products services sales agreements contain standard terms conditions agreements contain multiple elements nonstandard terms conditions result significant contract interpretation may required determine appropriate accounting including whether deliverables specified multiple element arrangement treated separate units accounting revenue recognition purposes price allocated among elements recognize revenue element changes allocation sales price elements may impact timing revenue recognition change total revenue recognized contract revenue recognition policies allocate revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence tpe vsoe available estimated selling price “esp” neither vsoe tpe available establish vsoe selling price using price charged deliverable sold separately tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers esp established considering internal factors margin objectives pricing practices controls customer segment pricing strategies product life cycle consideration also given market conditions industry pricing strategies technology life cycles determining esp apply management judgment establish margin objectives pricing strategies evaluate market conditions product life cycles use tpe consider products similar interchangeable competitors products standalone sales similarly situated customers revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years applied esp majority product revenue vsoe service revenue 2012 2011 2010 • sharebased compensation recognize sharebased compensation expense sharebased payment awards including stock options rsus rsas psas purchases employee stock purchase plan espp based awards fair value grant date utilize blackscholesmerton “bsm” optionpricing model order determine fair value stock options espp bsm model requires various highly subjective assumptions including volatility expected award life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience determine fair value rsus rsas psas based closing market price common stock date grant addition use significant judgment estimating sharebased compensation expense psas based vesting criteria recognize expense portions annual targets set assumptions used calculating fair value sharebased payment awards represent managements best estimates involve inherent uncertainties application managements judgment factors change different assumptions used sharebased compensation expense could materially different future additionally required estimate expected forfeiture rate based historical experience well judgment recognize expense expectedtovest shares actual forfeiture rate materially different estimate recorded sharebased compensation expense could different • income taxes subject income taxes united states numerous foreign jurisdictions significant judgment required evaluating uncertain tax positions determining provision income taxes although believe reserves reasonable assurance given final tax outcome matters different reflected historical income tax provisions accruals adjust reserves light changing facts circumstances closing tax audit refinement estimate extent final tax outcome matters different amounts recorded differences affect provision income taxes period determination made significant judgment also required determining valuation allowance recorded deferred tax assets assessing need valuation allowance consider available evidence including past operating results estimates future taxable income feasibility tax planning strategies event change determination amount deferred tax assets realized adjust valuation allowance corresponding impact provision income taxes period determination made provision income taxes subject volatility could adversely affected earnings lower anticipated countries lower tax rates higher anticipated countries higher tax rates changes valuation deferred tax assets liabilities expiration lapses rd tax credit laws transfer pricing adjustments including effect acquisitions intercompany rd costsharing arrangement legal structure tax effects nondeductible compensation tax costs related intercompany realignments changes accounting principles changes tax laws regulations including possible us changes taxation earnings foreign subsidiaries deductibility expenses attributable foreign income foreign tax credit rules significant judgment required determine recognition measurement attributes prescribed accounting guidance uncertainty income taxes accounting guidance uncertainty income taxes applies income tax positions including potential recovery previously paid taxes settled unfavorably could adversely affect provision income taxes additional paidin capital addition subject continuous examination income tax returns internal revenue service “irs” tax authorities regularly assess likelihood adverse outcomes resulting examinations determine adequacy provision income taxes assurance outcomes continuous examinations adverse effect operating results financial condition • loss contingencies use significant judgment assumptions estimate likelihood loss impairment asset incurrence liability determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated record charge equal minimum estimated liability litigation costs loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated regularly evaluate current information available us determine whether accruals adjusted whether new accruals required recent accounting pronouncements see note 2 significant accounting policies notes consolidated financial statements item 8 part ii report full description recent accounting pronouncements including expected dates adoption estimated effects financial condition results operations incorporated herein reference results operations following table presents product service millions except percentages decrease product revenues 2012 compared 2011 primarily due decline sales core edge legacy routing firewall products partially offset increase switching highend srx products 2012 revenues reflect initial sales introduction t4000 ptx acx routing products increase service revenues 2012 primarily driven strong contract renewals compared 2011 certain edge routing switching security products increase product revenues 2011 compared 2010 primarily due increase sales edge routing switching products partially offset decreases core routing highend firewall products 2011 revenues reflect initial sales introduction qfabric solution increase service revenues 2011 compared 2010 primarily attributable sales contract renewals certain edge routing switching security products net revenues market customer following table presents net revenues market millions except percentages sell highperformance network products service offerings psd ssd segments two primary markets service provider enterprise determination market particular revenue transaction relates based primarily upon customers industrial classification code may also include subjective factors intended use product service provider market generally includes wireline wireless cable operators well major internet content application providers including provide social networking search engine services enterprise market generally comprises businesses federal state local governments research education institutions net revenues sales service provider market decreased 2012 compared 2011 primarily due reduced routing purchases international content service providers partially offset strong growth tier 1 carrier service providers americas net revenues sales service provider market increased 2011 compared 2010 across geographic regions specifically americas emea increase largely attributable customers adoption routing switching products net revenues generated enterprise market decreased 2012 compared 2011 primarily due lower revenue federal financial services offset expanding presence apac emea net revenues generated enterprise market increased 2011 compared 2010 across three geographic regions increase reflecting demand routing switching products driven value proposition offer customers well expansion presence global enterprise market 2012 2010 verizon communications inc accounted 103 104 net revenues respectively 2011 single customer accounted greater 10 net revenues net revenues geographic region following table presents net revenues geographic region millions except percentages net revenues americas increased 2012 compared 2011 primarily due increased sales united states certain service providers offset decline enterprise market particularly among federal financial services customers net revenues americas increased 2011 compared 2010 primarily due increased sales united states attributable demand routing switching products services enterprise service provider customers net revenues emea decreased 2012 compared 2011 primarily due decreased sales western southern europe result challenging economic climate areas decrease partially offset increased revenues middle east top service provider eastern europe across broad range product portfolio increase net revenues emea 2011 compared 2010 driven service provider enterprise demand routing switching products related services service provider enterprise markets increases largely attributable sweden eastern europe netherlands addition recognized first revenue top service provider eastern europe across broad range product portfolio net revenues apac decreased 2012 compared 2011 primarily due decrease sales certain service provider customer japan following large product deployment occurred 2011 decrease partially offset growth china enterprise market net revenues apac increased 2011 compared 2010 due increase revenues service provider enterprise markets net revenues also increased southeast asia australia 2011 compared 2010 partially offset continued weakness japan deferral demand china gross margins following table presents gross margins millions except percentages product gross margin percentage decreased 2012 compared 2011 primarily due 443 million inventory charge related component inventory held excess forecasted demand intangible asset impairment charge 161 million related 2012 restructuring activities discussed note 8 financial information note 7 goodwill purchased intangible assets notes consolidated financial statements item 8 part ii report lesser extent decrease due increase size number strategic contracts lower margins shift product mix lower margin products product gross margin percentage decreased 2011 compared 2010 primarily due lower proportion router revenue shift geographic mix revenue americas increased fixed overhead inventoryrelated costs 2010 2012 product gross margins declined expect trend continue 2013 due shift product mix pricing pressures offset part innovation cost efficiencies service gross margin percentage increased 2012 compared 2011 primarily due higher service revenues combined continuing focus operational improvements cost efficiencies service gross margin percentage decreased 2011 compared 2010 primarily due growth headcount service support resources expanded product portfolio expect service gross margins remain relatively stable 2013 operating expenses following table presents operating expenses millions except percentages operating expenses historically driven personnelrelated costs including wages commissions bonuses vacation benefits sharebased compensation travel expect trend continue facility information technology “it” departmental costs allocated departments based usage headcount facility related headcount 368 375 388 december 31 2012 2011 2010 respectively total 9234 9129 8772 employees december 31 2012 2011 2010 respectively yearoveryear increase total operating expenses 2012 primarily driven increase personnelrelated costs 812 million primarily salaries benefits higher variable compensation sharebased compensation offset lower commissions headcount growth increase engineering program costs 122 million rd expense increased 2012 compared 2011 primarily due increase engineering program costs driven new product initiatives first half year addition higher variable compensation rd headcount decreased 1 december 31 2012 4081 compared 4138 december 31 2011 result restructuring activities second half 2012 rd expense increased 2011 compared 2010 primarily due increase personnelrelated expenses also contributing increase higher consulting facilities costs associated rd projects support new product initiatives including data center mobility core solutions increase partially offset lower variable compensation 2011 sales marketing expense increased slightly 2012 compared 2011 primarily due increase personnelrelated expenses 4 increase headcount 2568 employees december 31 2011 2680 employees december 31 2012 well higher demo costs associated bringing new products market increases partially offset lower commissions decrease outside services sales marketing expense increased 2011 compared 2010 primarily due increase personnelrelated expenses also contributing increase 2011 increase commission expense driven higher revenues increase outside services incurred support sales marketing activities general administrative ga expense increased 2012 compared 2011 primarily due increase outside professional services consists legal consulting fees support financerelated initiatives including erp implementation ga headcount increased 5 463 december 31 2011 486 december 31 2012 ga expense relatively flat 2011 compared 2010 costs associated ga headcount growth 3 449 december 31 2010 463 december 31 2011 largely offset lower variable compensation amortization purchased intangible assets decreased 2012 compared 2011 certain purchased intangible assets reached end amortization period 2011 partially offset addition purchased intangible assets acquisitions completed 2012 amortization purchased intangible assets increased 2011 compared 2010 due addition purchased intangible assets acquisitions 2011 2010 restructuring charges increased 2012 compared 2011 due restructuring plan 2012 restructuring plan initiated third quarter 2012 bring cost structure line desired longterm financial strategic model also incurred charges related restructuring plan 2011 restructuring plan implemented third quarter 2011 align business operations macroeconomic market conditions 2012 incurred 468 million restructuring charges related restructuring plans primarily workforce reductions facility closures restructuring charges increased 2011 compared 2010 primarily due 153 million charges related workforce reductions 135 million charges primarily related impairment abandoned inprocess internal use software project acquisitionrelated charges decreased 2012 compared 2011 due lower number size acquisitions completed 2012 compared 2011 fourth quarter 2010 2011 2010 recorded 71 million 63 million respectively direct indirect acquisitionrelated costs financial advisory legal due diligence integration costs acquisitions completed 2011 2010 see note 3 business combinations notes consolidated financial statements item 8 part ii report discussion acquisitions sharebased compensation sharebased compensation expense associated stock options espp rsus rsas psas recorded following cost expense categories millions except percentages sharebased compensation expense increased 2012 compared 2011 primarily due higher number rsu awards granted well change standard vesting terms four years three years rsu awards granted 2012 increase partially offset decrease stock options grants valued lower fair value decrease expense associated psas due lower achievement performance targets sharebased compensation expense increased 2011 compared 2010 primarily due increase awards granted driven headcount growth higher fair value equity awards attributable increase market value common stock awards expense income net income tax provision following table presents expense income net income tax provision millions except percentages interest income primarily includes interest income cash equivalents investments interest income increased 2012 compared 2011 primarily due higher balance longterm investments yielding higher interest income decreased 2011 compared 2010 primarily due lower balance longterm investments yielding lower interest expense primarily consists interest longterm debt customer financing arrangements interest expense increased 2012 compared 2011 primarily due issuance 10 billion senior notes near end first quarter 2011 related interest expense 400 million net capitalized interest expense increased 2011 compared 2010 primarily due 377 million interest expense net capitalized interest notes see note 10 longterm debt financing notes consolidated financial statements item 8 part ii report discussion notes typically consists investment foreign exchange gains losses nonoperational income expense items 2012 recognized gains 455 million including gain 147 million acquisition privatelyheld investment contrail impairment losses 200 million included related privatelyheld investments 2011 included certain legal expenses unrelated current recent operations approximately 70 million 2010 recognized total gain 87 million within primarily due acquisitions privatelyheld investments ankeena altor effective tax rates 360 257 204 2012 2011 2010 respectively effective rate 2012 substantially similar federal statutory rate 35 effective rate 2012 reflect benefit federal rd credit expired december 31 2011 january 2 2013 president signed law american taxpayer relief act 2012 retroactively extended federal rd credit two years december 31 2013 result expect record favorable benefit approximately170 million 190 million first quarter 2013 retroactive renewal 2012 federal rd credit increase overall effective tax rate 2012 compared 2011 2010 primarily due effect changes foreign earnings expiration rd credit december 31 2011 541 million income tax benefit 2010 resulting change estimate unrecognized tax benefits due taxpayer favorable ruling us court appeals ninth circuit xilinx inc v commissioner related sharebased compensation effective tax rates 2011 2010 differed federal statutory rate 35 primarily due federal rd credit benefit earnings foreign jurisdictions subject lower tax rates change estimate unrecognized tax benefits noted complete reconciliation effective tax rate us federal statutory rate 35 explanation income tax provision see note 14 income taxes notes consolidated financial statements item 8 part ii report segment information description products services segment see item 1 business part report description measures included segment contribution margin also found note 13 segment information notes consolidated financial statements item 8 part ii report select segment financial data three years period ended december 31 2012 follows platform systems division segment millions except percentages reconciliation contribution margin income taxes noncontrolling interest found note 13 segments notes consolidated financial statement item 8 report psd product revenues decreased 2012 compared 2011 due decline sales core edge legacy routing branch firewall products decline sales primarily attributable lower spending international customers content service provider customers americas partially offset increase sales switching products majority service revenues earned customers purchase products enter contracts support services psd service revenues increased 2012 compared 2011 primarily due strong contract renewals support services psd contribution margin percent psd revenues decreased 2012 compared 2011 primarily due decline revenues decrease also attributable shift product mix lower margin products period adjustments related prototype development costs recorded third quarter 2012 increased rd expense 115 million decrease contribution margin partially offset reduced costs result continuing focus operational improvements cost efficiencies psd product revenues increased 2011 compared 2010 primarily due growth enterprise service provider markets across regions increased demand routing switching products primarily driven growing network demand attributable increased reliance digital devices connected network lesser extent improved macroeconomic environment psd service revenues increased 2011 compared 2010 primarily due strong contract renewals support services psd contribution margin percentage psd revenues decreased 2011 compared 2010 due higher rd spend support product portfolio higher rate revenue return software solutions division segment millions except percentages reconciliation contribution margin income taxes noncontrolling interest found note 13 segments notes consolidated financial statement item 8 report ssd product revenues decreased 2012 compared 2011 primarily due decline sales legacy highend firewall products routing services products partially offset increase sales highend srx products ssd service revenues increased 2012 compared 2011 primarily driven strong contract renewals support services ssd contribution margin percentage ssd revenues remained relatively stable 2012 compared 2011 due shift product mix lower margin products offset reduced costs result continued focus operational improvements cost efficiencies ssd product revenues decreased slightly 2011 compared 2010 primarily due decline sales highend firewall products offset increases routing services products ssd service revenues increased 2011 compared 2010 primarily due increased revenue new service contracts strong contract renewals support services ssd contribution margin percentage ssd revenues 2011 compared 2010 decreased primarily due shift product mix toward lower margin products liquidity capital resources historically funded business primarily operating activities issuance common stock recently issuance notes following table shows capital resources millions except percentages significant components working capital cash equivalents shortterm investments accounts receivable reduced accounts payable accrued liabilities shortterm deferred revenue working capital decreased 7943 million year ended december 31 2012 primarily due higher cash equivalent balance december 31 2011 result issuance notes march 2011 decrease accounts receivables offset decreases accounts payable shortterm deferred revenue summary cash flows december 31 2012 cash equivalents decreased 5026 million december 31 2011 decrease mainly result cash used investing financing activities 5967 million 5483 million respectively offset 6424 million generated operating activities operating activities net cash provided operating activities 6424 million 9867 million 8123 million 2012 2011 2010 respectively cash flows operations decreased 3443 million 2012 compared 2011 primarily due lower consolidated net income higher taxes paid timing payments vendors decrease deferred revenue offset timing collections outstanding receivables cash flows operations increased 1744 million 2011 compared 2010 primarily due onetime litigation settlement payment 1693 million 2010 occur 2011 increase partially offset lower consolidated net income 2011 investing activities net cash used investing activities 5967 million 7072 million 5327 million 2012 2011 2010 respectively decrease net cash used investing activities 2012 compared 2011 primarily due fewer purchases investments offset higher spending asset purchases property equipment acquisitions 2011 invested proceeds issuance notes availableforsale securities purchased property equipment phased campus buildout corporate headquarters sunnyvale ca expect capital expenditures decrease 2013 complete phased campus buildout financing activities net cash used financing activities 5483 million 724 million 2012 2010 respectively net cash generated financing activities 8190 million 2011 change 2011 2012 primarily due issuance notes 2011 increase purchases retirement common stock fewer proceeds employee stock option exercises 2012 generated additional cash financing activities 2011 compared 2010 primarily due issuance notes partially offset repurchase outstanding common stock discussion longterm debt see note 10 longterm debt financing notes consolidated financial statements item 8 part ii report stock repurchase activities june 2012 board directors “board” approved stock repurchase program 2012 stock repurchase program authorized us repurchase 10 billion common stock 2012 stock repurchase program addition stock repurchase program approved board february 2010 “2010 stock repurchase program” authorized us repurchase 10 billion common stock 2010 stock repurchase program authorization addition stock repurchase program approved board march 2008 also enabled us repurchase 10 billion common stock repurchased retired approximately 358 million shares common stock average price 1805 per share aggregate purchase price 6456 million year ended december 31 2012 stock repurchase programs december 31 2012 5682 million authorized funds remaining stock repurchase programs expect continue calibrate buybacks future quarters market conditions time restructuring december 31 2012 accrued total restructuring charges approximately 182 million related 2012 2011 restructuring plans approximately 106 million related severance costs expected paid third quarter fiscal 2013 remaining 76 million facilitiesrelated charges expected paid march 2018 2012 made payments related restructuring plans totaling approximately 331 million severance costs facility closures contract terminations deferred revenue deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training following table summarizes deferred product service revenues millions total deferred revenue decreased 436 million 9234 million december 31 2012 compared 9670 million december 31 2011 due decline deferred service revenue driven timing revenue recognition partially offset increase net deferred product revenue offbalance sheet arrangements december 31 2012 2011 relationships unconsolidated entities financial partnerships entities often referred structured finance special purpose entities would established purpose facilitating offbalance sheet arrangements contractually narrow limited purposes business practice enter offbalance sheet arrangements however normal course business enter contracts consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding guarantees contractual obligations principal commitments consist obligations outstanding operating leases purchase commitments debt contractual obligations see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information regarding contractual commitments following table summarizes principal contractual obligations december 31 2012 effect obligations expected liquidity cash flow future periods millions operating leases contractual obligations operating leases primarily relate leased facilities noncancelable operating leases rent payments allocated costs operating expenses consolidated statements operations occupy approximately 26 million square feet worldwide operating leases majority office space north america including corporate headquarters sunnyvale california longest lease expires november 30 2022 purchase commitments order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based build forecasts contract manufacturers use components build products based forecasts purchase orders received customers generally components title product transfers contract manufacturers us immediately customers upon delivery designated shipment location components go unused products go unsold specified periods time may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet forecast customer orders december 31 2012 accrued 277 million based estimate charges total purchase commitments december 31 2012 consisted 1586 million ncnr orders longterm debt interest payment longterm debt march 2011 issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes together 2016 notes 2021 notes interest notes payable cash semiannually may redeem notes time whole time part subject makewhole premium event change control holders notes may require us repurchase cash part notes purchase price equal 101 aggregate principle amount plus accrued unpaid interest indenture governs notes also contains various covenants including limitations ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2012 compliance debt covenants based current outlook expect compliance debt covenants next twelve months contractual obligations contractual obligations primarily consisted 1242 million indemnityrelated service related escrows required certain acquisitions completed 2005 2010 2011 2012 551 million campus buildout obligations tax liabilities addition table tax liabilities include 1124 million longterm liabilities consolidated balance sheets unrecognized tax positions time unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees entered agreements customers contain indemnification provisions relating potential situations claims could alleged products infringe intellectual property rights thirdparty also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities december 31 2012 2011 126 million 199 million respectively bank guarantees standby letters credit related financial guarantees legal proceedings see note 16 commitments contingencies notes consolidated financial statements item 8 part ii report additional information liabilities may arise litigation contingencies liquidity capital resource requirements liquidity capital resources may impacted operating activities well acquisitions investments strategic relationships made may make future additionally repurchase additional shares common stock repurchase program liquidity may impacted december 31 2012 57 cash investment balances held outside us may subject us taxes repatriated august 2010 filed 15 billion shelf registration sec march 2011 issued notes amount 10 billion shelf registration statement therefore current plans may issue 500 million additional securities shelf registration statement shelf registration intended give us flexibility take advantage financing opportunities needed deemed desirable light market conditions additional offerings securities shelf registration statement made pursuant prospectus focused managing annual equity usage percentage common stock outstanding align peer group competitive levels made changes recent years reduce number shares underlying equity awards grant intention fiscal year 2012 target number shares underlying equity awards granted annual basis 275 less common stock outstanding pure share basis option rsu rsa psa granted counted one share psas counted target amount based upon shares underlying grants date options rsus psas achieved goal 2012 fiscal year 2012 result stock price weakness increased repurchase activity expect continue calibrate buybacks future quarters market conditions time also managed equity compensation programs reduce overall number shares subject outstanding awards past two years notably reduced use stock options equity compensation programs total number common shares subject outstanding awards connection juniper plans 542 million 582 million 635 million shares december 31 2012 2011 2010 respectively reflecting consecutive decline three years ended december 31 2012 based past performance current expectations believe existing cash equivalents shortterm longterm investments includes proceeds issuance notes together cash generated operations well cash generated exercise stock options purchases employee stock purchase plan sufficient fund operations anticipated growth least next twelve months believe working capital sufficient meet liquidity requirements capital expenditures commitments liquidity requirements associated existing operations period however future liquidity capital requirements may vary materially planned depending many factors including • level mix product sales gross profit margins • business product capital expenditures rd plans • repurchases common stock • incurrence repayment debt related interest obligations • litigation expenses settlements judgments similar items related resolution tax audits • volume price discounts customer rebates • accounts receivable levels maintain • acquisitions andor funding businesses assets products technologies • changes compensation policies • capital improvements new existing facilities • technological advances • competitors responses products andor pricing • relationships supplies partners customers • possible future investments raw material finished goods inventories • expenses related future restructuring plans • tax expense associated sharebased awards • issuance sharebased awards related payment cash withholding taxes current year possibly future years • level exercises stock options stock purchases equity incentive plans • general economic conditions specific conditions industry markets including effects disruptions global credit financial markets international conflicts related uncertainties item 7a item 7a quantitative qualitative disclosure market risk information required item see managements discussions analysis financial condition results operations 1999 annual report stockholders exhibit 131 hereto item 8item 7a quantitative qualitative disclosure market risk information required item see managements discussion analysis financial condition results operations 2000 annual report stockholders exhibit 131 hereto item 8item 7a quantitative qualitative disclosure market risk information required item see managements discussion analysis financial condition results operations 2001 annual report stockholders exhibit 131 hereto item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following table presents hypothetical changes fair value financial instruments held december 31 2002 sensitive changes interest rates thousands instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts majority revenue expenses transacted us dollars however since sales service operations outside us transactions denominated foreign currencies primarily euro japanese yen hong kong dollar british pound australian dollar enter foreign exchange forward contracts mitigate effect gains losses generated remeasurement certain assets liabilities denominated primarily euro japanese yen british pound australian dollar derivatives designated hedges sfas 133 “sfas 133” “accounting derivative instruments hedging activities” december 31 2002 notional fair values contracts material expect gains losses contracts material impact financial results also use foreign exchange forward contracts hedge foreign currency forecasted transactions related certain operating expenses denominated primarily euro japanese yen british pound australian dollar derivatives designated cash flow hedges sfas 133 december 31 2002 notional fair values contracts material expect gains losses contracts material impact financial results contracts original maturities ranging one three months enter foreign exchange contracts speculative trading purposes attempt limit exposure credit risk executing foreign contracts credit worthy financial institutions item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material adverse impact interest earnings investment portfolio currently hedge interest rate exposures following table presents hypothetical changes fair value financial instruments held december 31 2003 sensitive changes interest rates thousands instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts majority revenue expenses transacted us dollars however since sales service operations outside us transactions denominated foreign currencies primarily euro japanese yen hong kong dollar british pound australian dollar enter foreign exchange forward contracts mitigate effect gains losses generated remeasurement certain assets liabilities denominated primarily euro japanese yen british pound australian dollar derivatives designated hedges sfas 133 “sfas 133” “accounting derivative instruments hedging activities” december 31 2003 notional fair values contracts insignificant expect gains losses contracts material impact financial results also use foreign exchange forward contracts hedge foreign currency forecasted transactions related certain operating expenses denominated primarily euro japanese yen british pound australian dollar derivatives designated cash flow hedges sfas 133 december 31 2003 notional fair values contracts insignificant expect gains losses contracts material impact financial results contracts original maturities ranging one three months enter foreign exchange contracts speculative trading purposes attempt limit exposure credit risk executing foreign contracts credit worthy financial institutions item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following table presents hypothetical changes fair value financial instruments held december 31 2004 sensitive changes interest rates thousands instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts policy use derivatives partially offset market exposure fluctuations foreign currencies recognize derivatives consolidated balance sheet fair value enter derivatives speculative trading purposes use foreign exchange forward contracts hedge foreign currency forecasted transactions related certain operating expenses denominated primarily euro japanese yen british pound derivatives designated cash flow hedges maturities one two months attempt limit exposure credit risk executing foreign exchange contracts creditworthy financial institutions derivative designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statement operations line item hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2004 2003 2002 incomeexpense consolidated statement operations event underlying forecasted transaction occur becomes probable occur reclassify gain loss related cash flow hedge accumulated comprehensive income incomeexpense consolidated statement operations time years 39 ended december 31 2004 2003 2002 material net gains losses recognized incomeexpense relating hedges forecasted transactions occur additionally use foreign exchange forward contracts mitigate transaction gains losses generated certain monetary assets liabilities denominated primarily euro japanese yen british pound derivatives carried fair value changes recorded incomeexpense changes fair value foreign exchange contracts largely offset remeasurement underlying assets liabilities foreign exchange contracts maturities one two months performed sensitivity analysis assuming hypothetical 10 percent adverse movement foreign exchange rates foreign exchange contracts underlying exposures described december 31 2004 analysis indicated hypothetical market movements would material effect consolidated financial position results operations cash flows item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following table presents hypothetical changes fair value financial instruments held december 31 2006 sensitive changes interest rates millions following table presents hypothetical changes fair value financial instruments held december 31 2005 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts policy use derivatives partially offset market exposure fluctuations foreign currencies enter derivatives speculative trading purposes use foreign currency forward contracts mitigate transaction gains losses generated certain foreign currency denominated monetary assets liabilities derivatives carried fair value changes recorded income expense changes fair value derivatives largely offset remeasurement underlying assets liabilities foreign exchange contracts maturities one two months periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2006 2005 2004 income expense results operations item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities addition portion cash marketable securities held nonus domiciled countries securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following tables present hypothetical changes fair value financial instruments held december 31 2007 2006 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate transaction gains losses generated certain foreign currency denominated monetary assets liabilities derivatives carried fair value changes recorded income expense period changes fair value remeasurement underlying assets liabilities foreign exchange contracts maturities one two months sales costs revenues primarily denominated us dollars operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2007 2006 2005 respectively income expense consolidated statements operations increase operating expenses including research development sales marketing well general administrative expenses due foreign currency fluctuations net hedging approximately 2 2007 equity price risk portfolio publiclytraded equity securities inherently exposed equity price risk stock market fluctuates monitor equity investments impairment periodic basis event carrying value equity investments exceeds fair value determine decline value temporary reduce carrying value current fair value purchase equity securities intent use trading speculative purposes aggregate fair value marketable equity securities 86 million 08 million december 31 2007 2006 respectively hypothetical 30 adverse change stock prices portfolio publiclytraded equity securities would result immaterial loss addition publiclytraded securities also invested privatelyheld companies investments carried cost aggregate cost investments privatelyheld companies 233 million 204 million december 31 2007 2006 respectively item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities addition portion cash marketable securities held nonus domiciled countries marketable securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following tables present hypothetical changes fair value financial instruments held december 31 2008 2007 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points “bps” 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded income expense period changes fair value remeasurement underlying assets liabilities foreign exchange contracts maturities one two months sales costs revenues primarily denominated us dollars operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified line item consolidated statements operations hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2008 2007 2006 respectively income expense consolidated statements operations increase operating expenses including research development sales marketing well general administrative expenses due foreign currency fluctuations approximately 1 2008 equity price risk portfolio publiclytraded equity securities inherently exposed equity price risk stock market fluctuates monitor equity investments impairment periodic basis event carrying value equity investments exceeds fair value determine decline value temporary reduce carrying value current fair value 2008 realized impairment charge 35 million publiclytraded equity security due sustained decline fair value excess six months investment cost basis judged temporary purchase equity securities intent use trading speculative purposes aggregate fair value marketable equity securities 44 million 86 million december 31 2008 2007 respectively hypothetical 30 adverse change stock prices portfolio publiclytraded equity securities would result immaterial loss addition publiclytraded securities also invested privatelyheld companies investments carried cost 2008 realized impairment charge 113 million minority equity investments privatelyheld companies judged temporary aggregate cost investments privatelyheld companies 142 million 233 million december 31 2008 2007 respectively item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2009 50 cash marketable securities held nonus domiciled countries marketable securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures recognized immaterial gains losses years ended december 31 2009 2008 2007 related sales investments following tables present hypothetical changes fair value financial instruments held december 31 2009 2008 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points “bps” 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded income expense period changes fair value remeasurement underlying assets liabilities foreign exchange contracts maturities approximately two months sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating cost service revenue operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified line item consolidated statements operations hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2009 2008 2007 respectively income expense consolidated statements operations decrease operating expenses including cost service revenue rd sales marketing ga expenses due foreign currency fluctuations approximately 2 2009 2008 2007 increase cost service revenue operating expenses including rd sales marketing ga due foreign currency fluctuations approximately 1 2 respectively equity price risk portfolio publiclytraded equity securities inherently exposed equity price risk stock market fluctuates monitor publiclytraded equity investments impairment periodic basis event carrying value publictraded equity investment exceeds fair value determine decline value temporary reduce carrying value current fair value 2008 realized impairment charge 35 million publiclytraded equity security due sustained decline excess six months fair value investment cost basis judged temporary charge 2009 purchase publiclytraded equity securities intent use trading speculative purposes classified availableforsale securities consolidated balance sheets aggregate fair value marketable equity securities 54 million 44 million december 31 2009 2008 respectively additionally nonqualified deferred compensation “nqdc” plan may also hold publicly traded securities investments nqdc plan considered trading securities reported fair value consolidated balance sheet december 31 2009 2008 total investments nqdc plan 47 million 10 million respectively hypothetical 30 adverse change stock prices portfolio publiclytraded equity securities would result immaterial loss investments privatelyheld companies carried cost 2009 2008 realized impairment charge 55 million 113 million respectively minority equity investments privatelyheld companies judged temporary discussed note 4 fair value measurements notes consolidated financial statements item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2010 60 cash equivalents marketable securities held nonus domiciled countries marketable securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures recognized immaterial gains losses years ended december 31 2010 2009 2008 related sales investments following tables present hypothetical changes fair value financial instruments held december 31 2010 2009 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points “bps” 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded income expense period changes fair value remeasurement underlying assets liabilities foreign exchange contracts maturities approximately two months sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating cost service revenue operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified line item consolidated statements operations hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2010 2009 2008 respectively income expense consolidated statements operations change operating expenses including cost service revenue rd sales marketing ga expenses due foreign currency fluctuations approximately 1 2 1 2010 2009 2008 respectively equity price risk portfolio publiclytraded equity securities nonqualified deferred compensation “nqdc” plan may also hold publiclytraded equity securities inherently exposed equity price risk stock market fluctuates publiclytraded equity securities classified availableforsale securities consolidated balance sheets investments nqdc plan considered trading securities also reported fair value consolidated balance sheet purchase publiclytraded equity securities intent use speculative purposes december 31 2010 longer investments publiclytraded equity securities aggregate fair value publiclytraded equity securities december 31 2009 54 million december 31 2010 2009 total investments nqdc plan 81 million 47 million respectively hypothetical 30 adverse change total investments nqdc plan december 31 2010 2009 would result immaterial loss monitor portfolio publiclytraded equity investments impairment periodic basis event carrying value publictraded equity investment exceeds fair value determine decline value temporary reduce carrying value current fair value impairment charges 2010 2009 portfolio publiclytraded equity investments 2008 realized impairment charge 35 million addition publiclytraded equity securities also invested privatelyheld companies investments carried cost 2009 realized impairment charge 55 million investments privatelyheld companies judged temporary discussed note 6 fair value measurements notes consolidated financial statements item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2011 49 cash equivalents marketable securities held nonus domiciled countries marketable securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures recognized immaterial gains losses years ended december 31 2011 2010 2009 related sales investments following tables present hypothetical changes fair value financial instruments held december 31 2011 2010 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points “bps” 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded income expense period changes fair value remeasurement underlying assets liabilities foreign exchange contracts maturities one year less sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound euro indian rupee japanese yen approximately 76 costs operating expenses denominated us dollars periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions reduce variability cost service revenue operating expenses caused nonus dollar denominated operating expense costs designing specific hedging approach consider several factors including offsetting exposures significance exposures costs associated entering particular hedge instrument potential effectiveness hedge derivatives designated cash flow hedges maturities less one year effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified line item consolidated statements operations hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2011 2010 2009 respectively income expense consolidated statements operations change operating expenses including cost service revenue rd sales marketing ga expenses due foreign currency fluctuations approximately 1 2 2011 2010 2009 respectively overall foreign currency exchange rates comparison us dollar uniformly changes 10 amount cash equivalents marketable securities would report us dollars would change less 1 assuming constant foreign currency cash equivalents marketable securities balances equity price risk portfolio publiclytraded equity securities nonqualified deferred compensation “nqdc” plan may also hold publiclytraded equity securities inherently exposed equity price risk stock market fluctuates publiclytraded equity securities classified availableforsale securities consolidated balance sheets investments nqdc plan considered trading securities also reported fair value consolidated balance sheet purchase publiclytraded equity securities intent use speculative purposes december 31 2011 2010 total investments nqdc plan 93 million 81 million respectively hypothetical 30 adverse change total investments nqdc plan december 31 2011 2010 would result immaterial loss also invested privatelyheld companies investments carried cost 2011 impairment charge 18 million investments privatelyheld companies judged temporary discussed note 5 fair value measurements notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2013 60 cash equivalents marketable securities held outside us marketable securities generally classified availableforsale consequently recorded consolidated balance sheets fair value unrealized gains losses reported separate component accumulated comprehensive income investments also reviewed identify evaluate indications potential otherthantemporary impairments discussed note 4 cash equivalents investments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2015 94 cash equivalents marketable securities held outside united states may subject us taxes repatriated marketable securities generally classified availableforsale consequently recorded consolidated balance sheets fair value unrealized gains losses reported separate component accumulated comprehensive loss investments also reviewed identify evaluate indications potential otherthantemporary impairments discussed note 4 cash equivalents investments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2016 87 cash equivalents investments held outside united states may subject us taxes repatriated investments generally classified availableforsale consequently recorded consolidated balance sheets fair value unrealized gains losses reported separate component accumulated comprehensive loss investments also reviewed identify evaluate indications potential otherthantemporary impairments discussed note 4 cash equivalents investments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk primary objectives investment activities order priority preserve principal maintain liquidity maximize yield value investments subject market price volatility minimize risk maintain investment portfolio various holdings types maturities includes assetbacked securities certificates deposit commercial paper corporate debt securities foreign government debt securities money market funds mutual funds time deposits us government agency securities us government securities time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures following tables present hypothetical changes fair value availableforsale fixed income securities held december 31 2017 2016 sensitive changes interest rates assuming immediate parallel shifts yield curve 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate millions foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one month sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound chinese yuan euro indian rupee approximately 73 costs operating expenses denominated us dollars periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions reduce variability cost service revenue operating expenses caused nonus dollar denominated operating expense costs designing specific hedging approach consider several factors including offsetting exposures significance exposures costs associated entering particular hedge instrument potential effectiveness hedge derivatives designated cash flow hedges maturities eighteen months less change operating expenses including cost service revenue research development sales marketing general administrative expenses due foreign currency fluctuations reduction operating expenses 01 11 year ended december 31 2017 december 31 2016 respectively see note 5 derivative instruments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk primary objectives investment activities order priority preserve principal maintain liquidity maximize yield value investments subject market price volatility minimize risk maintain investment portfolio various holdings types maturities includes assetbacked securities certificates deposit commercial paper corporate debt securities foreign government debt securities money market funds mutual funds time deposits us government agency securities us government securities time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures following tables present hypothetical changes fair value availableforsale fixed income securities held december 31 2018 2017 sensitive changes interest rates assuming immediate parallel shifts yield curve 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate millions foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately three months sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound chinese yuan euro indian rupee approximately 78 costs operating expenses denominated us dollars periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions reduce variability cost service revenue operating expenses caused nonus dollar denominated operating expense costs designing specific hedging approach consider several factors including offsetting exposures significance exposures costs associated entering particular hedge instrument potential effectiveness hedge derivatives designated cash flow hedges maturities seventeen months less change operating expenses including cost service revenue research development sales marketing general administrative expenses due foreign currency fluctuations reduction operating expenses 01 years ended december 31 2018 december 31 2017 respectively see note 5 derivative instruments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk interest expense risk availableforsale fixed income securities primary objectives investment activities order priority preserve principal maintain liquidity maximize yield value investments subject market price volatility minimize risk maintain investment portfolio various holdings types maturities includes assetbacked securities certificates deposit commercial paper corporate debt securities foreign government debt securities money market funds mutual funds time deposits us government agency securities us government securities time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures following tables present hypothetical changes fair value availableforsale fixed income securities held december 31 2019 2018 sensitive changes interest rates assuming immediate parallel shifts yield curve 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate millions foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one four months sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound chinese yuan euro indian rupee approximately 79 costs operating expenses denominated us dollars periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions reduce variability cost service revenue operating expenses caused nonus dollar denominated operating expense costs designing specific hedging approach consider several factors including offsetting exposures significance exposures costs associated entering particular hedge instrument potential effectiveness hedge derivatives designated cash flow hedges maturities twentyfour months less change operating expenses including cost service revenue research development sales marketing general administrative expenses due foreign currency fluctuations reduction operating expenses 09 01 years ended december 31 2019 december 31 2018 respectively see note 6 derivative instruments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk interest expense risk availableforsale fixed income securities primary objectives investment activities order priority preserve principal maintain liquidity maximize yield value investments subject market price volatility minimize risk maintain investment portfolio various holdings types maturities includes assetbacked securities certificates deposit commercial paper corporate debt securities foreign government debt securities money market funds mutual funds time deposits us government agency securities us government securities time rise interest rates could material adverse impact fair value investment portfolio conversely decline interest rates could material impact interest income investment portfolio currently hedge interest rate exposures following tables present hypothetical changes fair value availableforsale fixed income securities held december 31 2020 2019 sensitive changes interest rates assuming immediate parallel shifts yield curve 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate millions interest rate swaps company uses interest rate swaps convert certain fixed interest rate notes floating interest rates based london interbank offered rate libor resulting net increase decrease interest expense swaps hedge interest rate risk exposures designated debt issuances december 31 2020 december 31 2019 aggregate notional amount interest rate swaps 3000 million december 31 2020 december 31 2019 aggregate fair value interest rate swaps resulted asset 203 million liability 31 million respectively hypothetical 10 change interest rates december 31 2020 would material impact operating results fair value interest rate swaps interest rate locks 2020 company entered interest rate locks aggregate notional amount 6500 million derivative instruments hedge impact changes benchmark interest rate future interest payments terminated upon closing future debt issuance record changes fair value cash flow hedges interest rate risk accumulated comprehensive income loss anticipated refinancing upon refinancing debt termination derivative instruments fair value interest rate locks amortized term new debt interest expense december 31 2020 fair value contracts resulted asset 307 million hypothetical 10 change interest rates december 31 2020 would material impact fair value interest rate locks foreign currency risk foreign exchange forward contracts periodically use derivatives hedge fluctuations foreign exchange rates enter derivatives speculative trading purposes use foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one four months sales costs product revenues primarily denominated us dollars cost service revenue operating expenses denominated us dollars well foreign currencies including british pound chinese yuan euro indian rupee approximately 79 costs operating expenses denominated us dollars periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions reduce variability cost service revenue operating expenses caused nonus dollar denominated operating expense costs designing specific hedging approach consider several factors including offsetting exposures significance exposures costs associated entering particular hedge instrument potential effectiveness hedge derivatives designated cash flow hedges maturities thirtysix months less change operating expenses including cost service revenue research development sales marketing general administrative expenses due foreign currency fluctuations reduction operating expenses 116 million 03 316 million 09 years ended december 31 2020 december 31 2019 respectively see note 5 derivative instruments notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2014 85 cash equivalents marketable securities held outside us may subject us taxes repatriated marketable securities generally classified availableforsale consequently recorded consolidated balance sheets fair value unrealized gains losses reported separate component accumulated comprehensive income investments also reviewed identify evaluate indications potential otherthantemporary impairments discussed note 4 cash equivalents investments notes consolidated financial statements item 8item 7a quantitative qualitative disclosure market risk interest rate risk maintain investment portfolio various holdings types maturities securities generally classified availableforsale consequently recorded consolidated balance sheet fair value unrealized gains losses reported separate component accumulated comprehensive income loss time rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following table presents hypothetical changes fair value financial instruments held december 31 2005 sensitive changes interest rates millions following table presents hypothetical changes fair value financial instruments held december 31 2004 sensitive changes interest rates millions instruments leveraged held purposes trading modeling technique used measures changes fair value arising selected potential changes interest rates market changes reflect immediate hypothetical parallel shifts yield curve plus minus 50 basis points bps 100 bps 150 bps representative historical movements federal funds rate foreign currency risk foreign exchange forward contracts policy use derivatives partially offset market exposure fluctuations foreign currencies enter derivatives speculative trading purposes uses foreign currency forward contracts mitigate transaction gains losses generated certain foreign currency denominated monetary assets liabilities derivatives carried fair value changes recorded income expense changes fair value derivatives largely offset remeasurement underlying assets liabilities foreign exchange contracts maturities one two months periodically use foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates record ineffectiveness hedging instruments immaterial years ended december 31 2005 2004 2003 income expense results operations item 8item 7a quantitative qualitative disclosures market risk interest rate risk maintain investment portfolio various holdings types maturities value investments subject market price volatility addition december 31 2012 57 cash equivalents marketable securities held outside us marketable securities generally classified availableforsale consequently recorded consolidated balance sheets fair value unrealized gains losses reported separate component accumulated comprehensive income loss investments also reviewed identify evaluate indications potential otherthantemporary impairments discussed note 4 cash equivalents investments notes consolidated financial statements item 8 item 8 financial statements supplementary data information required item see consolidated financial statements notes thereto 1999 annual report stockholders exhibit 131 hereto item 9item 8 financial statements supplementary data information required item see consolidated financial statements notes thereto 2000 annual report stockholders exhibit 131 hereto item 9item 8 financial statements supplementary data information required item see consolidated financial statements notes thereto 2001 annual report stockholders exhibit 131 hereto item 9item 8 financial statements supplementary data index consolidated financial statements report ernst young llp independent auditors board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2002 2001 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2002 audits also included financial statement schedule listed index item 15a financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2002 2001 consolidated results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respect information set forth therein effective january 1 2002 company changed method accounting goodwill see note 1 notes consolidated financial statements ernst young llp san francisco california january 14 2003 juniper networks inc consolidated balance sheets thousands except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statement operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business juniper networks inc “juniper networks” “company” leading provider network infrastructure solutions transform business networking converting bandwidth dependable secure highly valuable corporate asset company founded 1996 develop sell products would meet stringent demands service providers world’s leading network operators government agencies research education institutions information intensive enterprises rely upon juniper networks foundation uncompromising networks company sells markets products direct sales organization valueadded resellers july 2002 juniper networks completed acquisition unisphere networks inc “unisphere” subsidiary siemens corporation “siemens” following acquisition remainder 2002 siemens ag local country affiliates one company’s significant resellers unisphere developed manufactured sold data networking equipment optimized applications edge service provider networks accordance statement financial accounting standard “sfas” 141 “business combinations” company included results operations 2002 results unisphere july 1 2002 note 2 summary significant accounting policies basis presentation consolidated financial statements include accounts juniper networks wholly owned subsidiaries intercompany balances transactions eliminated investments company intends maintain temporary 20 50 interest otherwise ability exercise significant influence accounted equity method investments company less 20 interest andor ability exercise significant influence carried lower cost estimated realizable value use estimates reclassifications preparation consolidated financial statements related disclosures conformity accounting principles generally accepted united states requires management establish accounting policies contain estimates assumptions affect amounts reported consolidated financial statements accompanying notes policies include • revenue recognition • allowance doubtful accounts impacts general administrative expenses • valuation exposures associated contract manufacturing operations estimating future warranty costs impacts cost product revenues gross margins • initial continuing valuation certain longterm assets especially goodwill purchased intangible assets could result impairment would impact operating expenses company equally important accounting policies practices however adopted policies either generally require management make significant estimates assumptions otherwise require implementation adopted policy judgment policy despite company’s intention establish accurate estimates assumptions actual results could differ estimates addition certain amounts previously reported reclassified conform current period presentation cash equivalents juniper networks considers highly liquid investments original maturity 90 days less cash equivalents cash equivalents consist money market funds commercial paper government securities certificates deposit corporate debt securities equity investments juniper networks certain minority equity investments privately held companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company owns less 20 voting equity ability exercise significant influence companies december 31 2002 2001 carrying values company’s minority equity investments privately held companies 50 million 493 million respectively investments inherently high risk market technologies products manufactured companies usually early stage time investment juniper networks markets may never significant company could lose entire investment certain companies company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary addition equity investments privately held companies company holds certain marketable securities classified availableforsale securities reported fair value balance sheet dates unrealized gains losses recorded stockholders’ equity realized gains losses declines value determined temporary availableforsale securities reported income expense incurred following table summarizes impairment charges associated equity investments recorded company thousands fair value financial instruments carrying value company’s cash equivalents accounts receivable approximates fair market value due relatively short period time maturity see note 6 “cash equivalents shortterm longterm investments” discussion carrying values investment portfolio fair value 475 convertible subordinated notes due march 15 2007 “notes” based upon quoted market rates carrying amounts fair value notes thousands see note 9 “longterm debt” discussion change notes carrying value concentrations financial instruments subject juniper networks concentrations credit risk consist primarily cash equivalents investments trade accounts receivable juniper networks maintains cash equivalents investments fixed income securities highquality institutions invests high quality credit instruments deposits held banks may exceed amount insurance provided deposits generally deposits may redeemed upon demand therefore bear minimal risk part company’s investment portfolio includes minority equity investments publicly traded companies values subject significant market price volatility generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world juniper networks performs ongoing credit evaluations customers generally require collateral accounts receivable juniper networks maintains reserves potential credit losses historically losses within management’s expectations company’s net revenues 2002 derived sale products including five products sold 2001 plus gseries eseries jseries products well new platforms tseries gseries products cable modem termination system “cmts” products developed using technology acquired acquisition pacific broadband communications jseries developed ericsson ab joint venture serve wireless service provider space eseries product acquired acquisition unisphere net revenues 2001 2000 derived sale five mseries products 2002 one customer accounted 17 net product revenues compared 2001 three customers accounted 14 13 11 net product revenues 2000 one customer accounted 18 net product revenues sales outside united states accounted 51 36 35 net revenues 2002 2001 2000 respectively juniper networks relies sole suppliers certain components asics custom sheet metal additionally juniper networks relies three independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements juniper networks could negatively impact future operating results derivatives juniper networks enters foreign exchange forward contracts mitigate transaction gains losses generated certain assets liabilities denominated primarily euro japanese yen british pound australian dollar derivatives designated hedges sfas 133 “sfas 133” “accounting derivative instruments hedging activities” year ended december 31 2002 activities insignificant company expect gains losses contracts material impact financial results juniper networks also uses foreign exchange forward contracts hedge foreign currency forecasted transactions related certain operating expenses denominated primarily euro japanese yen british pound australian dollar derivatives designated cash flow hedges sfas 133 year ended december 31 2002 activities insignificant company expect gains losses contracts material impact financial results contracts original maturities ranging one three months company enter foreign exchange contracts speculative trading purposes juniper networks hold derivative instruments engage hedging activities 2001 2000 currency forward contracts effectiveness hedge measured using spot rates strategies value forward contract underlying hedged transaction ineffective portions hedge well amounts included assessment effectiveness recognized currently interest income expense cash flow hedge discontinued probable original hedged transaction occur anticipated unrealized gains losses would reclassified earnings subsequent gains losses related derivative instrument would recognized income period instrument matures terminated sold 2002 portion hedging instruments’ gains losses excluded assessment effectiveness ineffective portions hedges insignificant impact earnings significant impact results operations discontinued cash flow hedges result forecasted transactions occur foreign currency translation assets liabilities foreign operations translated us dollars using exchange rates effect end period revenue expenses translated using average exchange rates period foreign currency translation gains losses material years ended december 31 2002 2001 property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally three five years lease term respective assets land acquired january 2001 future corporate campus “land” depreciated property equipment consist following thousands depreciation expense 2002 2001 2000 416 million 243 million 110 million respectively addition company recognized charge approximately 53 million 2002 costs exiting certain contractual obligations associated land company plans continue develop land foreseeable future goodwill purchased intangible assets goodwill purchased intangible assets carried cost less accumulated amortization company adopted sfas 142 “goodwill intangible assets” january 1 2002 sfas 142 prohibits amortization goodwill intangible assets indefinite useful lives business combinations consummated july 1 2001 goodwill amortized december 31 2001 using straightline method estimated useful life three years goodwill amortized business combinations consummated june 30 2001 goodwill intangible assets indefinite lives reviewed least annually impairment amortization purchased intangibles finite useful lives computed using straightline method expected useful life two six years see note 3 “acquisitions” detail acquisitions company acquired goodwill intangible assets note 4 “goodwill purchased intangible assets” detail activity accounts 2002 2001 revenue recognition juniper networks recognizes product revenue accordance staff accounting bulletin “sab” 101 “revenue recognition financial statements” specifically product revenue recognized persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility reasonably assured unless company future obligations things network interoperability customer acceptance case revenue related costs deferred obligations met cases company recognizes product revenue upon shipment customers including resellers company’s policy practice ensure end user identified prior shipment reseller juniper networks also recognizes revenue service contracts vast majority company’s service revenue earned customers purchased products service revenue contracts typically oneyear periods services 24hour customer support nonspecified updates hardware repairs consulting services addition service contracts company also provides professional educational services service revenue deferred services commence point service revenue recognized ratably period obligation amounts billed excess revenue recognized included deferred revenue accounts receivable accompanying consolidated balance sheets company accrues sales returns allowances based best estimate future returns allowances research development costs develop company’s products expensed incurred accordance sfas 2 “accounting research development costs” establishes accounting reporting standards research development advertising costs charged sales marketing expense incurred totals insignificant date marketing development obligations customers charged sales marketing expense period related revenue recognized totals insignificant date stockbased compensation company employee stock benefit plans described fully note 10 “stockholders’ equity” company’s stock option plans accounted intrinsic value recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations exercise price options granted plans equal market price underlying common stock grant date stockbased employee compensation cost acquisitionrelated compensation recognized net income following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 “accounting stockbased compensation” employee stock benefits including shares issued stock option plans company’s stock purchase plan collectively called “options” pro forma information net tax effect follows thousands except per share amounts comprehensive loss sfas 130 “reporting comprehensive income” company required display comprehensive income loss components part financial statements company displayed comprehensive income loss part consolidated statements stockholders’ equity comprehensive loss 2002 includes net unrealized losses availableforsale securities net foreign currency translation losses excluded net loss see note 14 “comprehensive income loss” discussion changes components comprehensive income loss recent accounting pronouncements july 2002 financial accounting standards board issued sfas 146 “accounting costs associated exit disposal activity” sfas 146 revises accounting exit disposal activities emerging issues task force “eitf” issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” spreading reporting expenses related restructuring activities commitment plan exit activity dispose longlived assets longer sufficient record onetime charge restructuring activities instead companies record exit disposal costs “incurred” measured fair value addition resultant liabilities subsequently adjusted changes estimated cash flows sfas 146 effective prospectively exit disposal activities initiated december 31 2002 companies may restate previously issued financial statements effect provisions sfas 146 liabilities company previously recorded eitf issue 943 grandfathered company adopted sfas 146 january 1 2003 company enters restructuring activities future adoption sfas 146 may affect timing recognizing future restructuring costs well amount recognized costs november 2002 financial accounting standards board “fasb” issued interpretation “fin” 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 requires certain guarantees recorded fair value different current practice liability recorded loss probably reasonably estimable addition fin 45 also requires guarantor make significant new disclosures even likelihood making payments guarantee remote another change current practice general fin 45 applies contracts indemnification agreements contingently require guarantor make payments guaranteed party based changes underlying related asset liability equity security guaranteed party fin 45 applicable prospective basis guarantees issued modified december 31 2002 disclosure requirements effective financial statements interim annual periods ending december 15 2002 juniper networks currently evaluating impact fin 45 fin 45 applicable company revenues cost goods sold operating expenses could negatively affected juniper networks adopted disclosure requirements fin 45 regarding warranties herein annual report see note 7 december 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosure” sfas 148 amends sfas 123 provide alternative methods transition sfas 123’s fair value method accounting stockbased employee compensation sfas 148 also amends disclosure provisions sfas 123 apb 28 “interim financial reporting” require disclosure summary significant accounting policies effects entity’s accounting policy respect stockbased employee compensation reported net income earnings per share annual interim financial statements sfas 148 amend sfas 123 require companies account employee stock options using fair value method disclosure provisions sfas 148 applicable companies stockbased employee compensation regardless whether account compensation using fair value method sfas 123 intrinsic value method apb 25 since juniper networks accounts stockbased compensation apb 25 current plans switching sfas 123 impact sfas 148 limited annual interim reporting effects net income earnings per share company accounted stockbased compensation sfas 123 sfas 148 effective fiscal years ending december 15 2002 january 2003 fasb issued interpretation 46 “consolidation variable interest entities” “fin 46” interpretation accounting research bulletin arb 51 “consolidated financial statements” fin 46 establishes accounting guidance consolidation variable interest entity “vie” formerly referred special purpose entities fin 46 applies business enterprise public private controlling interest contractual relationship business relationship vie fin 46 provides guidance determining entity “primary beneficiary” consolidate another entity vie functions support activities primary beneficiary company currently contractual relationship business relationship vie therefore adoption effect consolidated financial position results operations note 3 acquisitions accordance sfas 141 juniper networks allocates purchase price business acquisitions tangible intangible assets acquired liabilities assumed well inprocess research development based estimated fair values excess purchase price fair values recorded goodwill fair values assigned tangible intangible assets acquired liabilities assumed based estimates assumptions provided management information compiled management including valuations utilize established valuation techniques appropriate high technology industry goodwill recorded result acquisitions expected deductible tax purposes unisphere business combination july 2002 juniper networks completed acquisition 100 unisphere subsidiary siemens acquisition unisphere enable juniper networks supply edge applications expertise leading service providers carriers postal telegraph telephone providers ptts throughout world acquisition resulted payment 3750 million cash issuance 365 million shares juniper networks’ common stock fair value approximately 3599 million former stockholders unisphere common stock issued acquisition valued using average closing price juniper networks’ common stock two days two days date transaction announced juniper networks also assumed outstanding stock options unisphere fair value approximately 1512 million options valued using blackscholes option pricing model inputs 08 volatility 2 years expected life 4 riskfree interest rate market value 986 per share described company also incurred direct costs associated acquisition approximately 136 million estimated liability approximately 148 million consisting primarily workforce reduction charges including severance employee benefits 90 individuals costs vacating duplicate facilities cost exiting certain contractual obligations summary total purchase price thousands total purchase price preliminarily allocated follows thousands quarter ended december 31 2002 company reversed approximately 28 million goodwill primarily related valuation certain assets awaiting information originally allocated purchase price purchase price allocation depicted preliminary subject change company obtains additional information concerning certain contingencies unisphere amortizable intangible assets total purchase price approximately 740 million allocated amortizable intangible assets including completed technology service contract relationships noncompete agreements order backlog completed technology consists products reached technological feasibility includes products unisphere’s product line principally erx product service contract relationships represent potential additional source revenue customers existing service contracts completed technology service contract relationships valued using discounted cash flow dcf method calculates value intangible asset present value tax cash flows potentially attributable net return fair value attributable tangible intangible assets juniper networks amortizing fair value completed technology service contract relationships straightline basis weighted average remaining useful lives approximately 5 years 6 years respectively noncompete agreements represent value noncompete nonsolicit agreements signed key executives unisphere noncompete agreements valued using lost profits method estimates value future cash flows would lost due customer defections nonsolicit agreements valued using avoided cost method estimates avoided costs replacing solicited employees juniper networks amortizing fair value assets straightline basis weighted average useful life approximately 2 years order backlog represents value standing orders products services order backlog valued using avoided cost method estimates avoided selling expenses due fact unisphere firm purchase orders place time acquisition juniper networks amortized fair value assets threemonth period ended september 30 2002 cost product revenues inprocess research development total purchase price approximately 827 million allocated inprocess research development iprd expensed quarter ended september 30 2002 projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition unisphere multiple iprd efforts way certain current future product lines efforts included developing new cards modules different bandwidths various software developments company utilized dcf method value iprd using rates ranging 30 35 applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time acquisition estimated development efforts 55 complete would completed next six twelve months december 31 2002 development efforts 90 complete estimate completed next twelve months deferred compensation unvested stock options intrinsic value approximately 05 million time acquisition allocated deferred compensation purchase price allocation amortized expense using graded vesting method options assumed conjunction acquisition exercise prices ranging 565 1473 per share weighted average exercise price 581 per share weighted average remaining contractual life approximately 9 years juniper networks assumed approximately 135 million vested options approximately 125 million unvested options pro forma results following unaudited pro forma financial information presents combined results operations juniper networks unisphere acquisition occurred beginning periods presented information 2002 unaudited amounts derived audited statement operations juniper networks year ended december 31 2002 unaudited statement operations unisphere sixmonth period ended june 30 2002 information 2001 unaudited amounts derived audited statements operations juniper networks year ended december 31 2001 unaudited statement operations unisphere fiscal year ended september 30 2001 adjustments 50 million 62 million made combined results operations year ended december 31 2002 2001 respectively reflecting elimination amortization purchased intangibles charges cost goods sold inventory writeups valuation order backlog iprd net tax impact unaudited pro forma financial information intended represent indicative consolidated results operations juniper networks would reported acquisition completed dates presented taken representative future consolidated results operations company pro forma financial information includes following material nonrecurring charges periods presented thousands asset purchase 2002 juniper networks entered note purchase agreement valued 25 million third party lenders whereby juniper networks purchased certain secured indebtedness private company “debtor” held lenders debtor defaulted indebtedness therefore juniper networks took possession underlying collateral included approximately 17 million fixed assets approximately 08 million iprd company treated assets acquired transaction business combination accordance sfas 142 company capitalized fixed assets depreciating useful lives expensed iprd upon acquisition pacific broadband business combination december 14 2001 juniper networks acquired 100 outstanding stock privately held pacific broadband communications “pacific broadband” developer standardsbased nextgeneration cable modem termination systems cmts juniper networks previously held minority interest result acquisition juniper networks gained access cable market new public network new market juniper networks time acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date since december 14 2001 pacific broadband’s results operations included company’s consolidated statements operations initial purchase price including prior investment 40 million approximately 1483 million consisting exchange approximately 4612000 shares company’s common stock fair value approximately 1098 million assumed stock options fair value approximately 305 million acquisition related expenses approximately 40 million consisting workforce reduction costs excess facilities costs filing fees well payments professional fees terms acquisition also included earnout provision payable shares company’s common stock wherein former stockholders employee option holders pacific broadband could receive additional consideration 590 million upon achieving certain product development milestones revenue targets 2002 fair value common stock given determined using average market price company’s common stock period including two days terms acquisition agreed announced fair value options given determined using blackscholes option model following table summarizes estimated fair values assets acquired liabilities assumed date acquisition thousands 42 million assigned research development assets written inprocess research development date acquisition accordance fasb interpretation 4 “applicability fasb statement 2 business combinations accounted purchase method” applications inprocess technology project integrated juniper networks’ products efforts required complete acquired inprocess technology included completion planning designing testing activities necessary establish product produced meet design requirements including functions features technical performance requirements value acquired inprocess technology computed using discounted cash flow analysis rate 30 anticipated income stream related product revenues discounted cash flow analysis based management’s forecast future revenues cost revenues operating expenses related products technologies purchased pacific broadband calculation value adjusted reflect value creation efforts pacific broadband prior close acquisition time acquisition product approximately 75 complete majority costs complete project incurred 2002 material resultant value inprocess technology reduced estimated value core technology project complete december 31 2002 fair value intangible assets determined based upon valuation using combination methods including income approach core technology cost approach supply agreements goodwill represents excess purchase price paid fair value net tangible intangible assets acquired none expected deductible tax purposes accordance sfas 141 sfas 142 goodwill amortized deferred compensation charge relates intrinsic value unvested stock options restricted stock assumed transaction deferred compensation presented reduction stockholders’ equity amortized vesting period applicable options restricted stock using graded vesting method terms pacific broadband acquisition earnout provision payable shares company’s common stock wherein former stockholders employee option holders pacific broadband could receive additional consideration 590 million upon achieving certain product development milestones revenue targets 2002 milestones achieved date value 165 million recorded additional goodwill potential earnout events remaining addition increases value goodwill acquired pacific broadband acquisition goodwill reduced 49 million certain liabilities accrued time acquisition realized micro magic business combination december 8 2000 juniper networks acquired micro magic inc “micro magic” integrated circuit solutions company acquisition accounted using purchase method accounting accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values acquisition date since december 8 2000 micro magic’s results operations included company’s consolidated statements operations fair value intangible assets determined based upon valuation using combination methods including cost approach assembled workforce income approach core technology purchase price approximately 2593 million consisted exchange approximately 828000 shares company’s common stock fair value approximately 1257 million assumed stock options fair value approximately 935 million approximately 400 million cash acquisition related expenses approximately 150000 consisting payments professional fees total purchase price approximately 19 million allocated net tangible assets acquired approximately 1217 million recorded deferred compensation remainder allocated intangible assets including inprocess technology 100 million core technology 73 million assembled workforce 900000 goodwill approximately 1175 million fair value common stock given determined using average market price juniper networks’ common shares period including two days terms acquisition agreed announced basis determining fair value options given blackscholes method deferred compensation charge relates intrinsic value unvested stock options restricted stock assumed transaction applications inprocess technology project integrated juniper networks’ products efforts required complete acquired inprocess technology included completion planning designing testing activities necessary establish product produced meet design requirements including functions features technical performance requirements value acquired inprocess technology computed using discounted cash flow analysis rate 19 anticipated income stream related product revenues discounted cash flow analysis based management’s forecast future revenues cost revenues operating expenses related products technologies purchased micro magic calculation value adjusted reflect value creation efforts micro magic prior close acquisition time acquisition product approximately 88 complete project completed 2001 resultant value inprocess technology reduced estimated value core technology expensed period transaction consummated deferred compensation presented reduction stockholders’ equity amortized vesting period applicable options restricted stock using graded vesting method acquired intangible assets amortized estimated useful lives three years date acquisition end fiscal 2001 goodwill amortized using straightline method three years beginning january 1 2002 goodwill longer amortized accordance sfas 142 note 4 goodwill purchased intangible assets accordance sfas 142 company ceased amortizing goodwill totaling 2088 million january 1 2002 following table presents impact sfas 142 net income loss net income loss per share effect years ended december 31 2001 2000 thousands except pershare amounts following table presents details company’s total purchased intangibles assets thousands table include intangible assets purchased completely amortized threemonth period ended september 30 2002 cost goods sold 36 million unisphere acquisition value backlog orders amortization expense purchased intangible assets 139 million 27 million 02 million included operating expenses years ended december 31 2002 2001 2000 respectively estimated future amortization expense purchased intangible assets next five years follows thousands changes carrying amount goodwill year ended december 31 2002 follows thousands company required perform goodwill impairment tests annual basis annual tests certain circumstances company performed impairment analysis january 1 2002 november 2002 determined impairment goodwill either time however future goodwill impairment tests include consideration company’s market capitalization relation historical stockholders’ equity may result charge earnings periods ending subsequent december 31 2002 note 5 restructuring operating charges 2002 plans third quarter 2002 connection acquisition unisphere juniper networks’ board directors approved management initiated plans restructure operations eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions consequently juniper networks recorded restructuring expenses approximately 149 million net 26 million adjustment costs going incurred due change estimate associated primarily workforce related costs vacating duplicative facilities contract termination costs noninventory asset impairment charges associated costs adjusted worldwide workforce reduction charge 90 million related principally termination 220 employees across many regions business functions job classes company expects pay remaining balance severance accrual first half 2003 noninventory asset impairment 09 million primarily longlived assets longer needed result unisphere acquisition adjusted facility charges 50 million consisted primarily cost vacating duplicate facilities impairment cost certain leasehold improvements costs accounted eitf issue 943 “eitf 943” “liability recognition certain employee termination benefits costs exit activity” included charge results operations year ended december 31 2002 restructuring charges based juniper networks’ restructuring plans committed management changes estimates executing currently approved plans restructuring unisphere organization recorded increase decrease goodwill changes occur within one year acquisition changes thereafter estimated costs restructuring former unisphere organization similar changes costs restructuring juniper networks organization reflected juniper networks’ results operations december 31 2002 balance accrued restructuring charge recorded conjunction restructuring juniper networks organization third quarter 2002 consisted following thousands amounts related net lease expense due consolidation facilities paid respective lease terms 2009 company’s estimated costs exit facilities based available commercial rates potential subleases actual loss incurred exiting facilities could different company’s estimates juniper networks also recorded approximately 148 million similar restructuring costs connection restructuring unisphere organization costs accounted eitf issue 953 “eitf 953” “recognition liabilities connection purchase business combinations” costs recognized liability assumed purchase business combination included allocation cost acquire unisphere accordingly included increase goodwill december 31 2002 approximately 97 million remaining paid primarily facilities paid respective lease terms 2009 professional services company recognized charge approximately 53 million quarter ended september 30 2002 related land acquired january 2001 located sunnyvale california charge primarily costs exiting certain contractual obligations associated land included operating expenses “restructuring other” company plans continue develop land foreseeable future 2001 plans june 2001 juniper networks announced restructuring program effort better align business operations current market service provider industry conditions restructuring program included worldwide workforce reduction consolidation excess facilities restructuring certain business functions costs associated restructuring program totaled 123 million recorded three months ended june 30 2001 operating expenses following table summarizes activity related 2001 restructuring charges thousands amounts related net lease expense due consolidation facilities paid respective lease terms 2009 company’s estimated costs exit facilities based available commercial rates potential subleases actual loss incurred exiting facilities could different company’s estimates note 6 cash equivalents shortterm longterm investments cash equivalents shortterm longterm investments consist following thousands company recognized realized gains sale availableforsale securities 04 million net 50 million impairment charge availableforsale securities recognized quarter ended september 30 2002 declines value deemed temporary 2002 55 million 2001 cost security sold based specific identification method note 7 warranties juniper networks offers oneyear warranty hardware products well 90day warranty software embedded products warranty generally includes parts labor 24hour service center support specific terms conditions warranties may vary depending products sold locations sold company estimates costs may incurred warranty obligations records liability amount costs time revenue recognized factors affect company’s warranty liability include number installed units historical anticipated rates warranty claims cost per claim company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary changes company’s warranty reserve period follows thousands note 8 commitments juniper networks leases facilities operating leases expire various times longest expires 2014 rental expense 2002 2001 2000 approximately 171 million 150 million 51 million respectively future minimum payments noncancellable operating leases consist following thousands note 9 longterm debt march 2000 juniper networks received 112 billion net proceeds notes offering 115 billion interest notes accrues 475 per year payable march 15 september 15 year cash convertible notes subordinate right payment senior debt notes convertible shares juniper networks common stock time prior maturity prior redemption repurchase juniper networks conversion rate 60992 shares per 1000 principal amount convertible notes subject adjustment certain circumstances third business day march 15 2003 juniper networks option redeem notes following redemption prices expressed percentages principle amount quarter ended september 30 2002 company paid approximately 1460 million retire portion notes partial retirement resulted gain 629 million difference carrying value notes including unamortized debt issuance costs time retirement amount paid extinguish notes company currently evaluating plans retire additional notes future therefore company consider gains associated retirement extraordinary based guidance sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” note 10 stockholders’ equity stock repurchase december 6 2000 juniper networks repurchased 1000000 shares common stock cost approximately 1300 million shares repurchased subsequently reissued later december 2000 difference repurchase price reissuance price charged additional paidin capital stock option plans amended restated 1996 stock option plan company’s amended restated 1996 stock option plan “1996 plan” provides granting incentive stock options employees nonstatutory stock options employees directors consultants incentive stock options granted exercise price less fair value per share common stock date grant nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors options granted 1996 plan generally become exercisable fouryear period beginning date grant options granted 1996 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant juniper networks authorized 146623000 shares common stock issuance 1996 plan december 31 2002 35919000 shares available future option grants stock sales 1996 plan 1996 plan also provides sale shares common stock employees consultants fair value per share common stock shares issued consultants fair value services previously rendered contingent upon future events shares sold employees made pursuant restricted stock purchase agreements containing provisions established board directors provisions give juniper networks right repurchase shares original sales price upon termination employee right expires rate determined board directors generally rate 25 one year 20833 per month thereafter shares issued 1996 plan 2002 2001 december 31 2002 2001 24000 476000 shares subject repurchase rights 1996 plan respectively december 31 2002 2001 3896000 3854000 shares respectively repurchased 1996 plan connection employee terminations 2000 nonstatutory stock option plan july 2000 board directors adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provides granting nonstatutory stock options employees directors consultants nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors options granted 2000 plan generally become exercisable fouryear period beginning date grant options granted 2000 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant december 31 2002 juniper networks authorized 44362000 shares common stock issuance 2000 plan december 31 2002 16588000 shares available future option grants 2000 plan micro magic inc 1995 stock option plan 2000 stock option plan connection acquisition micro magic inc december 2000 company assumed outstanding options micro magic inc 1995 stock option plan micro magic inc 2000 stock option plan collectively “mmi plans” mmi plans terminated except respect options outstanding time acquisition options mmi plans generally become exercisable fouryear period beginning date grant maximum term 10 years juniper networks authorized aggregate 626187 shares common stock issuance mmi plans shares available future option grants mmi plans december 31 2002 183000 shares outstanding mmi plans pacific broadband communications inc 2000 stock incentive plan 2000 subplan connection acquisition pacific broadband communications inc “pbc” december 2001 company assumed outstanding options pbc 2000 stock incentive plan 2000 subplan collectively “pbc plans” options pbc plans generally become exercisable fouryear period beginning date grant maximum term 10 years juniper networks authorized aggregate 1443374 shares common stock issuance pbc plans shares available future option grants pbc plans december 31 2002 927000 shares outstanding pbc plans unisphere networks inc 1999 stock incentive plan connection acquisition unisphere july 2002 company assumed outstanding options unisphere amended restated 1999 incentive plan “unisphere plan” options unisphere plan generally become exercisable fouryear period beginning date grant maximum term 10 years juniper networks authorized aggregate 26051000 shares common stock issuance unisphere plan shares available future option grants unisphere plans december 31 2002 17615000 shares outstanding unisphere plan option activity option plans summarized follows following schedule summarizes information stock options outstanding option plans december 31 2002 december 31 2001 14518000 options exercisable average exercise price 1412 stock option exchange program october 25 2001 company announced voluntary stock option exchange program employees program juniper networks employees given opportunity chose cancel certain outstanding stock options previously granted exercise price equal greater 1000 exchange equal number replacement options granted future date least six months one day cancellation date november 26 2001 options granted certain employees two 50 increments april 2001 july 2001 eligible exchange employee received grants elected participate exchange program options cancelled entirety condition exchanging eligible options replacement options addition employees electing participate exchange program required exchange options granted employees sixmonth period prior cancellation date except options grants cancelled described exchange program options 23827037 shares company’s common stock tendered canceled 21054076 eligible replacement option grants participant employee received eligible option included exchange oneforone replacement option exercise price replacement option fair market value company’s common stock date grant replacement options terms conditions substantially canceled options exchange program result additional compensation charges variable plan accounting employee stock purchase plan april 1999 board directors approved adoption juniper networks 1999 employee stock purchase plan purchase plan total 3000000 shares common stock originally reserved issuance 1999 purchase plan plus commencing january 1 2000 annual increases equal lesser 3000000 shares 1 outstanding common shares date lesser amount determined board directors 1999 purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year purchase plan implemented series offering periods six months duration provided however first offering period approximately thirteen months duration ending july 31 2000 price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day respective offering period 2002 781000 shares common stock purchased purchase plan average exercise price 948 per share december 31 2002 total 1587000 shares issued purchase plan average price 954 per share 10413000 shares remained available future issuance purchase plan stockbased compensation company elected follow apb 25 related interpretations accounting employee stockbased compensation plans exercise price company’s employee stock options equals market price underlying stock date grant compensation expense recognized fair value option granted assumed december 31 2002 estimated date grant date assumption using minimum value company went public blackscholes method fair value company’s stockbased awards estimated using following weightedaverage assumptions blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable blackscholes model requires input highly subjective assumptions including expected stock price volatility company’s stockbased awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing models necessarily provide reliable single measure fair value stockbased awards weighted average estimated fair value employee stock options granted 2002 2001 2000 485 2442 5617 per share respectively weighted average estimated fair value shares granted purchase plan 2002 2001 2000 1044 5630 371 respectively common stock reserved future issuance december 31 2002 juniper networks reserved aggregate 143544000 shares common stock future issuance stock option plans 1999 employee stock purchase plan future issuance upon conversion convertible subordinated notes note 11 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees eligible participate first day employment juniper networks plan employees may contribute 60 pretax salaries per year statutory limits beginning january 1 2001 juniper networks began matching employee contributions matching formula 050 dollar 6 eligible pay annual maximum 2000 matching contributions vest immediately company’s matching contributions plan totaled 20 million 2002 14 million 2001 note 12 segment information sfas 131 “disclosures segments enterprise related information” established standards reporting information operating segments company’s financial statements operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker decision making group deciding allocate resources assessing performance company operates one operating segment however tracks revenue geographic region following table shows net revenues geographic region thousands americas region includes net revenues countries united states approximately 311 million 428 44 years ended december 31 2002 2001 2000 respectively note 13 net income loss per share following table presents calculation basic diluted net income loss per share thousands except per share amounts 2002 2001 juniper networks excluded 11510000 16570000 common stock equivalents respectively consisting outstanding stock options shares subject repurchase calculation diluted loss per share securities antidilutive period due net loss employee stock options purchase approximately 41271000 shares 25277000 shares 567000 shares 2002 2001 2000 respectively outstanding included computation diluted earnings per share exercise price stock options greater average share price common shares therefore effect would antidilutive 2002 2001 2000 convertible subordinate notes also excluded calculation diluted loss per share effect assumed conversion notes antidilutive note 14 comprehensive income loss activity comprehensive income follows thousands components accumulated comprehensive income follows thousands note 15 joint venture quarter ended june 30 2001 juniper networks ericsson ab respective subsidiaries entered joint venture agreement develop market products wireless internet infrastructure market juniper networks began recording 40 share joint venture’s loss 2002 company’s share joint venture’s loss totaled approximately 13 million recorded single line item income section income statement date juniper networks funded joint venture amount 54 million addition joint venture ericsson also significant reseller juniper networks representing greater 10 revenues 2002 2001 december 31 2002 company obligations fund joint venture note 16 income taxes significant components provision benefit income taxes attributable operations follows thousands pretax income loss foreign operations 74 million 138 million 276 million years ended december 31 2002 2001 2000 respectively deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities follows december 31 thousands unused net operating loss research development tax credit carryforwards expire various dates beginning years 2021 2012 respectively company provided valuation allowance net deferred tax assets uncertainty regarding realizability due tax losses caused employee stock option exercises net valuation allowance increased 79 million year ended december 31 2002 528 million 2001 879 million 2000 december 31 2002 approximately 1360 million valuation allowance referenced relates tax benefits stock option deductions credited equity realized substantially remaining balance 440 million relates capital losses carry forward offset future capital gains provision income taxes differs provision calculated applying federal statutory tax rate income loss taxes following thousands irs currently auditing company’s federal income tax returns fiscal years 1999 2000 proposed adjustments received years management believes ultimate outcome irs audits material adverse impact company’s financial position results operations note 17 legal proceedings company subject legal claims litigation arising ordinary course business including matters described outcome matters currently determinable however company expect legal claims litigation ultimately material adverse effect company’s consolidated financial position results operations ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” company certain company’s officers action brought behalf purchasers company’s common stock company’s initial public offering june 1999 secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 companies various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company believes meritorious defenses claims intends defend vigorously federal securities class action suit quarter ended march 31 2002 number essentially identical shareholder class action lawsuits filed united states district court northern district california company certain officers former officers purportedly behalf stockholders purchased company’s publicly traded securities april 12 2001 june 7 2001 april 2002 judge granted defendants’ motion consolidate actions one may 2002 court appointed lead plaintiffs approved selection lead counsel amended complaint filed july 2002 plaintiffs allege defendants made false misleading statements assert claims violations federal securities laws seek unspecified compensatory damages relief september 2002 defendants moved dismiss amended complaint march 2003 judge granted defendants motion dismiss leave amend company continues believe claims without merit intends defend action vigorously state derivative claim based federal securities class action suit august 2002 consolidated amended shareholder derivative complaint purportedly filed behalf company captioned juniper networks inc derivative litigation civil action cv 807146 filed superior court state california county santa clara complaint alleges certain company’s officers directors breached fiduciary duties company engaging alleged wrongful conduct including conduct complained securities litigation described complaint also asserts claims juniper networks investor company named solely nominal defendant plaintiff seeks recovery october 2002 company nominal defendant individual defendants filed demurrers consolidated amended shareholder derivative complaint march 2003 judge sustained defendants’ demurrers leave amend plaintiffs must file amended complaint may 12 2003 company continues believe claims without merit intends defend action vigorously note 18 quarterly results unaudited table sets forth selected unaudited financial data quarter last two years basic diluted net losses per share computed independently quarters presented therefore sum quarters may equal full year net loss per share amounts item 9item 8 financial statements supplementary data index consolidated financial statements report ernst young llp independent auditors board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2003 2002 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2003 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2003 2002 consolidated results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respect information set forth therein ernst young llp san jose california january 13 2004 except note 18 date february 9 2004 juniper networks inc consolidated balance sheets thousands except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statement operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business juniper networks inc “juniper networks” “we” founded 1996 develop sell products would able meet stringent demands service providers today company leading provider network infrastructure solutions transform business networking products enable customers improve business models providing differentiation value end users well increased reliability security thereby making network valuable asset company sells markets products direct sales organization valueadded resellers july 2002 completed acquisition unisphere networks inc “unisphere” subsidiary siemens corporation subsidiary siemens ag “siemens” following acquisition remainder 2002 siemens local country affiliates one significant resellers unisphere developed manufactured sold data networking equipment optimized applications edge service provider networks acquisition enabled company expand customer base add complementary product existing product line without need reorganize modify existing organizational cost structure accordance statement financial accounting standard “sfas” 141 “business combinations” company included results operations 2002 results unisphere july 1 2002 note 2 summary significant accounting policies basis presentation consolidated financial statements include accounts juniper networks wholly owned subsidiaries intercompany balances transactions eliminated investments operating companies company intends maintain temporary 20 50 interest otherwise ability exercise significant influence accounted equity method investments operating companies company less 20 interest andor ability exercise significant influence carried lower cost estimated realizable value use estimates preparation consolidated financial statements related disclosures conformity accounting principles generally accepted united states requires us establish accounting policies contain estimates assumptions affect amounts reported consolidated financial statements accompanying notes policies include revenue recognition allowance doubtful accounts impacts general administrative expenses valuation exposures associated contract manufacturing operations estimating future warranty costs impacts cost product revenues gross margins provision income taxes would impact income tax expense base estimates historical experience also assumptions believe standard reasonable equally important accounting policies practices however adopted policies either generally require us make significant estimates assumptions otherwise require implementation adopted policy judgment policy despite intention establish accurate estimates assumptions actual results could differ estimates cash equivalents juniper networks considers highly liquid investments original maturity 90 days less cash equivalents cash equivalents consist money market funds commercial paper government securities certificates deposit corporate debt securities equity investments juniper networks certain minority equity investments privately held companies investments included longterm assets carried cost adjusted impairment company owns less 20 voting equity ability exercise significant influence companies december 31 2003 2002 carrying values company’s minority equity investments privately held companies 57 million 50 million respectively investments inherently high risk market technologies products manufactured companies usually early stage time investment juniper networks markets may never significant company could lose entire investment certain companies company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary addition equity investments privately held companies company held certain marketable equity securities classified availableforsale 2003 company sold investments cost basis approximately 43 million recognized gain approximately 87 million following table summarizes impairment charges associated equity investments recorded company thousands fair value financial instruments carrying value company’s cash equivalents accounts receivable approximates fair market value due relatively short period time maturity see note 7 “cash equivalents shortterm longterm investments restricted cash” discussion carrying values investment portfolio fair values 475 convertible subordinated notes due march 15 2007 “subordinated notes” zero coupon convertible senior notes due june 15 2008 “senior notes” based upon quoted market rates see note 4 “longterm debt” discussion company’s subordinated senior notes concentrations financial instruments subject juniper networks concentrations credit risk consist primarily cash equivalents investments trade accounts receivable juniper networks maintains cash equivalents investments fixed income securities highquality institutions invests high quality credit instruments deposits held banks may exceed amount insurance provided deposits generally deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world juniper networks performs ongoing credit evaluations customers generally require collateral accounts receivable juniper networks maintains reserves potential credit losses historically losses within management’s expectations 2003 two customers accounted 15 13 total net revenue 2002 one customer accounted 17 product net revenues compared 2001 one customer accounted 14 second customer accounted 13 third customer accounted 11 product net revenues see note 12 “segment information” breakdown net revenues geographic location juniper networks relies sole suppliers certain components asics custom sheet metal additionally juniper networks relies two independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements juniper networks could negatively impact future operating results derivatives juniper networks enters foreign exchange forward contracts mitigate transaction gains losses generated certain assets liabilities denominated primarily euro japanese yen british pound australian dollar derivatives designated hedges sfas 133 “sfas 133” “accounting derivative instruments hedging activities” year ended december 31 2003 activities insignificant company expect gains losses contracts material impact financial results juniper networks also uses foreign exchange forward contracts hedge foreign currency forecasted transactions related certain operating expenses denominated primarily euro japanese yen british pound australian dollar derivatives designated cash flow hedges sfas 133 activities insignificant year ended december 31 2003 company expect gains losses contracts material impact financial results contracts original maturities ranging one two months company enter foreign exchange contracts speculative trading purposes company expect gains losses contracts material impact financial results juniper networks hold derivative instruments engage hedging activities 2001 currency forward contracts effectiveness hedge measured using spot rates strategies value forward contract underlying hedged transaction ineffective portions hedge well amounts included assessment effectiveness recognized currently interest income expense cash flow hedge discontinued probable original hedged transaction occur anticipated unrealized gains losses would reclassified earnings subsequent gains losses related derivative instrument would recognized income period instrument matures terminated sold 2003 portion hedging instruments’ gains losses excluded assessment effectiveness ineffective portions hedges insignificant impact earnings significant impact results operations discontinued cash flow hedges result forecasted transactions occur foreign currency translation assets liabilities foreign operations translated us dollars using exchange rates effect end period revenue expenses translated using average exchange rates period foreign currency translation gains losses material years ended december 31 2003 2002 2001 property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally three five years lease term respective assets land acquired january 2001 “land” depreciated property equipment consist following thousands goodwill purchased intangible assets goodwill purchased intangible assets carried cost less accumulated amortization company adopted sfas 142 “goodwill intangible assets” january 1 2002 sfas 142 prohibits amortization goodwill intangible assets indefinite useful lives business combinations consummated july 1 2001 goodwill amortized december 31 2001 using straightline method estimated useful life three years goodwill amortized business combinations consummated june 30 2001 goodwill intangible assets indefinite lives reviewed least annually impairment company considered july 2003 decision cease development gseries cmts product impairment indicator accordingly reviewed goodwill determine impairment since company one reporting unit company compared estimated fair value measured it’s market capitalization net assets july 31 2003 since fair value substantially greater net assets company concluded impairment goodwill time cmts product discontinuance company also performed annual impairment review november 2003 determined impairment goodwill amortization purchased intangibles finite useful lives computed using straightline method expected useful life two six years see note 5 “acquisitions” detail acquisitions company acquired goodwill intangible assets note 6 “goodwill purchased intangible assets” detail activity accounts 2003 2002 revenue recognition juniper networks recognizes product revenue persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility reasonably assured unless company future obligations things network interoperability customer acceptance case revenue related costs deferred obligations met cases company recognizes product revenue upon shipment customers including resellers company’s policy practice ensure end user identified prior shipment reseller juniper networks also recognizes revenue service contracts vast majority company’s service revenue earned customers purchased products service revenue contracts typically oneyear renewable periods services 24hour customer support nonspecified updates hardware repairs consulting services addition service contracts company also provides professional educational services service revenue deferred services commence point service revenue recognized services completed ratably period obligation beginning july 1 2003 recognized revenue arrangements products services bundled accordance eitf 0021 “revenue arrangements multiple deliverables” applying concepts eitf 0021 company must determine whether deliverables separable multiple units accounting company allocates total fee arrangements individual deliverables either based relative fair values using residual method circumstances dictate company recognizes revenue deliverable accordance policies product service revenue recognition adoption material effect company’s consolidated financial position results operations cash flows amounts billed excess revenue recognized included deferred revenue accounts receivable accompanying consolidated balance sheets company accrues sales returns allowances based best estimate future returns allowances research development costs develop company’s products expensed incurred accordance sfas 2 “accounting research development costs” establishes accounting reporting standards research development advertising costs charged sales marketing expense incurred totals insignificant date marketing development obligations customers charged either sales marketing expense period related revenue recognized totals insignificant date stockbased compensation company employee stock benefit plans described fully note 10 “stockholders’ equity” company’s stock option plans accounted intrinsic value recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations exercise price options granted plans equal market price underlying common stock grant date stockbased employee compensation cost acquisitionrelated compensation cost recognized net income following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 “accounting stockbased compensation” employee stock benefits including shares issued stock option plans company’s stock purchase plan collectively called “options” pro forma information net tax effect follows thousands except per share amounts comprehensive income sfas 130 “reporting comprehensive income” company required display comprehensive income loss components part financial statements company displayed comprehensive income loss part consolidated statements stockholders’ equity comprehensive loss 2003 includes net unrealized losses availableforsale securities net foreign currency translation losses excluded net loss activity comprehensive income follows thousands components accumulated comprehensive income follows thousands provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 “accounting income taxes” records valuation allowance reduce deferred tax assets amount believes likely realizable accordingly valuation allowance amount equal net deferred tax assets established reflect uncertainty regarding future realization assets part due potential impact future stock option deductions addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due payment amounts ultimately proves unnecessary reversal liabilities may result tax benefits recognized period company determines liabilities longer necessary company’s estimate tax liabilities less amount ultimately assessed charge expense would result recent accounting pronouncements december 2003 financial accounting standards board fasb issued revision interpretation 46 “consolidation variable interest entities interpretation arb 51 “ “fin 46r” fin 46r clarifies application arb 51 “consolidated financial statements” certain entities equity investors characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support provided parties including equity holders fin 46r requires consolidation entities known variable interest entities “vies” primary beneficiary entity primary beneficiary entity absorb majority entity’s expected losses receive majority entity’s expected residual returns among changes revisions fin 46r clarified requirements original fin 46 issued january 2003 b eased implementation problems c added new scope exceptions fin 46r deferred effective date interpretation public companies end first reporting period ending march 15 2004 except public companies must minimum apply unmodified provisions interpretation entities previously considered “specialpurpose entities” practice fasb literature prior issuance fin 46r end first reporting period ending december 15 2003 among scope exceptions companies required apply fin 46r entity meets criteria considered “business” defined interpretation unless one four named conditions exist fin 46r applies immediately vie created acquired january 31 2003 company interests vies note 3 restructuring operating charges following restructuring charges based juniper networks’ restructuring plans committed management changes estimates executing approved plans reflected juniper networks’ results operations 2003 plan third quarter 2003 company announced longer developing gseries cmts products recorded onetime charge 140 million comprised workforce reduction costs noninventory asset impairment vacating facilities costs associated termination contracts related costs company’s board directors approved restructuring charge expects plan facilitate focus core competencies reducing cost structure charges accounted accordance sfas 146 “accounting costs associated exit disposal activities” following table shows breakdown restructuring charge liability remaining december 31 2003 thousands workforce reduction related primarily termination 76 employees mainly located americas europe regions expect pay remaining balance severance accrual end first quarter 2004 noninventory asset impairment primarily longlived assets longer needed result decision cease development product line facility charges consist primarily cost vacating facilities dedicated development gseries cmts products impairment cost certain leasehold improvements net present value facility charge calculated using riskadjusted borrowing rate amounts related net facility charge paid respective lease term july 2008 difference actual future rent payments net present value recorded operating expenses incurred contractual commitments charges consist primarily 09 million carrying obsolete material charges contract manufacturers suppliers onhand onorder material related gseries cmts products 09 million costs satisfy endoflife commitments certain customer contracts costs included charge results operations quarter ended september 30 2003 changes estimates executing currently approved plans restructuring reflected results operations 2002 plans restructuring plan related unisphere acquisition third quarter 2002 connection acquisition unisphere juniper networks’ board directors approved management initiated plans restructure operations eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions consequently juniper networks recorded restructuring expenses approximately 149 million associated primarily workforce related costs vacating duplicative facilities contract termination costs noninventory asset impairment charges associated costs net 26 million adjustment costs going incurred due change estimate adjusted worldwide workforce reduction charge 90 million related principally termination 220 employees across many regions business functions job classes noninventory asset impairment 09 million primarily longlived assets longer needed result unisphere acquisition adjusted facility charges 50 million consisted primarily cost vacating duplicate facilities impairment cost certain leasehold improvements costs accounted eitf issue 943 “eitf 943” “liability recognition certain employee termination benefits costs exit activity” included charge results operations year ended december 31 2002 december 31 2003 balance accrued restructuring charge recorded conjunction restructuring juniper networks organization third quarter 2002 consisted following thousands amounts related net lease expense due consolidation facilities paid respective lease terms 2009 company’s estimated costs exit facilities based available commercial rates potential subleases acquisition costs related unisphere acquisition juniper networks also recorded 148 million similar restructuring costs connection restructuring unisphere organization costs accounted eitf issue 953 “eitf 953” “recognition liabilities connection purchase business combinations” costs recognized liability assumed purchase business combination included allocation cost acquire unisphere accordingly included increase goodwill december 31 2003 66 million remaining paid primarily facilities paid respective lease terms 2009 professional services company recognized charge 53 million quarter ended september 30 2002 related land acquired january 2001 located sunnyvale california charge primarily costs exiting certain contractual obligations associated land included operating expenses “restructuring other” company plans continue develop land foreseeable future 2001 plan june 2001 juniper networks announced restructuring program effort better align business operations current market service provider industry conditions restructuring program included worldwide workforce reduction consolidation excess facilities restructuring certain business functions costs associated restructuring program totaled 123 million recorded three months ended june 30 2001 operating expenses december 31 2003 02 million remaining paid primarily facilities paid respective lease terms 2006 note 4 longterm debt june 2003 juniper networks received 3928 million net proceeds offering 4000 million aggregate principal amount zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes senior unsecured obligations rank parity right payment company’s existing future senior unsecured debt rank senior company’s existing future debt expressly provides subordinated notes including 475 convertible subordinated notes due march 15 2007 “subordinated notes” senior notes convertible shares juniper networks common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances nine months ended september 30 2003 company paid approximately 3812 million retire portion subordinated notes partial retirement resulted gain 141 million difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish subordinated notes october 2003 company called redemption november 26 2003 4000 million principal amount subordinated notes prior november 26 2003 holders could convert subordinated notes called redemption shares juniper networks common stock price approximately 1639559 per share 60992 shares juniper networks common stock per 1000 principal amount subordinated notes upon redemption holders received total 1036508 per 1000 principal amount subordinated notes consisting redemption price 102714 per 1000 principal amount subordinated notes plus accrued unpaid interest thereon september 15 2003 including november 26 2003 9368 per 1000 principal subordinated notes company paid 4109 million related redemption resulted loss 152 million difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish subordinated notes small amount called notes converted shares company’s common stock worth 2000 third business day march 15 2003 juniper networks option redeem subordinated notes following redemption prices expressed percentages principle amount carrying amounts fair values subordinated notes senior notes thousands note 5 acquisitions accordance sfas 141 juniper networks allocates purchase price business acquisitions tangible intangible assets acquired liabilities assumed well inprocess research development based estimated fair values excess purchase price fair values recorded goodwill fair values assigned tangible intangible assets acquired liabilities assumed based estimates assumptions provided management information compiled management including valuations utilize established valuation techniques appropriate high technology industry unisphere business combination july 2002 juniper networks completed acquisition 100 unisphere subsidiary siemens acquisition unisphere enable juniper networks supply edge applications expertise leading service providers carriers postal telegraph telephone providers ptts throughout world summary total purchase price thousands common stock issued acquisition valued using average closing price juniper networks’ common stock two days two days date transaction announced juniper networks also assumed outstanding stock options unisphere fair value approximately 1512 million options valued using blackscholes option pricing model inputs 08 volatility 2 years expected life 4 riskfree interest rate market value 986 per share described total purchase price allocated follows thousands quarter ended december 31 2002 company reversed approximately 28 million goodwill primarily related valuation certain assets awaiting information originally allocated purchase price 2003 company reversed approximately 43 million goodwill primarily related liabilities accrued time acquisition certain acquisition costs realized amortizable intangible assets total purchase price approximately 740 million allocated amortizable intangible assets including completed technology service contract relationships noncompete agreements order backlog completed technology consists products reached technological feasibility includes products unisphere’s product line principally erx product service contract relationships represent potential additional source revenue customers existing service contracts completed technology service contract relationships valued using discounted cash flow dcf method calculates value intangible asset present value tax cash flows potentially attributable net return fair value attributable tangible intangible assets juniper networks amortizing fair value completed technology service contract relationships straightline basis weighted average remaining useful lives approximately 5 years 6 years respectively noncompete agreements represent value noncompete nonsolicit agreements signed key executives unisphere noncompete agreements valued using lost profits method estimates value future cash flows would lost due customer defections nonsolicit agreements valued using avoided cost method estimates avoided costs replacing solicited employees juniper networks amortizing fair value assets straightline basis weighted average useful life approximately 2 years order backlog represents value standing orders products services order backlog valued using avoided cost method estimates avoided selling expenses due fact unisphere firm purchase orders place time acquisition juniper networks amortized fair value assets threemonth period ended september 30 2002 cost product revenues inprocess research development total purchase price approximately 827 million allocated inprocess research development iprd expensed quarter ended september 30 2002 projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition unisphere multiple iprd efforts way certain current future product lines efforts included developing new cards modules different bandwidths various software developments company utilized dcf method value iprd using rates ranging 30 35 applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time acquisition estimated development efforts 55 complete would completed next six twelve months development efforts completed december 31 2003 deferred compensation unvested stock options intrinsic value approximately 05 million time acquisition allocated deferred compensation purchase price allocation amortized expense using graded vesting method options assumed conjunction acquisition exercise prices ranging 565 1473 per share weighted average exercise price 581 per share weighted average remaining contractual life approximately 9 years juniper networks assumed approximately 135 million vested options approximately 125 million unvested options asset purchase 2002 juniper networks entered note purchase agreement valued 25 million third party lenders whereby juniper networks purchased certain secured indebtedness private company “debtor” held lenders debtor defaulted indebtedness therefore juniper networks took possession underlying collateral included approximately 17 million fixed assets approximately 08 million iprd company treated assets acquired transaction business combination accordance sfas 142 company capitalized fixed assets depreciating useful lives expensed iprd upon acquisition pacific broadband business combination december 14 2001 juniper networks acquired 100 outstanding stock privately held pacific broadband communications “pacific broadband” developer standardsbased nextgeneration cable modem termination systems cmts juniper networks previously held minority interest result acquisition juniper networks gained access cable market new public network new market juniper networks time acquisition initial purchase price including prior investment 40 million approximately 1483 million consisting exchange approximately 4612000 shares company’s common stock fair value approximately 1098 million assumed stock options fair value approximately 305 million acquisition related expenses approximately 40 million consisting workforce reduction costs excess facilities costs filing fees well payments professional fees terms acquisition also included earnout provision payable shares company’s common stock wherein former stockholders employee option holders pacific broadband could receive additional consideration 590 million upon achieving certain product development milestones revenue targets 2002 fair value common stock given determined using average market price company’s common stock period including two days terms acquisition agreed announced fair value options given determined using blackscholes option model following table summarizes estimated fair values assets acquired liabilities assumed date acquisition thousands 42 million assigned research development assets written inprocess research development date acquisition accordance fasb interpretation 4 “applicability fasb statement 2 business combinations accounted purchase method” applications inprocess technology project integrated juniper networks’ products efforts required complete acquired inprocess technology included completion planning designing testing activities necessary establish product produced meet design requirements including functions features technical performance requirements value acquired inprocess technology computed using discounted cash flow analysis rate 30 anticipated income stream related product revenues discounted cash flow analysis based management’s forecast future revenues cost revenues operating expenses related products technologies purchased pacific broadband calculation value adjusted reflect value creation efforts pacific broadband prior close acquisition time acquisition product approximately 75 complete majority costs complete project incurred 2002 material resultant value inprocess technology reduced estimated value core technology project complete december 31 2002 fair value intangible assets determined based upon valuation using combination methods including income approach core technology cost approach supply agreements goodwill represents excess purchase price paid fair value net tangible intangible assets acquired none expected deductible tax purposes accordance sfas 142 goodwill amortized deferred compensation charge relates intrinsic value unvested stock options restricted stock assumed transaction deferred compensation presented reduction stockholders’ equity amortized vesting period applicable options restricted stock using graded vesting method terms pacific broadband acquisition earnout provision payable shares company’s common stock wherein former stockholders employee option holders pacific broadband could receive additional consideration 590 million upon achieving certain product development milestones revenue targets 2002 milestones achieved date value 165 million recorded additional goodwill potential earnout events remaining addition increases value goodwill acquired pacific broadband acquisition goodwill reduced 49 million certain liabilities accrued time acquisition realized note 6 goodwill purchased intangible assets following table presents details company’s total purchased intangibles assets thousands table include intangible assets purchased completely amortized threemonth period ended september 30 2002 cost goods sold 36 million unisphere acquisition value backlog orders amortization expense purchased intangible assets 207 million 139 million 27 million included operating expenses years ended december 31 2003 2002 2001 respectively estimated future amortization expense purchased intangible assets next five years follows thousands changes carrying amount goodwill 2003 follows thousands accordance sfas 142 company ceased amortizing goodwill january 1 2002 sfas 142 effective year ended december 31 2001 net loss would decreased 466 million 014 per share note 7 cash equivalents shortterm longterm investments restricted cash equivalents shortterm longterm investments consist following thousands company recognized realized gains sale availableforsale securities 120 million 04 million 55 million 2003 2002 2001 respectively gain 2002 net 50 million impairment charge availableforsale securities recognized quarter ended september 30 2002 declines value deemed temporary cost security sold based specific identification method company restricted cash 308 million december 30 2003 related establishment trust secure indemnification obligations certain directors officers lines credits facility leases company established trust amount 250 million secure indemnification obligations certain directors officers arising activities event company provide financially incapable providing indemnification company terminate trust fiveyear anniversary establishment fiveyear anniversary thereafter upon termination company right amounts remaining trust corpus restricted cash reported longterm asset 250 million invested per company’s investment policy investments classified availableforsale therefore changes valuation reflected balance sheet note 8 warranties juniper networks generally offers oneyear warranty hardware products well 90day warranty media contains software embedded products warranty generally includes parts labor 24hour service center support specific terms conditions warranties may vary depending products sold locations sold company estimates costs may incurred warranty obligations records liability amount costs time revenue recognized factors affect company’s warranty liability include number installed units historical anticipated rates warranty claims cost per claim company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary changes company’s warranty reserve year ended december 31 2003 follows thousands note 9 commitments juniper networks leases facilities operating leases expire various times longest expires 2014 rental expense 2003 2002 2001 approximately 265 million 171 million 150 million respectively future minimum payments noncancellable operating leases consist following thousands note 10 stockholders’ equity stock option plans amended restated 1996 stock option plan company’s amended restated 1996 stock option plan “1996 plan” provides granting incentive stock options employees nonstatutory stock options employees directors consultants incentive stock options granted exercise price less fair value per share common stock date grant nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors options granted 1996 plan generally become exercisable fouryear period beginning date grant options granted 1996 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant juniper networks authorized 146623000 shares common stock issuance 1996 plan december 31 2003 33133000 shares available future option grants stock sales 1996 plan 1996 plan also provides sale shares common stock employees consultants fair value per share common stock shares issued consultants fair value services previously rendered contingent upon future events shares sold employees made pursuant restricted stock purchase agreements containing provisions established board directors provisions give juniper networks right repurchase shares original sales price upon termination employee right expires rate determined board directors generally rate 25 one year 20833 per month thereafter shares issued 1996 plan 2003 2002 2001 december 31 2003 2002 zero 24000 shares subject repurchase rights 1996 plan respectively december 31 2003 2002 3905000 3896000 shares respectively repurchased 1996 plan connection employee terminations 2000 nonstatutory stock option plan july 2000 board directors adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provides granting nonstatutory stock options employees directors consultants nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors options granted 2000 plan generally become exercisable fouryear period beginning date grant options granted 2000 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant december 31 2003 juniper networks authorized 44362000 shares common stock issuance 2000 plan december 31 2003 10804000 shares available future option grants 2000 plan micro magic inc 1995 stock option plan 2000 stock option plan connection acquisition micro magic inc december 2000 company assumed outstanding options micro magic inc 1995 stock option plan micro magic inc 2000 stock option plan collectively “mmi plans” mmi plans terminated except respect options outstanding time acquisition options mmi plans generally become exercisable fouryear period beginning date grant maximum term 10 years juniper networks authorized aggregate 626000 shares common stock issuance mmi plans shares available future option grants mmi plans december 31 2003 111000 shares outstanding mmi plans pacific broadband communications inc 2000 stock incentive plan 2000 subplan connection acquisition pacific broadband communications inc “pbc” december 2001 company assumed outstanding options pbc 2000 stock incentive plan 2000 subplan collectively “pbc plans” options pbc plans generally become exercisable fouryear period beginning date grant maximum term 10 years juniper networks authorized aggregate 1443000 shares common stock issuance pbc plans shares available future option grants pbc plans december 31 2003 307000 shares outstanding pbc plans unisphere networks inc 1999 stock incentive plan connection acquisition unisphere july 2002 company assumed outstanding options unisphere amended restated 1999 incentive plan “unisphere plan” options unisphere plan generally become exercisable fouryear period beginning date grant maximum term 10 years juniper networks authorized aggregate 26051000 shares common stock issuance unisphere plan shares available future option grants unisphere plans december 31 2003 12123000 shares outstanding unisphere plan option activity option plans summarized follows following schedule summarizes information stock options outstanding option plans december 31 2003 thousands december 31 2002 37461000 options exercisable average exercise price 1192 december 31 2001 14518000 options exercisable average exercise price 1412 stock option exchange program october 25 2001 company announced voluntary stock option exchange program employees program juniper networks employees given opportunity chose cancel certain outstanding stock options previously granted exercise price equal greater 1000 exchange equal number replacement options granted future date least six months one day cancellation date november 26 2001 options granted certain employees two 50 increments april 2001 july 2001 eligible exchange employee received grants elected participate exchange program options cancelled entirety condition exchanging eligible options replacement options addition employees electing participate exchange program required exchange options granted employees sixmonth period prior cancellation date except options grants cancelled described exchange program options 23827000 shares company’s common stock tendered canceled 21054000 eligible replacement option grants participant employee received eligible option included exchange oneforone replacement option exercise price replacement option fair market value company’s common stock date grant replacement options terms conditions substantially canceled options exchange program result additional compensation charges variable plan accounting employee stock purchase plan april 1999 board directors approved adoption juniper networks 1999 employee stock purchase plan “purchase plan” purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year purchase plan implemented series offering periods six months duration provided however first offering period approximately thirteen months duration ending july 31 2000 price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day respective offering period 2003 1475000 shares common stock purchased purchase plan average exercise price 674 per share december 31 2003 total 3062000 shares issued purchase plan average price 727 per share 8938000 shares remained available future issuance purchase plan stockbased compensation company elected follow apb 25 related interpretations accounting employee stockbased compensation plans exercise price company’s employee stock options equals market price underlying stock date grant compensation expense recognized company disclosed pro forma fair value stockbased compensation information required sfas 123 note 2 “summary significant accounting policies” fair value option granted assumed december 31 2003 estimated date grant date assumption using minimum value company went public blackscholes method following shows assumptions used calculate fair value company’s stockbased awards blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable blackscholes model requires input highly subjective assumptions including expected stock price volatility company’s stockbased awards characteristics significantly different traded options changes subjective input assumptions materially affect fair value estimate management’s opinion existing models necessarily provide reliable single measure fair value stockbased awards weighted average estimated fair value employee stock options granted 2003 2002 2001 817 485 2442 per share respectively weighted average estimated fair value shares granted purchase plan 2003 2002 2001 308 1044 5630 respectively common stock reserved future issuance december 31 2003 juniper networks reserved aggregate 141994000 shares common stock future issuance stock option plans 1999 employee stock purchase plan future issuance upon conversion convertible subordinated notes note 11 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees eligible participate first day employment juniper networks plan employees may contribute 60 pretax salaries per year statutory limits beginning january 1 2001 juniper networks began matching employee contributions matching formula 050 dollar 6 eligible pay annual maximum 2000 matching contributions vest immediately company’s matching contributions plan totaled 20 million 20 million 14 million 2003 2002 2001 respectively note 12 segment information sfas 131 “disclosures segments enterprise related information” established standards reporting information operating segments company’s financial statements operating segments defined components enterprise separate financial information available evaluated regularly chief operating decision maker decision making group deciding allocate resources assessing performance company operates one operating segment however tracks revenue geographic region following table shows net revenues geographic region thousands americas region includes net revenues countries united states 281 million 311 million 428 million years ended december 31 2003 2002 2001 respectively note 13 net income loss per share following table presents calculation basic diluted net income loss per share thousands except per share amounts 2002 2001 juniper networks excluded 11510000 16570000 common stock equivalents respectively consisting outstanding stock options shares subject repurchase calculation diluted loss per share securities antidilutive period due net loss employee stock options purchase approximately 13065000 shares 41271000 shares 25277000 shares 2003 2002 2001 respectively outstanding included computation diluted earnings per share exercise price stock options greater average share price common shares therefore effect would antidilutive 2003 2002 2001 subordinate notes also excluded calculation diluted loss per share effect assumed conversion notes antidilutive addition senior notes excluded calculation diluted loss per share 2003 senior notes convertible terms note 14 income taxes significant components provision benefit income taxes attributable operations follows thousands pretax income foreign operations 212 million 74 million 138 million fiscal years 2003 2002 2001 respectively deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities follows thousands unused net operating loss research development tax credit carryforwards expire various dates beginning years 2021 2012 respectively company provided valuation allowance net deferred tax assets uncertainty regarding realizability due tax losses caused employee stock option exercises net valuation allowance increased 28 million year ended december 31 2003 79 million 2002 december 31 2003 approximately 162 million valuation allowance referenced relates tax benefits stock option deductions credited equity realized remaining balance 365 million relates capital losses carry forward offset future capital gains 94 million relates acquired net operating losses credited goodwill realized provision income taxes differs provision calculated applying federal statutory tax rate income loss taxes following thousands irs currently auditing company’s federal income tax returns fiscal years 1999 2000 proposed adjustments received years management believes ultimate outcome irs audits material adverse impact company’s financial position results operations note 15 joint venture quarter ended june 30 2001 juniper networks ericsson ab respective subsidiaries entered joint venture agreement develop market products wireless internet infrastructure market juniper networks began recording 40 share joint venture’s loss 2002 company’s share joint venture’s loss totaled approximately 13 million recorded single line item income section statement operations december 31 2002 company obligations fund joint venture note 16 legal proceedings company subject legal claims litigation arising ordinary course business including matters described outcome matters currently determinable however company expect legal claims litigation ultimately material adverse effect company’s consolidated financial position results operations ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” company certain company’s officers action brought behalf purchasers company’s common stock company’s initial public offering june 1999 secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company proposal made settlement release claims issuer defendants including company settlement subject number conditions including approval proposed settling parties court settlement occur litigation company continues company believes meritorious defenses intends defend case vigorously federal securities class action suit quarter ended march 31 2002 number essentially identical shareholder class action lawsuits filed united states district court northern district california company certain officers former officers purportedly behalf stockholders purchased company’s publicly traded securities april 12 2001 june 7 2001 april 2002 judge granted defendants’ motion consolidate actions one may 2002 court appointed lead plaintiffs approved selection lead counsel amended complaint filed july 2002 plaintiffs allege defendants made false misleading statements assert claims violations federal securities laws seek unspecified compensatory damages relief september 2002 defendants moved dismiss amended complaint march 2003 judge granted defendants motion dismiss leave amend plaintiffs filed amended complaint april 2003 defendants moved dismiss amended complaint may 2003 hearing defendants’ motion dismiss held september 12 2003 judge yet ruled motion discovery date trial scheduled company continues believe claims without merit intends defend action vigorously state derivative claim based federal securities class action suit august 2002 consolidated amended shareholder derivative complaint purportedly filed behalf company captioned juniper networks inc derivative litigation civil action cv 807146 filed superior court state california county santa clara complaint alleges certain company’s officers directors breached fiduciary duties company engaging alleged wrongful conduct including conduct complained securities litigation described complaint also asserts claims juniper networks investor company named solely nominal defendant plaintiff seeks recovery october 2002 company nominal defendant individual defendants filed demurrers consolidated amended shareholder derivative complaint march 2003 judge sustained defendants’ demurrers leave amend plaintiffs lodged amended complaint may 2003 defendants demurred amended complaint moved stay consolidated action pending resolution federal action august 25 2003 court sustained defendants’ demurrer leave amend denied motion stay without prejudice plaintiffs’ third amended complaint due february 24 2004 limited discovery date trial scheduled company continues believe claims without merit intends defend action vigorously toshiba patent infringement litigation november 13 2003 toshiba corporation filed suit united states district court delaware company alleging certain products infringe four toshiba patents seeking injunction unspecified damages company believes meritorious defenses claims intends defend suit vigorously note 17 quarterly results unaudited table sets forth selected unaudited financial data quarter last two years thousands except per share amounts basic diluted net losses per share computed independently quarters presented therefore sum quarters may equal full year net loss per share amounts note 18 subsequent events february 2004 juniper networks signed agreement acquire netscreen technologies inc stockforstock merger transaction based upon juniper networks closing stock price 2947 february 6 2004 deal approximate value 4 billion transaction completed juniper networks stock exchanged netscreen technologies stock fixed exchange ratio 1404 shares juniper networks common stock outstanding share netscreen technologies common stock acquisition expected close second calendar quarter 2004 subject customary closing conditions including approval stockholders companies regulatory approvals item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting juniper networks inc’s management responsible establishing maintaining adequate internal control company’s financial reporting inherent limitations effectiveness system internal control including possibility human error circumvention overriding controls accordingly even effective internal controls provide reasonable assurances respect financial statement preparation changes conditions effectiveness internal control may vary time assessed effectiveness company’s internal control financial reporting december 31 2004 making assessment used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment using criteria concluded december 31 2004 juniper networks inc’s internal control financial reporting effective juniper networks inc’s independent registered public accounting firm ernst young llp audited financial statements included annual report form 10k issued audit report management’s assessment company’s internal control financial reporting report appears page 42 annual report form 10k sunnyvale ca march 3 2005 index consolidated financial statements reports independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity consolidated statements cash flows notes consolidated financial statements 40 report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2004 2003 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2004 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedules based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2004 2003 consolidated results operations cash flows three years period ended december 31 2004 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness juniper networks inc’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 1 2005 expressed unqualified opinion thereon ernst young llp san jose ca march 1 2005 41 report independent registered public accounting firm board directors stockholders juniper networks inc audited management’s assessment included accompanying management’s report internal control financial reporting juniper networks inc maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment juniper networks inc maintained effective internal control financial reporting december 31 2004 fairly stated material respects based coso criteria also opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2004 based coso criteria also audited accordance standards public company accounting oversight board united states 2004 consolidated financial statements juniper networks inc report dated march 1 2005 expressed unqualified opinion thereon ernst young llp san jose ca march 1 2005 42 juniper networks inc consolidated balance sheets thousands except par values see accompanying notes consolidated financial statements 43 juniper networks inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements 44 juniper networks inc consolidated statements stockholders’ equity thousands 45 see accompanying notes consolidated financial statements 46 juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements 47 juniper networks inc notes consolidated financial statements note 1 description business juniper networks inc “juniper networks” “company” founded 1996 develop sell products would able meet stringent demands service providers today company designs sells products services together provide customers internet protocol “ip” secure networking solutions company’s solutions incorporated global web interconnected public private networks across variety media including voice video data travel end users around world company’s network infrastructure solutions enable service providers networkintensive businesses support deliver services applications highly efficient low cost integrated network company’s security solutions meet broad array customer’s security priorities protecting network protecting data network together company’s secure networking solutions enable customers convert networks provide commoditized best efforts services valuable assets provide differentiation value increased reliability security end users company sells markets products direct sales organization valueadded resellers distributors april 2004 company completed acquisition netscreen technologies inc “netscreen” order expand customer base portfolio products netscreen developed marketed sold broad array integrated network security solutions enterprises carriers government entities accordance statement financial accounting standards “sfas” 141 business combinations company included results operations results netscreen beginning april 16 2004 therefore revenues cost revenues operating expenses significantly greater 2004 compared 2003 2002 result netscreen acquisition company expanded customer base portfolio products offer two categories networking products infrastructure products consist predominately original juniper networks products security products consist predominately former netscreen products note 2 summary significant accounting policies basis presentation consolidated financial statements include accounts juniper networks wholly owned subsidiaries intercompany balances transactions eliminated investments operating companies company controlling interest ability exercise significant influence carried lower cost estimated realizable value financial accounting standards board “fasb” interpretation 46 “consolidation variable interest entities” “fin 46” issued january 2003 fin 46 requires entity primary beneficiary variable interest entity assets liabilities results operations variable interest entity included consolidated financial statements entity fasb interpretation 46r “consolidation variable interest entities” “fin 46r” issued december 2003 revised parts fin 46 company adopted fin 46r effective january 1 2004 company interests vies certain reclassifications made prior year balances order conform current year’s presentation specifically deferred revenue restructuring liabilities reclassified shortterm longterm amounts 48 use estimates preparation consolidated financial statements related disclosures conformity accounting principles generally accepted united states requires company establish accounting policies contain estimates assumptions affect amounts reported consolidated financial statements accompanying notes policies include • revenue recognition • estimating future warranty costs valuation exposures associated contract manufacturing operations • provision income taxes tax related accruals • allowance doubtful accounts • initial continuing valuation goodwill purchased intangible assets company important accounting policies practices however adopted policies either generally require company make significant estimates assumptions otherwise require implementation adopted policy judgment policy company bases estimates historical experience also assumptions believes standard reasonable cash equivalents juniper networks considers highly liquid investments purchased maturity 90 days less cash equivalents cash equivalents consist money market funds commercial paper government securities certificates deposit corporate debt securities equity investments juniper networks certain minority equity investments privately held companies investments included longterm assets carried cost adjusted impairment company controlling interest ability exercise significant influence companies december 31 2004 2003 carrying values company’s minority equity investments privately held companies 38 million 57 million respectively investments inherently high risk market technologies products manufactured companies usually early stage time investment juniper networks markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary addition equity investments privately held companies company held certain marketable equity securities classified availableforsale 2003 company sold investments cost basis approximately 43 million recognized gain approximately 87 million following table summarizes impairment charges associated equity investments recorded company thousands 49 fair value financial instruments carrying value company’s cash equivalents accounts receivable approximates fair market value due relatively short period time maturity see note 6 “cash equivalents shortterm longterm investments restricted cash” discussion carrying values investment portfolio fair values zero coupon convertible senior notes due june 15 2008 “senior notes” based upon quoted market rates see note 7 “longterm debt” discussion company’s outstanding debt concentrations financial instruments subject juniper networks concentrations credit risk consist primarily cash equivalents investments trade accounts receivable juniper networks maintains cash equivalents investments fixed income securities highquality institutions invests high quality credit instruments deposits held banks may exceed amount insurance provided deposits generally deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world juniper networks performs ongoing credit evaluations customers generally require collateral accounts receivable juniper networks maintains reserves potential credit losses historically losses within management’s expectations one customer accounted 15 total net revenues 2004 two customers individually accounted 15 13 total net revenues 2003 2002 one customer accounted 17 net product revenues see note 12 “segment information” breakdown net revenues geographic location juniper networks relies sole suppliers certain components asics custom sheet metal additionally juniper networks relies primarily two independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements juniper networks could negatively impact future operating results derivatives company’s policy use derivatives partially offset market exposure fluctuations foreign currencies accordance sfas 133 accounting derivative instruments hedging activities “sfas 133” company recognizes derivatives balance sheet fair value company enter derivatives speculative trading purposes company uses foreign exchange forward contracts hedge foreign currency forecasted transactions related certain operating expenses denominated primarily euro japanese yen british pound derivatives designated cash flow hedges sfas 133 maturities one two months derivative designated cash flow hedge effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statement operations line item hedged transaction relates company records ineffectiveness hedging instruments immaterial years ended december 31 2004 2003 2002 incomeexpense consolidated statements operations event underlying forecasted transaction occur becomes probable occur company reclassifies gain loss related cash flow hedge accumulated comprehensive income incomeexpense consolidated 50 statements operations time years ended december 31 2004 2003 2002 material net gains losses recognized incomeexpense relating hedges forecasted transactions occur additionally company uses foreign currency forward contracts mitigate transaction gains losses generated certain monetary assets liabilities denominated primarily euro japanese yen british pound derivatives carried fair value changes recorded incomeexpense changes fair value derivatives largely offset remeasurement underlying assets liabilities foreign exchange contracts maturities one two months foreign currency translation assets liabilities foreign operations translated us dollars using exchange rates effect end period revenue expenses translated using average exchange rates period foreign currency translation gains losses material years ended december 31 2004 2003 2002 property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally three five years lease term respective assets land acquired january 2001 depreciated property equipment consist following thousands goodwill purchased intangible assets goodwill purchased intangible assets carried cost less accumulated amortization company adopted sfas 142 goodwill intangible assets january 1 2002 prohibits amortization goodwill intangible assets indefinite useful lives business combinations consummated july 1 2001 goodwill amortized december 31 2001 using straightline method estimated useful life three years goodwill amortized business combinations consummated june 30 2001 goodwill intangible assets indefinite lives amortized tested least annually impairment amortization purchased intangibles finite useful lives computed using straightline method expected useful life two seven years see note 3 “business acquisitions” detail acquisitions company acquired goodwill intangible assets note 4 “goodwill purchased intangible assets” detail activity accounts 2004 2003 51 revenue recognition company recognizes product revenue persuasive evidence arrangement exists delivery occurred fee fixed determinable collectibility reasonably assured unless future obligations things customer acceptance case revenue related costs deferred obligations met cases company recognizes product revenue upon shipment customers including valueadded resellers “var” company’s practice identify end user prior shipment var company defers revenues sales distributors information indicating distributor sold products customers company recognizes revenue service contracts services completed ratably period obligation majority service revenue earned customers purchase company’s products enter service contracts service contracts typically oneyear renewable periods services 24hour customer support nonspecified updates hardware repairs addition service contracts company also provides professional educational services arrangements products services bundled company determines whether deliverables separable multiple units accounting company allocates total fee arrangements individual deliverables either based relative fair values using residual method circumstances dictate company recognizes revenue deliverable accordance policies product service revenue recognition company accrues sales returns allowances based best estimate future returns allowances although arrangements endusers vars generally include contractual rights return general policy accept returns unique circumstances company accepted may future accept product returns customers addition company’s agreements distributors provide limited stock rotation price protection rights stock rotation rights provide distributors right exchange unsold inventory alternate products equal greater value price protection rights grant distributors right credit certain purchases event decreases prices products company accrues credits based estimates expected stock rotation price protection obligations company’s resellers distributors participate various cooperative marketing programs maintains estimated accruals allowances programs amounts billed excess revenue recognized included deferred revenue accounts receivable accompanying consolidated balance sheets breakdown company’s deferred revenue thousands 52 allowance doubtful accounts allowance doubtful accounts based company’s assessment collectibility customer accounts company regularly reviews allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customer’s ability pay research development costs develop company’s products expensed incurred accordance sfas 2 accounting research development costs establishes accounting reporting standards research development advertising costs charged sales marketing expense incurred totals insignificant date stockbased compensation company employee stock benefit plans described fully note 10 “stockholders’ equity” company’s stock option plans accounted intrinsic value recognition measurement principles apb opinion 25 accounting stock issued employees related interpretations exercise price options granted plans equal market price underlying common stock grant date stockbased employee compensation cost acquisitionrelated compensation cost recognized net income following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 accounting stockbased compensation employee stock benefits including shares issued stock option plans company’s stock purchase plan pro forma information net tax effect follows thousands except per share amounts comprehensive income sfas 130 reporting comprehensive income company required display comprehensive income loss components part financial statements company displayed comprehensive income loss part consolidated statements stockholders’ equity comprehensive income 2004 includes net unrealized losses availableforsale securities net foreign currency translation gains losses excluded net loss activity comprehensive income follows thousands 53 components accumulated comprehensive income loss follows thousands provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 accounting income taxes records valuation allowance reduce deferred tax assets amount believes likely realizable accordingly valuation allowance amount equal us domestic net deferred tax assets established reflect uncertainty regarding future realization assets part due potential impact future stock option deductions addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due recent accounting pronouncements december 2004 fasb revised sfas 123 “fas 123r” sharebased payment requires companies expense estimated fair value employee stock options similar awards accounting provisions fas 123r effective company beginning third quarter fiscal 2005 company adopt provisions fas 123r using modified prospective application modified prospective application fas 123r provides certain changes method valuing stockbased compensation among changes apply new awards outstanding effective date subsequently modified cancelled compensation expense outstanding awards requisite service rendered effective date recognized remaining service period using compensation cost calculated pro forma disclosure purposes fas 123 company process determining new method valuing stockbased compensation prescribed fas 123r applied valuing stockbased awards granted effective date impact recognition compensation expense related awards financial statements emerging issues task force issued eitf issue 048 “eitf 048” effect contingently convertible debt diluted earnings per share september 2004 eitf 048 states issued securities embedded conversion features contingently exercisable upon occurrence marketprice condition included calculation diluted eps regardless whether market price trigger met eitf 048 consensus must applied retroactively based terms effect amounts outstanding last day fiscal period consensus becomes effective eitf 048 effective company beginning fourth quarter 2004 eitf 048 applied company’s senior notes issued june 2003 application eitf 048 reduced 2003 diluted earnings per share one cent accordingly company restated diluted shares earnings per share year ended december 31 2003 54 note 3 business acquisitions juniper networks allocates purchase price business acquisitions tangible intangible assets acquired liabilities assumed well inprocess research development based estimated fair values excess purchase price fair values recorded goodwill fair values assigned tangible intangible assets acquired liabilities assumed based estimates assumptions provided management information compiled management including valuations utilize established valuation techniques appropriate high technology industry netscreen technologies inc april 2004 juniper networks completed acquisition netscreen acquisition resulted issuance approximately 132 million shares company’s common stock fair value approximately 36512 million former stockholders netscreen common stock issued acquisition valued using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced juniper networks also assumed outstanding netscreen stock options fair value approximately 5205 million options valued using blackscholes option pricing model inputs 08 volatility 3 years expected life 25 riskfree interest rate market value juniper networks common stock 2764 per share determined described company also incurred direct costs associated acquisition approximately 134 million summary total purchase price millions purchase price preliminarily allocated follows millions purchase price allocation preliminary subject change company obtains additional information concerning fair values certain tangible assets liabilities netscreen initial purchase price allocation second quarter 2004 company decreased net tangible assets acquired increased goodwill 61 million change due recognition preacquisition contingency 120 million related earnout payable shareholders neoteris inc company purchased netscreen november 2003 partially offset number reductions valuation certain preacquisition accruals additional potential 180 million earnout related neoteris acquisition may paid event certain financial milestones achieved goodwill recorded result acquisition expected deductible tax purposes 55 acquisition costs related netscreen acquisition company accrued acquisition charges 213 million primarily related severance facility charges company recognized costs accordance eitf issue 953 recognition liabilities connection purchase business combinations “eitf 953” ninetyfour former netscreen employees identified termination time acquisition related severance paid remaining restructuring change consists primarily facility charges paid end lease terms extend 2008 december 31 2004 126 million remained paid 82 million recorded longterm liabilities amortizable intangible assets existing technology consists products reached technological feasibility includes products netscreen’s product line principally vpn firewall appliances existing technology valued using discounted cash flow “dcf” method calculates value intangible asset present value tax cash flows potentially attributable net return fair value attributable tangible intangible assets juniper networks amortizing fair value existing technology straightline basis remaining estimated useful life four years maintenance agreements represent revenue generated contracts customers pay annual maintenance support income approach used estimate fair value maintenance agreements includes estimating ongoing aftertax income expected maintenance agreements place time netscreen acquisition including expected renewals juniper networks amortizing fair value maintenance agreements straightline basis remaining estimated useful life five years patents core technology represent combination processes patents trade secrets used existing inprocess technology value trade name trademarks represented benefit owning intangible assets rather paying royalties use intangible assets valued using royalty savings method estimates value intangible assets capitalizing royalties saved company owns assets juniper networks amortizing fair value assets remaining estimated useful life four years straightline basis relationships vars distributors represent rights granted var distributor resell certain netscreen products netscreen distributors located north america latin america asia pacific region europe middle east africa region var distributor relationships valued using avoided cost method takes account cost establishing relationship juniper networks amortizing var relationships five years straightline basis distributor relationships seven years straightline basis difference estimated useful lives vars distributors attributed longer historical lives distributor relationships order backlog represents value standing orders products services order backlog valued using avoided cost method estimates avoided selling expenses due fact netscreen firm purchase orders place time acquisition juniper networks amortized fair value assets threemonth period ended june 30 2004 cost revenues inprocess research development total purchase price 275 million allocated inprocess research development “iprd” expensed three months ended june 30 2004 projects qualify iprd represent yet reached technological feasibility alternative future use 56 technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition netscreen multiple iprd efforts way certain current future product lines efforts included developing integrating secure routers embedded encryption chips well functions features next generation internet protocol “ip” wireless digital subscriber line connectivity voice ip capability company utilized dcf method value iprd using rates ranging 20 25 depending estimated useful life technology applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time netscreen acquisition estimated development efforts would completed next eighteen months estimated cost approximately 25 million december 31 2004 estimated development efforts would completed next nine months estimated cost approximately 105 million deferred compensation unvested stock options restricted stock valued 935 million time netscreen acquisition allocated deferred compensation purchase price allocation amortized expense using gradedvesting method intrinsic value unvested stock options restricted stock adjusted percent assumed expensed grant date acquisition date using gradedvesting method options assumed conjunction acquisition exercise prices ranging 009 2711 per share weighted average exercise price 1248 per share weighted average remaining contractual life approximately 8 years juniper networks assumed approximately 59 million vested options approximately 205 million unvested options restricted stock pro forma results following unaudited pro forma financial information presents combined results operations juniper networks netscreen acquisition occurred beginning periods presented information 2004 unaudited amounts derived audited statement operations juniper networks year ended december 31 2004 unaudited statement operations netscreen three half months ended april 15 2004 information 2003 unaudited amounts derived audited statements operations juniper networks year ended december 31 2003 audited statement operations netscreen fiscal year ended september 30 2003 adjustments 06 million 868 million made combined results operations years ended december 31 2004 2003 respectively reflecting elimination amortization purchased intangibles deferred stock compensation charges cost goods sold inventory writeups valuation order backlog iprd net tax impact unaudited pro forma financial information intended represent indicative consolidated results operations juniper networks would reported acquisition completed dates presented taken representative future consolidated results operations company 57 pro forma financial information includes following material nonrecurring charges period presented millions unisphere networks inc july 2002 juniper networks completed acquisition unisphere subsidiary siemens acquisition unisphere enabled juniper networks supply edge applications expertise leading service providers carriers postal telegraph telephone providers ptts throughout world summary total purchase price millions total purchase price allocated follows millions amortizable intangible assets total purchase price approximately 740 million allocated amortizable intangible assets including completed technology service contract relationships noncompete agreements order backlog completed technology consisted products reached technological feasibility included products unisphere’s product line principally erx product service contract relationships represented potential additional source revenue customers existing service contracts completed technology service contract relationships valued using discounted cash flow dcf method juniper networks amortizing fair value completed technology service contract relationships straightline basis weighted average remaining useful lives approximately five years six years respectively noncompete agreements represented value noncompete nonsolicit agreements signed key executives unisphere noncompete agreements valued using lost profits method estimates value future cash flows would lost due customer defections nonsolicit agreements valued using avoided cost method estimates avoided costs replacing solicited employees juniper networks amortizing fair value assets straightline basis weighted average useful life approximately two years order backlog represented value standing orders products services order backlog valued using avoided cost method estimates avoided selling expenses 58 due fact unisphere firm purchase orders place time acquisition juniper networks amortized fair value assets threemonth period ended september 30 2002 cost product revenues inprocess research development total purchase price approximately 827 million allocated inprocess research development iprd expensed quarter ended september 30 2002 time acquisition unisphere multiple iprd efforts way certain current future product lines efforts included developing new cards modules different bandwidths various software developments development efforts completed december 31 2003 deferred compensation unvested stock options intrinsic value approximately 05 million time acquisition allocated deferred compensation purchase price allocation amortized expense using graded vesting method options assumed conjunction acquisition exercise prices ranging 565 1473 per share weighted average exercise price 581 per share weighted average remaining contractual life approximately 9 years juniper networks assumed approximately 135 million vested options approximately 125 million unvested options acquisition costs related unisphere acquisition juniper networks recorded 148 million similar restructuring costs connection restructuring unisphere organization third quarter 2002 costs accounted eitf 953 recognized liability assumed purchase business combination included allocation cost acquire unisphere increase goodwill 2004 company adjusted liability 37 million primarily changes sublease assumptions recorded adjustment credit restructuring consolidated statement operations december 31 2004 14 million remaining paid primarily facilities paid respective lease terms 2014 professional services note 4 goodwill purchased intangible assets following table presents details company’s purchased intangible assets definite lives millions amortization expense purchased intangible assets 568 million 207 million 139 million included operating expenses years ended december 31 2004 2003 2002 respectively estimated future amortization expense purchased intangible assets definite lives next five years follows millions changes carrying amount goodwill 2004 follows millions company 06 million worth intangibles indefinite lives related acquisitions prior periods never amortized reclassified goodwill 2004 company performed annual impairment analysis november 2004 determined impairment goodwill time note 5 restructuring operating charges following restructuring charges based juniper networks’ restructuring plans committed management changes estimates executing approved plans reflected juniper networks’ results operations restructuring connection netscreen acquisition three months ended june 30 2004 connection netscreen acquisition company recorded restructuring charge 04 million termination 13 employees eliminate certain duplicative activities employees functions geographic theaters addition 94 former netscreen employees also terminated charges accounted accordance sfas 146 accounting costs associated exit disposal activities “sfas 146” severance payments made september 30 2004 restructuring connection discontinuance cmts products third quarter 2003 company announced would longer develop gseries cmts products recorded charge 140 million comprised workforce reduction costs asset impairment charge costs associated vacating facilities costs associated termination contracts related costs charges accounted accordance sfas 146 company paid severance related workforce reduction related primarily termination 76 employees mainly located americas europe regions asset impairment charge primarily longlived assets longer needed result company’s decision cease development gseries cmts product line facility charges consisted primarily cost vacating facilities dedicated development gseries cmts products impairment cost certain leasehold improvements net present value facility charge calculated using company’s riskadjusted borrowing rate amounts related net facility charge included accrued liabilities paid respective lease term july 2008 difference actual future rent payments net present value recorded operating expenses incurred contractual commitments charges consisted primarily carrying obsolete material charges company’s contract manufacturers suppliers onhand onorder material related gseries cmts products costs satisfy endoflife commitments certain customer contracts costs included charge results operations quarter ended september 30 2003 result netscreen acquisition portion facilities originally included restructuring needed combine operations juniper networks netscreen result adjusted restructuring reserve 2004 net 09 million credit restructuring consolidated statement operations following table shows breakdown restructuring charge liability remaining december 31 2004 thousands restructuring connection unisphere acquisition third quarter 2002 connection company’s acquisition unisphere juniper networks initiated plans restructure operations eliminate certain duplicative activities focus strategic product customer bases reduce cost structure better align product operating expenses existing general economic conditions consequently juniper networks recorded restructuring expenses associated primarily workforce related costs vacating duplicative facilities contract termination costs noninventory asset impairment charges associated costs associated restructuring program totaled 149 million included charge results operations 2002 costs accounted eitf issue 943 liability recognition certain employee termination benefits costs exit activity 2004 company adjusted reserve 09 million primarily changes sublease assumptions recorded adjustment credit restructuring consolidated statement operations company’s estimated costs exit facilities based available commercial rates potential subleases december 31 2004 12 million remaining paid entirely leases consolidated facilities paid respective lease terms 2009 note 6 cash equivalents short longterm investments restricted cash equivalents short longterm investments consist following thousands company recognized realized gains losses sale availableforsale securities 03 million 120 million 04 million 2004 2003 2002 respectively gain 2002 net 50 million impairment charge availableforsale securities recognized quarter ended september 30 2002 declines value deemed temporary cost security sold based specific identification method company restricted cash 312 million december 31 2004 related establishment trust amount 250 million lines credits facility leases company established trust secure indemnification obligations certain directors officers arising activities event company provide financially incapable providing indemnification note 7 longterm debt 2004 2003 2002 company paid 1450 million 7920 million 1460 million respectively retire outstanding 475 convertible subordinated notes due march 15 2007 retirements resulted net loss 41 million 2004 net loss 11 million 2003 net gain 629 million 2002 loss gain represents difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish subordinated notes june 2003 juniper networks received 3928 million net proceeds offering 4000 million aggregate principal amount zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes senior unsecured obligations rank parity right payment company’s existing future senior unsecured debt rank senior company’s existing future debt expressly provides subordinated notes senior notes convertible shares juniper networks common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances carrying amounts fair values senior notes thousands note 8 warranties juniper networks generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty generally includes parts labor obtained company’s 24hour service center occasion specific terms conditions warranties vary company accrues warranty costs based estimates costs may incurred warranty obligations including material costs technical support labor costs associated overhead warranty accrual included company’s cost revenues recorded time revenue recognized factors affect company’s warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimated support labor costs associated overhead company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary changes company’s warranty reserve years ended december 31 2004 2003 follows thousands note 9 commitments juniper networks leases facilities operating leases expire various times longest expires 2014 rental expense 2004 2003 2002 approximately 298 million 265 million 171 million respectively future minimum payments noncancellable operating leases consist following thousands note 10 stockholders’ equity stock option plans amended restated 1996 stock option plan company’s amended restated 1996 stock option plan “1996 plan” provides granting incentive stock options employees nonstatutory stock options employees directors consultants incentive stock options granted exercise price less fair value per share common stock date grant nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors committee board directors options granted 1996 plan generally become exercisable fouryear period beginning date grant options granted 1996 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant juniper networks authorized 164623000 shares common stock issuance 1996 plan december 31 2004 34210000 shares available future option grants stock sales 1996 plan 1996 plan also provides sale shares common stock employees consultants shares issued consultants fair value services previously rendered contingent upon future events shares sold employees made pursuant restricted stock purchase agreements containing provisions established board directors committee board directors provisions give juniper networks right repurchase shares original sales price upon termination employee right expires rate determined board directors generally rate 25 one year 20833 per month thereafter december 31 2003 zero shares subject repurchase rights 1996 plan december 31 2003 3905000 shares repurchased 1996 plan connection employee terminations shares restricted stock issued 1996 plan 2004 2003 2002 2000 nonstatutory stock option plan july 2000 board directors adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provides granting nonstatutory stock options employees directors consultants nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors committee board directors options granted 2000 plan generally become exercisable fouryear period beginning date grant options granted 2000 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant december 31 2004 juniper networks authorized 63875000 shares common stock issuance 2000 plan december 31 2004 28190000 shares available future option grants 2000 plan plans assumed upon acquisition connection acquisitions made since 2000 company assumed options plans acquired companies exchanged options juniper networks options authorized appropriate number shares common stock issuance pursuant options december 31 2004 approximately 23381000 shares outstanding plans assumed acquisitions option activity option plans summarized follows following schedule summarizes information stock options outstanding option plans december 31 2004 december 31 2003 38303000 options exercisable average exercise price 1297 december 31 2002 37461000 options exercisable average exercise price 1192 employee stock purchase plan april 1999 board directors approved adoption juniper networks 1999 employee stock purchase plan “purchase plan” purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year purchase plan implemented series offering periods six months duration price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day respective offering period 2004 employees purchased 769000 shares common stock purchase plan average exercise price 1539 per share december 31 2004 total 3831000 shares issued purchase plan average price 795 per share 8169000 shares remained available future issuance purchase plan stockbased compensation company elected follow apb 25 related interpretations accounting employee stockbased compensation plans exercise price company’s employee stock options equals market price underlying stock date grant compensation expense recognized acquisitionrelated compensation costs company disclosed pro forma fair value stockbased compensation information required sfas 123 note 2 “summary significant accounting policies” fair value option granted assumed december 31 2004 estimated date grant date assumption using minimum value company went public blackscholes method following shows assumptions used calculate fair value company’s stockbased awards blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable blackscholes model requires input highly subjective assumptions including expected stock price volatility three months ended september 30 2004 company changed method estimating volatility common stock believes provides thorough accurate forecast company currently estimates volatility considering volatility publicly traded options purchase common stock outstanding convertible debentures historical stock volatility prior three months ended september 30 2004 company estimated future volatility solely based historical stock volatility estimating volatility one inputs used blackscholes model calculate fair value options granted company’s stock plans stock purchase plan weighted average estimated fair value employee stock options granted 2004 2003 2002 1157 817 485 per share respectively weighted average estimated fair value shares granted purchase plan 2004 2003 2002 444 308 1044 respectively common stock reserved future issuance december 31 2004 juniper networks reserved aggregate approximately 179648000 shares common stock future issuance stock option plans 1999 employee stock purchase plan future issuance upon conversion convertible senior notes common stock repurchase program july 2004 company announced board directors approved new program repurchase 2500 million company’s common stock 2004 company repurchased retired 29 million shares common stock average price 2217 per share aggregate purchase price 636 million program may discontinued time note 11 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees eligible participate first day employment juniper networks plan employees may contribute 60 pretax salaries per year statutory limits beginning january 1 2001 juniper networks began matching employee contributions matching formula 050 dollar 6 eligible pay annual maximum 2000 matching contributions vest immediately company’s matching contributions plan totaled 31 million 20 million 20 million 2004 2003 2002 respectively note 12 segment information operating segment defined component enterprise engages business activities may earn revenue incur expenses separate financial information available evaluated regularly chief operating decision maker “codm” deciding allocate resources assessing performance company’s codm reviews financial information presented consolidated basis accompanied disaggregated information revenues geographic theater categories similar products purposes making operating decisions assessing financial performance purposes allocating resources company evaluates performance geographic theaters product categories based revenues company assess performance geographic theaters categories networking products measures income expenses accordingly company operates one operating segment company’s net revenues geographic theater millions net revenues attributable united states 5618 million 2682 million 2690 million years ended december 31 2004 2003 2002 respectively net revenues attributable japan 1587 million 1024 million 568 million years ended december 31 2004 2003 2002 respectively result netscreen acquisition company expanded customer base portfolio products offers two categories networking products infrastructure products consist predominately original juniper networks products security products consist predominately former netscreen products company’s service revenue generated services delivered categories products managed one organization therefore results service organization reported one amount statements operations net product revenues categories networking products follows millions substantially company’s property equipment december 31 2004 2003 attributable us operations note 13 net income loss per share following table presents calculation basic diluted net income loss per share thousands except per share amounts 2002 juniper networks excluded 11510000 common stock equivalents consisting outstanding stock options shares subject repurchase calculation diluted loss per share securities antidilutive period due net loss employee stock options purchase approximately 11833000 shares 13065000 shares 41271000 shares 2004 2003 2002 respectively outstanding included computation diluted earnings per share exercise price stock options greater average share price common shares therefore effect would antidilutive shares issuable upon conversion zero coupon convertible senior notes due june 15 2008 “senior notes” included calculation diluted earnings per share years ended december 31 2004 2003 accordance eitf issue 048 effect contingently convertible debt diluted earnings per share “eitf 048” eitf 048 required retroactive application therefore diluted earnings per share 2003 restated note 14 income taxes significant components provision income taxes attributable operations follows thousands pretax income foreign operations 1116 million 212 million 74 million fiscal years 2004 2003 2002 respectively deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities follows thousands longterm liabilities balance sheet include deferred tax liability 574 million december 31 2004 company valuation allowance us domestic deferred tax assets approximately 2078 million approximately 1698 million relates tax benefits stock option deductions credited equity realized remaining balance 380 million relates capital losses carry forward offset future capital gains december 31 2004 company federal state net operating loss carryforwards approximately 2999 million 2784 million respectively company also federal state tax credit carryforwards approximately 569 million 545 million respectively unused net operating loss research development tax credit carryforwards expire various dates beginning years 2021 2022 respectively provision income taxes differs provision calculated applying federal statutory tax rate income loss taxes following thousands company provides us income taxes earnings foreign subsidiaries unless subsidiaries’ earnings considered indefinitely reinvested outside united states december 31 2004 company unrecognized deferred tax liabilities approximately 201 million related approximately 558 million cumulative net undistributed earnings foreign subsidiaries earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations american jobs creation act 2004 act enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated either fiscal 2004 fiscal 2005 juniper elect provision fiscal 2004 therefore period qualifying distributions made fiscal 2005 deduction would result approximate 525 federal tax rate repatriated earnings qualify deduction earnings must reinvested united states pursuant domestic reinvestment plan established company’s chief executive officer approved company’s board directors certain criteria act must satisfied well note 15 contingencies company subject legal claims litigation arising ordinary course business employment intellectual property claims including matters described outcome matters currently determinable adverse result one matters could negatively affect results period occur ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” company certain company’s officers action brought behalf purchasers company’s common stock company’s initial public offering june 1999 secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company june 2004 stipulation settlement release claims issuers including company submitted court preliminary approval terms settlement approved would dismiss release claims participating defendants including company exchange dismissal directors officers insurance carriers would agree guarantee recovery plaintiffs underwriter defendants least 1 billion issuer defendants would agree assignment surrender plaintiffs certain claims issuer defendants may underwriters settlement subject number conditions including certification class settlement purposes formal court approval settlement occur litigation continues company believes meritorious defenses intends defend case vigorously federal securities class action suit quarter ended march 31 2002 number essentially identical shareholder class action lawsuits filed united states district court northern district california company certain officers former officers purportedly behalf stockholders purchased company’s publicly traded securities april 12 2001 june 7 2001 april 2002 court granted defendants’ motion consolidate actions one may 2002 court appointed lead plaintiffs approved selection lead counsel consolidated complaint filed august 2002 plaintiffs allege defendants made false misleading statements assert claims violations federal securities laws seek unspecified compensatory damages relief september 2002 defendants moved dismiss consolidated complaint march 2003 court granted defendants motion dismiss leave amend plaintiffs filed amended complaint april 2003 defendants moved dismiss amended complaint may 2003 hearing defendants’ motion dismiss held september 2003 march 2004 court granted defendants motion dismiss without leave amend april 2004 plaintiffs filed notice appeal fully briefed parties court appeals yet scheduled arguments appeal state derivative claim based federal securities class action suit august 2002 consolidated amended shareholder derivative complaint purportedly filed behalf company captioned juniper networks inc derivative litigation civil action cv 807146 filed superior court state california county santa clara complaint alleges certain company’s officers directors breached fiduciary duties company engaging alleged wrongful conduct including conduct complained securities litigation described company named solely nominal defendant plaintiffs seek recovery previous complaints dismissed leave amend plaintiffs lodged third amended complaint august 2004 defendants demurred third amended complaint november 18 2004 court sustained defendants’ demurrer without leave amend entered order final judgment plaintiffs january 2005 plaintiffs filed notice appeal ruling yet briefing argument appeal toshiba patent infringement litigation november 13 2003 toshiba corporation filed suit united states district court delaware company alleging certain company’s products infringe four toshiba patents seeking injunction unspecified damages limited discovery date irs notices proposed adjustments internal revenue service irs concluded audit company’s federal income tax returns fiscal years 1999 2000 2004 company received notice proposed adjustment “nopa” irs final resolution issues raised nopa uncertain company believes made adequate provisions accompanying consolidated financial statements adjustments irs proposed respect tax returns conjunction irs income tax audit certain company’s us payroll tax returns currently examination fiscal years 1999 2001 company received second nopa amount 117 million employment tax assessments primarily related timing tax deposits related employee stock option exercises company intends dispute assessment irs resolve issue appeals level company currently believe probable final assessment sustained believe liability reasonably estimated time event issue resolved unfavorably company exists possibility material adverse impact company’s results operations period unfavorable outcome becomes probable reasonably estimable note 16 quarterly results unaudited table sets forth selected unaudited financial data quarter last two years thousands except per share amounts 2004 quarterly results reflect impact acquisition netscreen second quarter ongoing effects operations remainder year basic diluted net losses per share computed independently quarters presented therefore sum quarters may equal full year net loss per share amounts addition diluted earnings per share restated include shares issuable upon conversion senior notes accordance eitf 048 item 9item 8 consolidated financial statements supplementary data management’s annual report internal control financial reporting juniper networks inc’s management responsible establishing maintaining adequate internal control company’s financial reporting assessed effectiveness company’s internal control financial reporting december 31 2006 making assessment used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment using criteria concluded december 31 2006 juniper networks inc’s internal control financial reporting effective juniper networks inc’s independent registered public accounting firm ernst young llp audited financial statements included annual report form 10k issued audit report management’s assessment company’s internal control financial reporting report appears page 60 annual report form 10k please note inherent limitations effectiveness system internal control including possibility human error circumvention overriding controls accordingly even effective internal controls provide reasonable assurances respect financial statement preparation changes conditions effectiveness internal control may vary time sunnyvale california march 6 2007 index consolidated financial statements page report independent registered public accounting firm report independent registered public accounting firm consolidated statements operations consolidated balance sheets consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2006 2005 restated related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2006 restated audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2006 2005 restated consolidated results operations cash flows three years period ended december 31 2006 restated conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein discussed note 2 “restatement consolidated financial statements” company restated previously issued financial statements december 31 2005 years two year period ended december 31 2005 discussed note 1 consolidated financial statements effective january 1 2006 company adopted provision statement financial accounting standards 123 revised 2004 sharebased payment also audited accordance standards public company accounting oversight board united states effectiveness juniper networks inc’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 6 2007 expressed unqualified opinion thereon ernst young llp san jose california march 6 2007 report independent registered public accounting firm board directors stockholders juniper networks inc audited management’s assessment included accompanying management’s annual report internal control financial reporting juniper networks inc maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment juniper networks inc maintained effective internal control financial reporting december 31 2006 fairly stated material respects based coso criteria also opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2006 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets juniper networks inc december 31 2006 2005 restated related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2006 restated report dated march 6 2007 expressed unqualified opinion thereon ernst young llp san jose california march 6 2007 juniper networks inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets thousands except par values 1 consolidated balance sheet december 31 2005 restated reflect correct information based adjustments discussed note 2 “restatement consolidated financial statements” see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business juniper networks inc “juniper networks” “company” founded 1996 develop sell products would able meet stringent demands service providers today company designs sells products services together provide customers secured assured internet protocol “ip” secure networking solutions company’s solutions incorporated global web interconnected public private networks across variety media including voice video data travel end users around world company’s network infrastructure solutions enable service providers networkintensive businesses support deliver services applications highly efficient low cost integrated network company’s service layer technologies “slt” solutions meet broad array customer’s priorities protecting network protecting data network maximizing existing bandwidth acceleration applications across distributed network together company’s secure networking solutions enable customers convert networks provide commoditized best efforts services valuable assets provide differentiation value increased reliability security end users company sells markets products direct sales organization valueadded resellers distributors 2005 company completed acquisitions funk software inc “funk” acorn packet solutions inc “acorn” peribit networks inc “peribit” redline networks inc “redline” kagoor networks inc “kagoor” 2004 company completed acquisition netscreen technologies inc “netscreen” result acquisitions company expanded customer base portfolio products offers two categories networking products infrastructure products consist predominately original juniper networks router portfolio acquired kagoor acorn products slt products consist predominately former funk peribit redline netscreen products basis presentation consolidated financial statements include company whollyowned subsidiaries intercompany balances transactions eliminated use estimates preparation financial statements related disclosures conformity accounting principles generally accepted united states requires management make estimates judgments affect amounts reported consolidated financial statements accompanying notes estimates used revenue recognition allowance sales returns allowance doubtful accounts allowance contract manufacturer obligations allowance warranty costs goodwill impairments income taxes litigation settlement costs loss contingencies company bases estimates historical experience also assumptions believes standard reasonable actual results experienced company may differ materially management’s estimates cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand balances banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company’s investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income equity investments juniper networks investments privately held companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment juniper networks markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary fair value financial instruments carrying value company’s financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments determined using quoted market prices securities similar financial instruments concentrations financial instruments subject juniper networks concentrations credit risk consist primarily cash equivalents investments accounts receivable juniper networks maintains cash equivalents investments fixed income securities highquality institutions invests high quality credit instruments deposits held banks may exceed amount insurance provided deposits generally deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world juniper networks performs ongoing credit evaluations customers generally require collateral accounts receivable juniper networks maintains reserves potential credit losses historically losses within management’s expectations one customer accounted 14 15 total net revenues 2006 2005 2004 respectively company relies sole suppliers certain components applicationspecific integrated circuits “asics” custom sheet metal additionally juniper networks relies primarily two significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements juniper networks could negatively impact future operating results property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally three five years lease term respective assets land subject depreciation goodwill purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trademarks developed technologies customer maintenance contracts intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based test future goodwill impairment tests could result charge earnings purchased intangibles finite lives amortized straightline basis respective estimated useful lives ranging two twelve years impairment company evaluates longlived assets heldforuse impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized measured amount carrying amount asset exceeds fair market value company assesses recoverability longlived intangible assets determining whether unamortized balances recovered undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows company evaluates goodwill minimum annual basis whenever events changes circumstances indicate carrying amount asset may recoverable impairment goodwill tested reporting unit level comparing reporting unit’s carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income discounted cash flows approach market approach utilizes comparable companies’ data carrying value reporting unit exceeds fair value goodwill considered impaired second step performed measure amount impairment loss discussed note 4 second quarter 2006 company concluded carrying value goodwill impaired recorded impairment charge recording impairment charge juniper networks conducted annual impairment test november 1 2006 determined carrying value remaining goodwill impaired events circumstances date december 31 2006 would impact assessment future impairment indicators including declines company’s market capitalization decrease revenue profitability levels could require additional impairment charges recorded revenue recognition juniper networks sells products services direct sales force strategic distribution relationships valueadded resellers company’s products integrated software essential functionality equipment additionally company provides unspecified upgrades enhancements related integrated software maintenance contracts products accordingly company accounts revenue accordance statement position 972 software revenue recognition related interpretations company recognizes revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectibility reasonably assured evidence arrangement generally consists customer purchase orders certain instances sales contracts agreements shipping terms related documents written evidence customer acceptance applicable used verify delivery performance instances final acceptance product system solution specified customer revenue deferred acceptance criteria met company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment collectibility assessed based creditworthiness customer determined credit checks customer’s payment history company accounts receivable recorded net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements company allocates revenue element using residual method based vendor specific objective evidence fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vendor specific objective evidence fair value based price charged element sold separately sales direct endusers valueadded resellers company recognizes product revenue upon transfer title risk loss generally upon shipment endusers valueadded resellers company significant obligations future performance rights return pricing credits portion company’s sales made distributors agreements allowing pricing credits andor rights return product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough sales transfers financial instruments accounted statement financial accounting standard 140 accounting transfers servicing financial assets extinguishments liabilities “sfas 140” company sells interests accounts receivables part distributor accounts receivable financing arrangement established company major financing company receivables sold arrangements removed balance sheet related transaction fees recorded statement operations time sold accordance sfas 140 specifically receivables legally isolated company purchasers right pledge exchange receivables purchasers obtain effective control receivables company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time shipping charges billed customers included product revenue related shipping costs included cost product revenues costs associated cooperative advertising programs estimated recorded reduction revenue time related sales recognized services include maintenance training professional services addition providing unspecified upgrades enhancements available basis company’s maintenance contracts includes 24hour technical support hardware repair replacement parts maintenance offered renewable contracts revenue maintenance contracts deferred recognized ratably contractual support period generally one year revenue training professional services recognized services completed ratably contractual period allowance doubtful accounts allowance doubtful accounts based company’s assessment collectibility customer accounts juniper networks regularly reviews allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customer’s ability pay warranties juniper networks generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty generally includes parts labor obtained company’s 24hour service center occasion specific terms conditions warranties vary company accrues warranty costs based estimates costs may incurred warranty obligations including material costs technical support labor costs associated overhead warranty accrual included company’s cost revenues recorded time revenue recognized factors affect company’s warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimated support labor costs associated overhead company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary contract manufacturer liabilities company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture company’s products based company’s demand forecasts based company’s estimates future demand company products turn based historical trends analysis company’s sales marketing organizations adjusted overall market conditions company establishes accrued liabilities included current accrued liabilities accompanying consolidated balance sheets carrying charges obsolete material charges excess components purchased based historical trends research development costs research design develop company’s products expensed incurred software development costs capitalized beginning product’s technological feasibility established ending product available general release customers generally juniper networks’ products released soon technological feasibility established result costs subsequent achieving technological feasibility significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 68 million 66 million 79 million 2006 2005 2004 respectively litigation settlement costs time company involved disputes litigation legal actions company records charge equal least minimum estimated liability loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated however actual liability litigation may materially different company’s estimates could result need record additional expenses loss contingencies company subject possibility various loss contingencies arising ordinary course business considers likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available management determine whether accruals adjusted whether new accruals required stockbased compensation january 1 2006 company adopted statement financial accounting standards 123 revised 2004 sharebased payment “sfas 123r” requires measurement recognition compensation expense stockbased awards made employees directors including employee stock options restricted stock units “rsus” purchases company’s employee stock purchase plan based estimated fair values sfas 123r supersedes previous accounting principles board opinion 25 accounting stock issued employees “apb 25” allowed statement financial accounting standards 123 accounting stockbased compensation “sfas 123” periods beginning 2006 march 2005 securities exchange commission “sec” issued staff accounting bulletin 107 “sab 107” relating sfas 123r company applied provisions sab 107 conjunction adoption sfas 123r company adopted sfas 123r using modified prospective transition method requires application accounting standard january 1 2006 first day company’s fiscal year 2006 company’s consolidated financial statements year ended december 31 2006 reflect impact sfas 123r accordance modified prospective transition method company’s consolidated financial statements periods prior 2006 restated reflect include impact sfas 123r sfas 123r requires companies estimate fair value stockbased awards date grant using optionpricing model company uses blackscholesmerton option pricing model determine fair value stock options sfas 123r consistent used pro forma disclosures sfas 123 fair value rsu equivalent market price company’s common stock grant date value portion stockbased award ultimately expected vest recognized expense requisite service periods period grant requisite service period provided company’s consolidated statement operations stockbased compensation expense recognized company’s consolidated statement operations year ended december 31 2006 included compensation expense stockbased awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance provisions sfas 123 ii compensation expense stockbased awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions sfas 123r conjunction adoption sfas 123r company changed accounting policy attributing fair value stockbased compensation expense accelerated multipleoption approach provided apb 25 allowed sfas 123 straightline singleoption approach allowed sfas 123r compensation expense expectedtovest stockbased awards granted prior december 31 2005 continue recognized using accelerated attribution method compensation expense expectedtovest stockbased awards granted modified subsequent december 31 2005 recognized straightline basis provided amount compensation cost recognized date less portion grantdate value award vested date sfas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates company’s stockbased compensation expense required apb 25 pro forma information required sfas 123 periods prior 2006 company accounted forfeitures occurred prior adoption sfas 123r stockbased compensation expense recognized company’s consolidated statement operations provisions apb 25 accordance apb 25 compensation expense required employee stock purchases company’s employee stock purchase plan apb 25 stockbased compensation expense 223 million 549 million years ended 2005 2004 respectively related employee stockbased awards stock options assumed acquisitions result adopting sfas 123r stockbased compensation expense recorded 2006 876 million 744 million higher would reported company continued account stockbased compensation apb 25 net income 2006 approximately 514 million lower would reported company continued account stockbased compensation apb 25 unamortized deferred compensation associated stock options assumed past acquisitions employee stockbased awards 177 million reclassified additional paidin capital company’s consolidated balance sheet upon adoption sfas 123r january 1 2006 additional information discussed note 2 “restatement consolidated financial statements” note 10 “stockholders’ equity” accordance sfas 123r company presented financing cash flows tax benefits resulting tax deductions excess compensation cost recognized options beginning 2006 tax benefits employee stock plans 97 million related tax deductions excess compensation cost recognized presented financing cash flows 2006 prior adoption sfas 123r tax benefits employee stock plans presented operating cash flows additionally accordance sfas 123r sfas 109 “accounting income taxes” “sfas 109” eitf topic d32 “intraperiod tax allocation effect pretax income continuing operations” company elected recognize excess income tax benefits stock option exercises additional paidin capital incremental income tax benefit would realized considering tax attributes presently available company following table summarizes pro forma net income earnings per share net related tax effect company applied fair value recognition provisions sfas 123 employee stock benefits millions except per share amounts 1 see note 2 “restatement consolidated financial statements” consolidated financial statements derivatives company’s policy use derivatives partially offset market exposure fluctuations foreign currencies company enter derivatives speculative trading purposes juniper networks uses foreign currency forward contracts mitigate transaction gains losses generated certain foreign currency denominated monetary assets liabilities derivatives carried fair value changes recorded income expense changes fair value derivatives largely offset remeasurement underlying assets liabilities foreign exchange forward contracts maturities one two months periodically company uses foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2006 2005 2004 income expense consolidated statements operations provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 “accounting income taxes” records valuation allowance reduce deferred tax assets amount believes likely realizable company believes likely forecasted income together tax effects deferred tax liabilities sufficient fully recover remaining deferred tax assets event part net deferred tax assets determined realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due comprehensive income comprehensive income defined change equity period nonowner sources company presented comprehensive income part consolidated statements stockholders’ equity comprehensive income includes net unrealized losses availableforsale securities net foreign currency translation gains losses excluded net income foreign currency translation assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period foreign currency translation gains losses material years ended december 31 2006 2005 2004 effect exchange rate changes cash balances held foreign currencies immaterial years presented recent accounting pronouncements july 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxes “fin 48” fin 48 applies tax positions related income taxes subject sfas 109 accounting income taxes including uncertain tax positions fin 48 company recognize benefit tax position morelikelythannot position would sustained upon audit based solely technical merits tax position fin 48 clarifies company would measure income tax benefits tax positions recognized provides guidance timing derecognition previously recognized tax benefits describes methods classifying disclosing liabilities within financial statements unrecognized tax benefits fin 48 also addresses company record interest penalties related tax positions interest penalties may classified within income statement presented balance sheet differences amounts recognized statements financial position prior adoption fin 48 would accounted cumulativeeffect adjustment beginning balance retained earnings upon adoption possibility cumulative effect would result adjustment beginning balance retained earnings addition application fin 48 may increase company’s future effective tax rates future intraperiod effective tax rate volatility company required adopt fin 48 january 1 2007 company currently evaluating effect adoption fin 48 consolidated financial statements yet position determine effects september 2006 fasb issued fasb statement “sfas” 157 fair value measurement “sfas 157” sfas 157 provides enhanced guidance using fair value measure assets liabilities guidance clarifies principle assessing fair value based assumptions market participants would use pricing asset liability support principle guidance establishes fair value hierarchy prioritizes information used develop assumptions fair value hierarchy gives highest priority quoted prices active markets lowest priority unobservable data companies’ data guidance fair value measurements would separately disclosed level within fair value hierarchy sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years company currently evaluating sfas 157 expects adopt guidance beginning january 1 2008 reclassifications certain reclassifications made prior year balances order conform current year’s presentation note 2 restatement consolidated financial statements restatement previously issued financial statements form 10k year ended december 31 2006 “2006 form 10k” juniper networks restating consolidated balance sheet december 31 2005 related consolidated statements operations shareholders’ equity cash flows fiscal years ended december 31 2005 2004 result independent stock option investigation commenced board directors audit committee 2006 form 10k also reflect restatement “selected consolidated financial data” item 6 fiscal years ended december 31 2005 2004 2003 2002 addition company restating unaudited quarterly financial information financial statements interim periods 2005 unaudited condensed financial statements three months ended march 31 2006 financial information included reports form 10k form 10q form 8k filed juniper networks prior august 10 2006 related opinions independent registered public accounting firm earnings press releases similar communications issued company prior august 10 2006 relied upon superseded entirety report reports form 10q form 8k filed company sec august 10 2006 stock option investigation may 22 2006 company issued press release form 8k announcing received request information relating company’s stock option granting practices us attorney’s office eastern district new york press release form 8k company announced board directors “board” directed board’s audit committee comprised outside directors conduct review company’s stock option granting practices may 24 2006 company counsel received letter sec indicating sec conducting inquiry regarding juniper networks investigation conducted assistance independent counsel forensic accountants collectively “investigative team” investigation focused stock option grants made employees officers directors consultants period following company’s initial public offering “ipo” june 24 1999 may 23 2006 “relevant period” addition audit committee investigation involved testing analyses company’s hiring termination leave absence grant notification exercise practices regarding stock options certain issues regarding grants made ipo scope investigation include review options granted companies acquired juniper networks companies acquired juniper networks one exception privately held companies none acquisitions accounted pooling interests acquisitions accounted purchase method provided statement financial standards 141 business combinations predecessor accounting principles board opinion 16 business combinations consistent accounting literature recent guidance sec company organized grants relevant period categories based grant type process grant finalized company analyzed evidence audit committee’s investigation related category including limited physical documents electronic documents underlying electronic data documents witness interviews based relevant facts circumstances company applied appropriate accounting standards determine every grant within category proper measurement date measurement date originally assigned grant date accounting adjustments made required resulting stockbased compensation expense related tax effects grants made board directors compensation committee officers directors company concluded measurement dates several grants executive officers “reporting persons” term defined section 16 securities exchange act 1934 amended “officers” members board directors made june 1999 june 2003 incorrect general relevant period board compensation committee board made grants officers directors grants sometimes approved meetings bodies action unanimous written consent several instances grants officers directors given grant dates corresponding exercise prices prior date formal corporate action making grant taken general appears done make grant date coincide either specific event appointment reelection director purported date options granted nonofficers cases company determined correct measurement date board compensation committee took action approve grant company also identified instances grants officers granted effective upon future event commencement employment closing acquisition cases company determined date future event correct measurement date grants connection application measurement principles accounting forfeitures company adjusted measurement compensation cost options covering 56 million shares common stock resulting incremental stockbased compensation expense 803 million pretax basis respective awards’ vesting terms juniper network’s ceo scott kriens received two stock option awards whose measurement dates financial accounting purposes differ recorded grant dates awards however options exchanged cancelled unexercised 2001 part companywide option repricing program mr kriens exercised stock options since 1998 approximately nine months company’s ipo addition one grant officer approval grant reflected minutes meeting action unanimous written consent board directors compensation committee grant measurement date determined based terms officer’s offer letter date employment commenced respect grant company adjusted measurement compensation cost options covering 15 million shares common stock resulting incremental stockbased compensation expense 65 million pretax basis award’s vesting terms accounting forfeitures grants nonofficers company concluded measurement dates large number grants nonofficers period june 1999 december 2004 incorrect company’s practice grant stock options except prohibited nearly fulltime employees connection joining company facilitate granting options juniper networks’ rapidly growing workforce board directors established stock option committee grant options nonofficer employees june 1999 june 2003 dates large number grants made stock option committee chosen benefit hindsight price company’s stock give favorable exercise prices moreover stock option committee’s process finalizing documenting grants often completed originally assigned grant date beginning grants dated june 20 2003 company implemented number new procedures policies regarding granting options nonofficer employees pattern consciously looking back favorable dates employees ceased however documentation written approvals grant dates still generally trailed recorded grant dates based available facts circumstances originally recorded measurement dates grants made stock option committee period july 1999 december 2004 relied upon isolation correct measurement dates 2005 company made additional changes procedures grants 2005 2006 required new measurement dates apb 25 defines measurement date determining stockbased compensation expense first date 1 number shares individual employee entitled receive 2 option purchase price known throughout relevant period company’s stock administration department entered option grant information grants made stock option committee equity edge stock administration system used monitor administer company’s stock option program data equity edge sent regular basis designated brokers allowing grantees view options information accounts via internet grants made stock option committee june 1999 december 2004 reliable objective evidence pointing earlier single specific date number shares individuals entitled receive price become final company determined equity edge entry date reliable measurement date calculating additional stockbased compensation expense apb 25 using measurement date accounting forfeitures company adjusted measurement compensation cost options covering 742 million shares common stock resulting incremental stockbased compensation expense 6367 million pretax basis respective awards’ vesting terms many cases equity edge entry date used measurement date formal stock option committee granting documentation consisting unanimous written consents minutes related lists recipients amounts types awards created completed later date awards listed formal granting documentation differ grants entered equity edge notice awards made available employees prior creation completion granting documents completion documentation treated perfunctory company determined equity edge entry date proper measurement date apb 25 rather date stock option committee granting documentation completed number cases reliable objective evidence pointing single specific date number shares individuals entitled receive price become final evidence primarily consisted electronic data indicating granting instrument schedule created prior equity edge entry date company also relied evidence emails written agreements determine date certain options became final evidence used determine measurement dates options company adjusted measurement compensation cost options covering 279 million shares common stock resulting incremental stockbased compensation expense 1412 million pretax basis respective awards’ vesting terms company also concluded instances clerical errors omissions regarding persons receive award number options granted corrected date award case additions made correct omissions corrections reflected grant documentation time applicable grant date documentation existing time grant company determined new measurement date established company considered whether certain changes additions give rise variable accounting treatment concluded treatment appropriate grants represented independent decisions events rather continuation modification grants company believes correct measurement date grants date stock administration entered correction addition equity edge except objective evidence identifies earlier date correction approved accounting forfeitures company adjusted measurement compensation cost options covering 13 million shares common stock resulting incremental stockbased compensation 119 million pretax basis respective awards’ vesting terms stock option grant modifications connected terminations leaves absences matters compensation expense also recognized result modifications made certain employee option grant awards connection certain employees’ terminations leaves absence typically modifications related extensions time employees could exercise options following termination employment enabled employee vest additional shares relation leave absence example connection reductions work force 2001 2002 company increased period affected employees exercise options 30 days 90 days company incremental stockbased compensation expense associated terminations leaves absence 200 million pretax basis period modification compensation expense 02 million pretax basis also recognized result nonemployee grants consultants exchange services matters judgment light significant judgment used establishing revised measurement dates alternate approaches used company could resulted different compensation expense charges recorded restatement company considered various alternative approaches example cases formal documentation grant completed date grant entered equity edge alternative measurement date using equity edge entry date could creation date documentation company believes approaches used appropriate circumstances summary stockbased compensation adjustments company adjusted measurement dates options covering total 1105 million 76 1460 million shares common stock covered options granted relevant period incremental impact consolidated statement operations recognizing stockbased compensation expense december 31 2006 resulting investigation follows millions addition 8947 million recognized fiscal 2005 21 million unamortized deferred compensation remained december 31 2005 bringing total incremental impact investigation approximately 8968 million required sfas 123r adopted january 1 2006 unamortized deferred compensation 21 million reclassified additional paidin capital along unamortized deferred compensation stock options assumed past acquisitions company’s consolidated balance sheet beginning 2006 incremental amortization resulting investigation included stockbased compensation expense provisions sfas 123r incremental pretax stock compensation expense restatement employee stock options 06 million pretax basis year ended december 31 2006 recorded fourth quarter 2006 additionally company restated pro forma amortization deferred stock compensation included reported net income net tax total stockbased employee compensation expenses determined fair value based method net tax sfas 123 note 1 reflect impact stockbased compensation expense resulting correction past stock options grants company also determined previously reported pro forma compensation expense options assumed 2004 acquisition inadvertently based incorrect fair value amount pro forma stockbased compensation expense reported table revised reflect proper fair value options assumed 2004 acquisition adjustment previously disclosed company’s annual report form 10k year ended december 31 2005 following table presents effect related adjustments pro forma calculation net income per share years ended december 31 2005 2004 respectively millions except per share amounts matters considering available evidence primarily current 2005 operating projections future income remain appropriate management concluded previously recorded valuation allowance related tax benefit stock options deductions reversed fourth quarter 2005 accordingly company decreased valuation allowance december 31 2005 1580 million corresponding credit additional paid capital remaining valuation allowance balance 406 million relates capital losses carry forward offset future capital gains additionally company misclassified tax benefit deductions stock options assumed acquisitions accordingly company reduced additional paidin capital years ended december 31 2005 2004 60 million 185 million respectively corresponding decrease goodwill total reduction additional paidin capital goodwill december 31 2005 245 million virtually holders options issued company involved aware incorrect pricing company taken intends take actions deal certain adverse tax consequences may incurred holders certain incorrectly priced options primary adverse tax consequences incorrectly priced stock options vesting december 31 2004 may subject option holder penalty tax irc section 409a applicable similar penalty taxes california state tax laws company recorded 101 million charges operating expense 2006 relation items tax related items company expects incur future charges resolve adverse tax consequences incorrectly priced options company misclassified losses retirement treasury shares fiscal 2004 accordingly company reduced retained earnings accumulated deficit december 31 2005 2004 636 million corresponding increase additional paidin capital effects restatement adjustments following table presents effects restatement adjustments upon company’s previously reported consolidated statements operations millions following table presents effects stockbased compensation related tax impact adjustments upon company’s previously reported consolidated balance sheet december 31 2005 millions includes impact 7724 million net tax increase additional paidin capital corresponding decrease retained earnings accumulated deficit related stockbased compensation investigation b includes impact 636 million increase additional paidin capital corresponding decrease retained earnings accumulated deficit related misclassified losses retirement company’s treasury shares c includes impact 21 million increase additional paidin capital corresponding increase deferred compensation related unamortized stockbased compensation includes impact 245 million decrease additional paidin capital corresponding decrease goodwill related misclassified tax benefit deductions stock options assumed acquisitions e includes impact 1580 million 550 million increases additional paidin capital corresponding decrease valuation allowance related deferred tax assets stock options deductions stockbased compensation investigation respectively amounts impact current longterm net deferred tax assets details adjustments summarized follows millions effect restatement adjustments component stockholders’ equity end year summarized follows millions following tables present effects stockbased compensation related tax adjustments upon company’s previously reported consolidated statements cash flows fiscal years ended december 31 2005 december 31 2004 millions note 3 business acquisitions juniper networks completed six purchase acquisitions three years ended december 31 2006 acquisitions 2006 2005 company acquired funk acorn peribit redline kagoor 2004 company acquired netscreen total purchase price acquisition respective acquisition dates including subsequent escrow adjustments outlined millions total purchase price certain acquisitions could increase upon release amounts held escrow indemnity obligations upon additional contingent payments allocation initial purchase consideration company allocated purchase price tangible intangible assets acquired liabilities assumed including iprd based fair values excess purchase price fair values recorded goodwill subject change due release amounts held escrow indemnity obligations additional contingent payments changes acquisition related assets liabilities fair values assigned intangible assets acquired based valuations prepared independent third party appraisal firms using estimates assumptions provided management summary purchase price allocations acquisition follows millions purchased intangible assets following table presents details purchased intangible assets acquired millions except years existing technology consists products reached technological feasibility includes products acquired product lines existing technology valued using discounted cash flow “dcf” method calculates value intangible asset present value tax cash flows potentially attributable net return fair value attributable tangible intangible assets maintenance agreements represent revenue generated contracts customers pay annual maintenance support income approach used estimate fair value maintenance agreements includes estimating ongoing aftertax income expected maintenance agreements place time acquisition including expected renewals patents core technology represent combination processes patents trade secrets used existing inprocess technology value trade name trademarks represented benefit owning intangible assets rather paying royalties use intangible assets valued using royalty savings method estimates value intangible assets capitalizing royalties saved company owns assets relationships customers represent rights granted var distributor resell certain products var distributor relationships valued using avoided cost method takes account cost establishing relationship 2006 acquisitions pro forma results operations presented 2006 acquisitions 2006 2005 acquisitions pro forma results operations presented 2005 acquisitions effects acquisitions material juniper networks either individual aggregate annual basis funk acquisition december 1 2005 company completed acquisition funk leading provider standardsbased network access security solutions developed products technologies protect integrity network ensuring user device meet organization’s security policies granting access purchase price funk included cash payment 1102 million currently excluded aggregate purchase price 1113 million balance 122 million held escrow indemnity obligations onehalf expire january 2007 remaining onehalf june 2007 addition company paid 48 million upon achieving certain agreedupon conditions january 2007 contingent payments associated future employment conditions recorded compensation expense ratably 13 month period acquisition date acorn acquisition october 20 2005 company completed acquisition acorn’s products technologies provide smooth migration path flexible costeffective connecting legacy time division multiplexing tdm circuitbased applications across nextgeneration ip networks purchase price acorn included cash payment 40 million currently excluded aggregate purchase price 43 million balance 15 million held escrow indemnity obligations expire may 30 2007 depending contingency additional payments recorded either compensation expense additional purchase price addition company paid 11 million january 2007 connection services provided former acorn employees recognized amount compensation expense ratably 12 month period following acquisition future lease contractual obligations immaterial time acquisition peribit acquisition july 1 2005 company completed acquisition peribit acquisition enabled company secure assure delivery performance applications ip network premium traffic processing acquisition peribit expand company’s customer base portfolio products acquisition resulted issuance 113 million shares company’s common stock fair value approximately 2564 million former shareholders peribit approximately 16 million shares fair value 352 million established acquisition date held escrow indemnity obligations prescribed merger agreement common stock issued acquisition valued using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced april 26 2005 company also assumed outstanding peribit stock options fair value approximately 364 million options valued using blackscholes option pricing model volatility assumption 41 expected life 18 years riskfree interest rate 36 market value company’s common stock 2262 per share determined described close acquisition company recorded liability 30 million associated future lease severance contractual obligations march 2009 july 2006 company released 08 million shares valued 103 million former shareholders peribit formerly held escrow company continues hold additional 08 million shares held escrow secure certain indemnity obligations prescribed merger agreement escrow amounts excluded original purchase price 3120 million remaining shares escrow expired february 1 2007 almost escrow shares distributed february 2007 current market value 1915 per share aggregate fair value 141 million redline acquisition may 2 2005 company completed acquisition redline pioneer development application front end “afe” technology designed network solutions improve performance flexibility scalability webenabled enterprise data centers public web sites purchase price redline included cash payment 975 million 30 million preacquisition loan company redline forgiven assumed stock options aggregate fair value 211 million stock options valued using blackscholes option pricing model inputs 43 volatility 156 years expected life 35 riskfree interest rate market value juniper networks common stock 2262 per share determined using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced april 26 2005 company also assumed 10 million net liabilities company recorded additional 132 million cash escrow payment original purchase price 1231 million related redline’s indemnity obligations expired 2006 kagoor acquisition may 1 2005 company completed acquisition kagoor leading provider session border control products voiceoverinternet protocol voip networking purchase price kagoor included 582 million cash assumed stock options aggregate fair value 76 million stock options valued using blackscholes option pricing model inputs 43 volatility 158 years expected life 35 riskfree interest rate market value juniper networks common stock 2164 per share determined using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced march 29 2005 excluded aggregate purchase price 663 million escrow payment 68 million related indemnity obligations associated acquisition 20 million paid 2006 2007 company distributed additional 46 million former kagoor stockholders final settlement escrow account inprocess research development company’s methodology allocating purchase price purchase acquisitions inprocess research development “iprd” determined established valuation techniques hightechnology communications equipment industry projects qualify iprd represent yet reached technological feasibility alternative future use iprd expensed upon acquisition year ended december 31 2005 total iprd expense 110 million connection funk peribit kagoor acquisitions iprd acorn redline acquisitions funk efforts pertained development radius products including steelbelted radius “sbr” sbr high availability “ha” mobile ip module “mim” ii products funk’s iprd acquisition date also included development new versions endpoint assurance proxy remote control odyssey product families time acquisition estimated development efforts completed next four months estimated cost approximately 09 million peribit efforts included development next versions software sequence reducer “sr” family sequence mirror “sm” family central management system “cms” products well hardware program sr sm families time acquisition estimated development efforts completed next twelve months estimated cost approximately 23 million kagoor efforts included variety signaling protocols next generation products operating systems time acquisition estimated development efforts completed next eight months estimated cost approximately 08 million december 31 2006 total estimated costs completing research development efforts relating acquisitions immaterial deferred stockbased compensation unvested stock options valued 132 million 38 million 20 million issued peribit redline kagoor acquisitions respectively unvested portion intrinsic value replacement stock options established acquisition date allocated deferred compensation purchase price allocation amortized expense using gradedvesting method remaining vesting period 2004 acquisition netscreen acquisition april 16 2004 juniper networks completed acquisition netscreen acquisition resulted issuance approximately 1320 million shares company’s common stock fair value approximately 36512 million former stockholders netscreen common stock issued acquisition valued using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced juniper networks also assumed outstanding netscreen stock options fair value approximately 5205 million options valued using blackscholes option pricing model inputs 08 volatility 3 years expected life 25 riskfree interest rate market value juniper networks common stock 2764 per share determined described company also incurred direct costs associated acquisition approximately 134 million initial purchase price allocation company decreased net tangible assets acquired increased goodwill 61 million change due recognition preacquisition contingency 120 million partially offset number reductions valuation certain preacquisition accruals company accrued acquisition charges 213 million primarily related severance facility charges ninetyfour former netscreen employees identified termination time acquisition related severance paid remaining restructuring change consists primarily facility charges paid end lease terms extend 2008 2006 company reversed immaterial amount acquisition accrual 2005 company reversed 69 million acquisition accrual primarily due reoccupation former netscreen facilities december 31 2006 16 million remained paid 06 million recorded longterm liabilities consolidated balance sheets order backlog represents value standing orders products services order backlog valued using avoided cost method estimates avoided selling expenses due fact netscreen firm purchase orders place time acquisition juniper networks amortized fair value acquired order backlog 2004 cost revenues total purchase price 275 million allocated inprocess research development “iprd” expensed 2004 projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition netscreen multiple iprd efforts way certain current future product lines efforts included developing integrating secure routers embedded encryption chips well functions features next generation internet protocol “ip” wireless digital subscriber line connectivity voice ip capability company utilized dcf method value iprd using rates ranging 20 25 depending estimated useful life technology applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time netscreen acquisition estimated development efforts would completed next eighteen months estimated cost approximately 250 million development efforts completed december 2005 december 31 2006 remaining costs associated research development efforts unvested stock options restricted stock valued 935 million allocated deferred compensation purchase price allocation amortized expense using gradedvesting method remaining vesting period value represented unvested portion intrinsic value replacement stock options restricted stock established acquisition date options assumed conjunction acquisition exercise prices ranging 009 2711 per share weighted average exercise price 1248 per share weighted average remaining contractual life approximately 8 years juniper networks assumed approximately 59 million vested options approximately 205 million unvested options restricted stock note 4 goodwill purchased intangible assets following table presents details company’s purchased intangible assets definite lives millions amortization expense related finitelived purchased intangible assets 973 million 852 million 568 million 2006 2005 2004 respectively amortization expense purchased intangible assets 918 million 55 million included operating expenses cost product revenue 2006 company recorded impairment charge 34 million due significant decrease forecasted revenues associated session border control “sbc” kagoor’s standalone products 2005 company recorded impairment charge operating expense 59 million due significant decrease forecasted revenues associated kagoor’s products estimated future amortization expense purchased intangible assets definite lives next five years follows millions changes carrying amount goodwill 2006 follows millions 1 see note 2 “restatement consolidated financial statements” consolidated financial statements second quarter ended june 30 2006 company concluded carrying value goodwill slt segment impaired recorded impairment charge 12800 million significant portion goodwill initially recorded based stock prices time related merger agreements executed announced impairment goodwill primarily attributable decline company’s market capitalization occurred period approximately six months prior impairment review lesser extent decrease forecasted future cash flows used income approach first step impairment test compare fair value reporting unit carrying value including goodwill related respective reporting units calculated fair value reporting units exceed carrying value goodwill considered impaired company required perform hypothetical purchase price allocation order calculate extent goodwill impairment company determined four reporting units time impairment calculation consisting infrastructure service respective segments security application acceleration two components slt segment company utilized external service providers calculate fair value reporting units using combination income market approaches income approach requires estimates expected revenue gross margin operating expenses order discount sum future cash flows using particular business’ weighted average cost capital company’s growth estimates based historical data internal estimates developed part longterm planning process company tested reasonableness inputs outcomes discounted cash flow analysis comparing available market data determining carrying value reporting unit company allocated fair values shared tangible net assets reporting unit based revenue fair values security application acceleration reporting units lower allocated book values company performed step two goodwill impairment calculation two reporting units within slt segment second step goodwill impairment review management calculated fair value company’s tangible intangible net assets assistance external service providers identified intangible assets valued specifically reporting unit tested difference calculated fair value reporting unit sum identified net assets results residual value goodwill future impairment indicators including declines company’s market capitalization could require additional impairment charges goodwill impairment 2005 2004 2006 goodwill increase primarily attributable settlements company’s escrow obligations company released escrow accounts 08 million shares common stock total market value 103 million 20 million restricted cash indemnity obligations associated acquisitions peribit networks inc “peribit” kagoor networks inc “kagoor” respectively company also distributed 131 million restricted cash escrow obligations associated acquisition redline networks inc “redline” restated year end balances include 60 million 185 million decreases goodwill 2005 2004 respectively related misclassified tax benefits deductions stock options assumed acquisitions note 5 restructuring acquisition related reserves restructuring charges restructuring charges based juniper networks’ restructuring plans committed management changes estimates executing approved plans reflected company’s results operations following table shows changes restructuring liabilities 2006 millions june 2006 company implemented restructuring plan focused ipg segment product development cost reduction efforts discontinuation sbc product approximately 20 million including 06 million severance charges 33 employees paid 2006 addition payments relating 2006 plan company paid 07 million facility charges associated restructuring plans initiated prior 2006 december 31 2006 restructuring reserves 15 million relate future facility charges amounts related net facility charge included accrued liabilities paid remaining respective lease term july 2008 difference actual future rent payments net present value recorded operating expenses incurred 2004 company adjusted restructuring reserve established prior year 14 million primarily changes facilities sublease assumptions acquisition related restructuring acquisition related reserves pertain restructuring reserves established connection company’s past acquisitions conjunction various acquisitions company accrued acquisition related restructuring charges primarily related severance facility charges 2006 company paid 30 million primarily facility related charges december 31 2006 approximately 36 million remained unpaid 15 million recorded longterm liabilities consolidated balance sheet december 31 2005 approximately 69 million remained unpaid 33 million recorded longterm liabilities consolidated balance sheet 2006 company reversed existing acquisition restructuring 04 million previously accrued unisphere netscreen facilities 2005 company reversed existing acquisition related restructuring reserves 69 million primarily due changes estimates previous accrual netscreen facility 2004 company reduced acquisition related restructuring charges 37 million primarily changes facilities sublease assumptions following restructuring charges based juniper networks’ restructuring acquisition related restructuring plans committed management changes estimates executing approved plans reflected juniper networks’ results operations details company’s restructuring reserve acquisition reserve charges recorded operating expense follows millions note 6 investments following summary availableforsale investments fair value december 31 2006 millions following summary availableforsale investments fair value december 31 2005 millions significant realized gain loss sale availableforsale securities 2006 realized losses sale availableforsale securities 09 million 03 million 2005 2004 respectively december 31 2006 company approximately 250 investments unrealized loss position gross unrealized losses related investments due changes interest rates contractual terms investments permit issuer settle securities price less amortized cost investment given company ability intent hold investments recovery fair values may maturity company consider investments otherthantemporarily impaired december 31 2006 company reviews investments identify evaluate investments indication possible impairment company aggregated investments category length time securities continuous unrealized loss position following table shows summary fair value unrealized losses investments december 31 2006 millions note 7 longterm debt 2003 juniper networks received 3928 million net proceeds offering 4000 million aggregate principal amount zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes senior unsecured obligations rank parity right payment company’s existing future senior unsecured debt rank senior company’s existing future debt expressly provides subordinated notes senior notes convertible shares juniper networks common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances carrying amounts fair values senior notes millions 2005 2006 immaterial amount company’s senior notes converted common shares 2004 company paid 1450 million retire outstanding 475 convertible subordinated notes due march 15 2007 retirement resulted net loss 41 million 2004 loss represented difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish subordinated notes due stock option investigation company file quarterly reports form 10q quarters ended june 30 2006 september 30 2006 respective due dates company received notice default august 25 2006 trustee senior notes alleging company violation certain provisions indenture relating senior notes result failure file given 60day cure period file quarterly reports holders senior notes may right accelerate senior notes sending company valid notice acceleration accordance terms indenture long event default continuing filing report company received notice acceleration upon filing company’s quarterly reports form 10q periods ended june 30 2006 september 30 2006 alleged default event default relating late filings reports longer continuing note 8 financial information property equipment property equipment consist following millions depreciation expense 762 million 536 million 408 million 2006 2005 2004 respectively restricted cash restricted cash december 31 2006 consisted escrow accounts required certain 2005 acquisitions directors officers “do” trust juniper networks established trust secure indemnification obligations certain directors officers arising activities event company provide financially incapable providing indemnification 2006 company reduced restricted cash 59 million deposit requirements standby letters credits issued facility leases removed distributed 131 million restricted cash upon settlement certain escrow funds associated redline acquisition distributed 20 million restricted cash upon settlement certain escrow funds associated kagoor acquisition 2005 company added 122 million 25 million 135 million 69 million restricted cash escrow accounts established connection acquisitions funk acorn redline kagoor respectively significant restricted cash accrued paid 2004 equity investments december 31 2006 2005 carrying values company’s minority equity investments privately held companies 204 million 132 million respectively 2006 company made 73 million minority investments privatelyheld companies 2005 company invested total 110 million privately held companies addition company recognized gain 17 million due business combination one portfolio companies cost basis 10 million wrote 04 million investment one privately held companies deferred revenue amounts billed excess revenue recognized included deferred revenue accounts receivable accompanying consolidated balance sheets product deferred revenue net related cost revenue includes shipments endusers valueadd resellers distributors breakdown company’s deferred revenue millions warranties changes company’s warranty reserve follows millions prior period amounts reclassified conform current year presentation comprehensive income activity comprehensive income follows millions components accumulated comprehensive loss follows millions charges net charges recognized consist following millions restructuring acquisition related expenses 59 million 2006 primarily consisted 56 million bonus earnout accrual associated funk acorn acquisitions 2006 company also recorded 03 million net restructuring charges acquisition related restructuring charges 65 million credit restructuring expense 2005 primarily consisted 69 million reversal adjustments related restructuring accrual company reoccupied portion former netscreen facility previously included acquisitionrelated reserve 2004 company also recorded net adjustments 51 million previously established restructuring reserves primarily changes estimates related changes lease sublease assumptions company recorded significant costs 2006 2005 related integration acquired product lines business units years integration costs 51 million recognized netscreen acquisition 2004 integration expenses incremental costs directly related integration two companies integration expenses consisted principally facility related expenses workforce related expenses professional fees 2006 company incurred legal professional fees 205 million connection stock option investigation see note 2 additional information company recorded 101 million operating expense 2006 relation certain tax related items see note 2 additional information note 9 commitments contingencies commitments following table summarizes company’s principal contractual obligations december 31 2006 millions operating leases juniper networks leases facilities operating leases expire various times longest expires 2016 rental expense 2006 2005 2004 approximately 403 million 364 million 298 million respectively future minimum payments noncancellable operating leases totaled 1822 million december 31 2006 rent related expenses paid related party 49 million 44 million 33 million 2006 2005 2004 respectively purchase commitments company firm purchase commitments contract manufacturers order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders valued 1205 million december 31 2006 based company’s build forecasts company take ownership components ncnr orders represent firm purchase commitments pursuant juniper networks’ agreements contract manufacturers components used contract manufacturers build products based purchase orders company received customers company incur liability products built contract manufacturers fulfill customer’s order ships however components go unused company may assessed carrying charges obsolete charges december 31 2006 company accrued 224 million based estimate charges contractual obligations december 31 2006 contractual obligations consisted following • escrow amount 128 million related funk acquisition secure certain indemnity obligations onehalf escrow expired january 2007 remaining onehalf expire june 2007 also included contingent bonus payable based certain milestones 50 million earned one year period ended 2006 • escrow amount 16 million related acorn acquisition secure certain indemnity obligations escrow period expire may 2007 also included contingent earnout payable former acorn stockholders based certain milestones 22 million bonus payable employees related continued employment 05 million earnout bonus amounts earned paid 2007 2008 • escrow amount related redline kagoor acquisitions 07 million 51 million respectively secure certain indemnity obligations addition 08 million shares company’s common stock fair value 176 million established acquisition date held escrow secure certain indemnity obligations peribit acquisition december 31 2006 almost escrow shares distributed february 2007 current market value 1915 per share aggregate fair value 141 million guarantees company entered agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product performance standby letters credits certain lease facilities company recorded liability related indemnification guarantee provisions guarantees indemnification arrangements significant impact company’s financial position results operations cash flows legal proceedings company subject legal claims litigation arising ordinary course business employment intellectual property claims including matters described outcome matters currently determinable although company expect legal claims litigation ultimately material adverse effect consolidated financial position results operations adverse result one matters could negatively affect company’s results period occur stock option lawsuits federal derivative lawsuits may 24 2006 august 17 2006 seven purported shareholder derivative actions filed united states district court northern district california company certain company’s current former officers directors lawsuits allege company’s officers directors either participated illegal backdating stock option grants allowed happen lawsuits assert causes action violations federal securities laws violations california securities laws breaches fiduciary duty aiding abetting breaches fiduciary duty abuse control corporate waste breach contract unjust enrichment gross mismanagement insider selling constructive fraud actions also demand accounting rescission allegedly improper stock option grants october 19 2006 court ordered consolidation actions juniper derivative actions 0603396 appointed lead plaintiffs timothy hill employerteamsters local nos 175 505 pension trust fund indiana state district council laborers hod carriers pension fund court ordered lead plaintiffs file consolidated complaint later january 12 2007 february 14 2007 parties agreed extend deadline plaintiffs file consolidated complaint thirty days company completes filing restated financial statements securities exchange commission court approved stipulation february 15 2007 state derivative lawsuits california may 24 2006 june 2 2006 two purported shareholder derivative actions filed santa clara county superior court state california company certain company’s current former officers directors two actions consolidated juniper networks derivative litigation 106cv064294 order dated june 20 2006 consolidated complaint filed july 17 2006 consolidated complaint alleges certain company’s current former officers directors either participated illegal backdating stock options allowed happen complaint asserts causes action unjust enrichment breach fiduciary duty abuse control gross mismanagement waste violations california securities laws insider selling plaintiffs also demand accounting rescission allegedly improper stock options grants july 28 2006 defendants filed motion stay discovery action august 16 2006 defendants filed motion dismiss stay action favor federal derivative actions pending northern district california plaintiffs yet filed oppositions two motions november 6 2006 parties stipulated plaintiffs could file motion amend complaint motion compel responses discovery later thirty days company completes filing restated financial statements hearing defendants’ two pending motions heard date plaintiffs’ two contemplated motions federal securities class actions july 14 2006 purported class action complaint styled garber v juniper networks inc et al c064327 mjj filed northern district california company certain company’s officers directors plaintiff filed corrected complaint july 28 2006 garber class action brought behalf purchasers company’s common stock september 1 2003 may 22 2006 august 29 2006 another purported class action complaint styled peters v juniper networks inc et al c 06 5303 jw filed northern district california company certain officers directors peters class action brought behalf purchasers company’s common stock april 10 2003 august 10 2006 purported class actions allege company certain company’s officers directors violated federal securities laws manipulating stock option grant dates coincide low stock prices issuing false misleading statements including among others incorrect financial statements due improper accounting stock option grants november 20 2006 court appointed new york city pension funds lead plaintiffs lead plaintiffs filed consolidated class action complaint january 12 2007 consolidated complaint asserts claims behalf purchasers otherwise acquired company’s publicly traded securities april 10 2003 including august 20 2006 consolidated complaint alleges violations securities act 1933 securities exchange act 1934 company certain company’s current former officers directors february 15 2007 parties agreed plaintiffs may file amended consolidated complaint within thirty days company files restated financial statements securities exchange commission court approved stipulation february 16 2007 matters ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” company certain company’s officers action brought behalf purchasers company’s common stock company’s initial public offering june 1999 secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company june 2004 stipulation settlement release claims issuers including company submitted court preliminary approval terms settlement approved would dismiss release claims participating defendants including company exchange dismissal directors officers insurance carriers would agree guarantee recovery plaintiffs underwriter defendants least 10 billion issuer defendants would agree assignment surrender plaintiffs certain claims issuer defendants may underwriters august 31 2005 court granted preliminary approval settlement april 24 2006 court held fairness hearing connection motion final approval settlement court issue ruling motion final approval fairness hearing settlement remains subject number conditions including final court approval december 5 2006 court appeals second circuit reversed court’s october 2004 order certifying class case company along five issuers selected test case underwriter defendants plaintiffs coordinated proceeding unclear impact settlement case company toshiba patent infringement litigation november 13 2003 toshiba corporation filed suit united states district court delaware company alleging certain company’s products infringe four toshiba patents seeking injunction unspecified damages markman hearing held april 2006 ruling favorable company issued june 28 2006 toshiba stipulated noninfringement four patents filed notice appeal court appeals federal circuit delaware court removed trial previously scheduled august 2006 calendar pending resolution appeal company expects appeal heard july 2007 irs notices proposed adjustments irs concluded audit company’s federal income tax returns fiscal years 1999 2000 2004 company received notice proposed adjustment nopa irs final resolution issues raised nopa uncertain company believe outcome matter material adverse effect consolidated financial position results operations company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits conjunction irs income tax audit certain company’s us payroll tax returns currently examination fiscal years 1999 2001 company received second nopa amount 117 million employment tax assessments primarily related timing tax deposits related employee stock option exercises company responded nopa february 2005 intends dispute assessment irs initial appeals conference held january 31 october 3 2006 appeals process available company concluded event issue resolved unfavorably company exists possibility material adverse impact company’s results operations note 10 stockholders’ equity stock repurchase activities july 2004 company’s board directors “the board” authorized stock repurchase program authorized repurchases 2500 million company’s common stock 2006 company repurchased 10071100 common shares average price 1851 per share part stock repurchase program december 31 2006 total 12939700 common shares repurchased retired since inception program equating approximately 2500 million average price 1932 per share purchase price 636 million 1864 million shares company’s stock repurchased 2004 2006 respectively reflected reduction retained earnings july 2006 company’s board approved new stock repurchase program authorizing company repurchase 10 billion juniper networks’ common stock program february 2007 company’s board approved increase 10 billion new stock repurchase program coupled prior authorization 10 billion announced july 2006 company authorized repurchase total 20 billion common stock purchases plan subject review circumstances place time acquisitions share repurchase program made time permitted securities laws legal requirements program may discontinued time stock option plans amended restated 1996 stock plan company’s amended restated 1996 stock plan “1996 plan” provided granting incentive stock options employees nonstatutory stock options employees directors consultants november 3 2005 board adopted amendment 1996 plan add ability issue rsus 1996 plan rsus represent obligation company issue unrestricted shares common stock grantee extent vesting criteria award satisfied case rsus vesting criteria based time conditions specified board authorized committee board however vesting occurs grantee entitled stockholder rights respect unvested shares company authorized 164623039 shares common stock issuance 1996 plan effective may 18 2006 additional equity awards 1996 plan discontinued new equity awards granted 2006 equity incentive plan “2006 plan” remaining authorized shares 1996 plan subject outstanding awards may 18 2006 canceled may 18 2006 1996 plan remain effect outstanding equity awards granted plan prior may 18 2006 1996 plan incentive stock options may granted exercise price less fair market value per share common stock date grant company granted incentive stock options since june 1999 nonstatutory stock options may granted terms plan exercise price determined board directors committee authorized board directors see note 2 “restatement condensed consolidated financial statements” vesting exercise provisions permitted determined terms plan board directors committee authorized board options granted 1996 plan generally become exercisable fouryear period beginning date grant maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant see note 2 “restatement condensed consolidated financial statements” 1996 plan also provided sale restricted shares common stock rsus employees consultants shares issued consultants fair value services previously rendered contingent upon future events shares sold employees made pursuant restricted stock purchase agreements containing provisions established board committee authorized board provisions give juniper networks right repurchase shares original sales price upon termination employee right expires rate determined board generally rate 25 one year 20833 per month thereafter december 31 2006 zero shares subject repurchase 1996 plan 2000 nonstatutory stock option plan july 2000 board adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provided granting nonstatutory stock options employees directors consultants nonstatutory stock options may granted terms plan exercise price determined board committee authorized board see note 2 “restatement condensed consolidated financial statements” vesting exercise provisions permitted determined terms plan board authorized committee board options granted 2000 plan generally become exercisable fouryear period beginning date grant maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant company authorized 90901437 shares common stock issuance 2000 plan effective may 18 2006 additional equity awards 2000 plan discontinued new equity awards granted 2006 plan remaining authorized shares 2000 plan subject outstanding awards may 18 2006 canceled may 18 2006 2000 plan remain effect outstanding equity awards granted plan prior may 18 2006 equity incentive plan may 18 2006 company’s stockholders adopted 2006 plan enable granting incentive stock options nonstatutory stock options rsus restricted stock appreciation rights performance shares performance units deferred stock units dividend equivalents employees consultants company 2006 plan also provides automatic nondiscretionary award nonstatutory stock options company’s nonemployee member board “outside directors” maximum aggregate number shares authorized 2006 plan 64500000 shares common stock plus addition shares subject outstanding options 1996 plan 2000 plan subsequently expired unexercised may 18 2006 maximum 75000000 additional shares common stock extent 2006 plan award settled cash rather stock cash payment shall reduce number shares available issuance 2006 plan restricted stock appreciation right performance share performance unit deferred stock unit dividend equivalent issued december 31 2006 company issued 66 million 07 million stock options rsus respectively 2006 plan december 31 2006 restricted stock rsus per share unit purchase price lower 100 market price company’s common stock day grant shall counted two onetenth shares every one share case restricted stock performance share award entire number shares subject award would issued time grant shares could subject vesting provisions based time conditions specified board authorized committee board company would right repurchase unvested shares subject restricted stock performance share award grantee’s service company terminated prior full vesting award repurchased unvested shares would considered outstanding dividend voting purposes incentive stock options granted exercise price less fair market value company’s common stock date option granted exercise price incentive stock option granted 10 greater stockholder may less 110 fair market value common stock grant date vesting exercise provisions determined board authorized committee board stock options granted 2006 plan generally vest become exercisable four year period restricted stock performance shares rsus deferred stock units vest solely based continuing employment provision services vest full earlier three year anniversary grant date event vesting based factors continued future provision services awards vest full earlier one year anniversary grant date options granted 2006 plan maximum term seven years grant date incentive stock options granted 10 greater stockholder maximum term five years grant date 2006 plan provides outside director automatic grant option purchase 50000 shares common stock upon date individual first becomes outside director whether election stockholders company appointment board fill vacancy “first option” addition company’s annual stockholder meetings outside director outside director date prior year’s annual stockholder meeting shall automatically granted option purchase 20000 shares common stock ii outside director outside director date prior year’s annual stockholder meeting shall receive option purchase prorata portion 20000 shares common stock determined time elapsed since individual’s first option grant “the annual option” first option vests monthly approximately three years grant date subject outside director’s continuous service board annual option shall vest monthly approximately one year grant date subject outsider director’s continuous service board 2006 plan options granted outside directors maximum term seven years plans assumed upon acquisition connection past acquisitions company assumed options restricted stock plans acquired companies company exchanged options restricted stock juniper networks’ options case options authorized appropriate number shares common stock issuance pursuant options december 31 2006 approximately 8779075 shares outstanding plans assumed acquisitions year ended december 31 2006 333 shares restricted common stock repurchased average price 035 per share connection employee terminations restricted shares subject repurchase december 31 2006 december 31 2005 approximately 15472302 shares outstanding plans assumed acquisitions 2005 6517 shares restricted common stock repurchased average price 033 per share connection employee terminations 33586 shares restricted shares subject repurchase december 31 2005 equity award activities related information three years ended december 31 2006 summarized follows outstanding options 821 million preceding table include rsus outstanding december 31 2006 32 million shares rsus outstanding december 31 2006 aggregate intrinsic value 610 million weighted average remaining life 18 years following schedule summarizes information stock options outstanding option plans december 31 2006 december 31 2006 approximately 63195000 options exercisable average exercise price 1892 december 31 2005 approximately 68150000 options exercisable average exercise price 1818 company’s vested expectedtovest stock options exercisable stock options december 31 2006 summarized aggregate intrinsic value represents difference company’s closing stock price last trading day fiscal period 1894 december 31 2006 exercise price multiplied number related options pretax intrinsic value options exercised 1078 million year ended december 31 2006 intrinsic value represents difference fair market value company’s common stock date exercise price option total fair value options vested 2006 1063 million december 31 2006 approximately 828 million total unrecognized compensation cost related stock options expected recognized weightedaverage period 28 years approximately 284 million total unrecognized compensation cost estimated forfeited prior vesting awards excluded preceding cost restricted stock units activity december 31 2006 company 32 million rsus outstanding excluded options outstanding balance preceding tables company’s outstanding rsus vested expectedtovest rsus summarized none issued rsus vested december 31 2006 rsus deducted shares available grant company’s stock option plans weightedaverage grant date fair value restricted stock units granted 2006 2005 1845 2190 respectively december 31 2006 approximately 363 million total unrecognized compensation cost related rsus expected recognized weightedaverage period 18 years approximately 146 million total unrecognized compensation cost estimated forfeited prior vesting awards excluded preceding cost extension stock option exercise periods former employees company cannot issue securities registration statements form s8 period current sec reporting obligations filing periodic reports securities exchange act 1934 result options vested held company’s former employees cannot exercised completion company’s stock option investigation company’s public filings obligations met “trading blackout period” 2006 approximately 1446000 options due expire company extended expiration date stock options end 30day period subsequent company’s filing required regulatory reports result modification fair value stock options reclassified current liabilities subsequent modification subject marktomarket provisions end reporting period final settlement company measured fair value stock options using blackscholesmerton option valuation model recorded aggregate fair value approximately 61 million current liabilities december 31 2006 changes fair values options future periods settlement expensed company’s consolidated statements operations period change acceleration unvested “outofthemoney” employee stock options december 16 2005 company’s board directors approved acceleration vesting certain unvested “outofthemoney” stock options exercise price per share equal greater 2200 previously granted stock option plans outstanding december 16 2005 options purchase approximately 212 million shares common stock 493 total outstanding unvested options december 16 2005 accelerated options accelerated excluded options previously granted certain employees including company’s executive officers directors addition acceleration unvested “outofthemoney” options accompanied restrictions imposed shares purchased exercise accelerated options restrictions prevent sale shares prior date shares would originally vested optionee employed date whether optionee actually employee time purpose acceleration enable company avoid recognizing compensation expense associated options future periods statements operations pursuant financial accounting standards board statement 123r “sfas 123r” sfas 123r company applied expense recognition provisions relating stock options beginning first quarter fiscal 2006 approving acceleration company’s board considered impact future financial results stockholder value employee retention board believes acceleration unvested “outofthemoney” options best interest stockholders reduce company’s reported compensation expense future periods light accounting regulations result acceleration company expected reduce pretax stock option expense otherwise would required record approximately 1530 million estimated time acceleration subsequent adoption sfas 123r beginning 2006 acceleration vesting options result charge results operations 2005 employee stock purchase plan december 16 2005 board directors amended company’s 1999 employee stock purchase plan “espp” eliminate ability participant espp increase rate hisher payroll deductions offering period defined espp change effective beginning offering period commencing february 1 2006 april 1999 board directors approved adoption juniper networks 1999 employee stock purchase plan “purchase plan” purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year purchase plan implemented series offering periods six months duration shorter period determined board price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day respective offering period december 16 2005 board amended company’s espp eliminate ability participant espp increase rate hisher payroll deductions offering period defined espp change effective beginning offering period commencing february 1 2006 pretax compensation expense related common stock issued espp 66 million compensation expense espp 2005 periods required footnote disclosure prior adoption sfas 123r result company’s failure file quarterly reports form 10q second third quarters 2006 company suspended employee payroll withholdings purchase common stock espp august 2006 filing required regulatory reports january 2007 board directors approved delay start next offering period february 1 2007 april 1 2007 offering period end july 31 2007 employees purchased approximately 1748000 shares 912000 shares 769000 shares common stock espp average exercise price 1306 1996 1539 per share fiscal years 2006 2005 2004 respectively 2006 number authorized shares espp increased 3000000 shares december 31 2006 approximately 6490500 shares issued 8509500 shares remained available future issuance espp december 31 2005 approximately 4742700 shares issued 7257300 shares remained available future issuance december 31 2004 approximately 3831100 shares issued average price 795 per share 8168900 shares remained available future issuance espp stockbased compensation valuation stockbased compensation sfas 123r requires use valuation model calculate fair value stockbased awards company elected use blackscholesmerton optionpricing model incorporates various assumptions including volatility expected life riskfree interest rates expected volatility based historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options adjusted relevant factors including implied volatility market traded options company’s common stock expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time 2006 company began granting stock option awards contractual life seven years date grant prior 2006 stock option awards generally ten year contractual life date grant result expected term assumption used year ended december 31 2006 reflects shorter contractual life new option awards granted period assumptions used resulting estimates weightedaverage fair value per share options granted employee stock purchases espp periods summarized follows 1 see note 2 “restatement consolidated financial statements” consolidated financial statements anticipation adopting sfas 123r company refined variables used blackscholesmerton model 2005 result company refined methodology estimating expected term representative future exercise patterns company also refined computation expected volatility considering volatility publicly traded options purchase common stock historical stock volatility weighted average estimated fair value employee stock options granted 2006 2005 2004 609 923 1144 per option respectively weighted average estimated fair value shares granted employee stock purchase plan 2006 2005 2004 519 636 444 per share respectively common stock reserved future issuance december 31 2006 juniper networks reserved aggregate approximately 174223000 shares common stock future issuance stock option plans 1999 employee stock purchase plan future issuance upon conversion convertible senior notes convertible preferred stock 10000000 shares convertible preferred stock par value 000001 per share authorized issuance preferred stock issued outstanding december 31 2006 2005 note 11 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirement defined may contribute statutory limits year company matched employee contributions since january 1 2001 matching formula 50 6 eligible pay annual maximum 2000 effective january 1 2005 company increased match 50 100 eligible pay annual maximum 2000 effective january 1 2007 company matches 25 employee contributions matching contributions vest immediately company’s matching contributions plan totaled 58 million 51 million 31 million 2006 2005 2004 respectively note 12 segment information operating segment defined component enterprise engages business activities may earn revenue incur expenses separate financial information available evaluated regularly chief operating decision maker “codm” deciding allocate resources assessing performance 2005 company’s codm senior management team together “management” began allocate resources assess performance based financial information categories products service following acquisitions funk acorn peribit redline kagoor company combined products acquired companies security segment create slt operating segment result company currently following operating segments infrastructure slt service infrastructure segment includes products e tseries router product families well circuittopacket products sbc products prior 2006 sbc products included slt segment includes security products application acceleration reporting units beginning 2007 company longer segregate two reporting units within slt segment slt segment consists primarily firewall virtual private network “vpn” systems appliances secure sockets layer vpn appliances intrusion detection prevention appliances “idp” application front end platforms jseries router product family odyssey products wide area network “wan” optimization platforms service segment delivers worldwide services customers infrastructure slt segments 2004 management evaluated company’s performance geographic theater categories products based revenues management assess performance geographic theaters categories products measures income expenses therefore company one operating segment realignment operating segments 2005 due shift management structure responsibilities measure business based product service profitability commencing fourth quarter 2005 primary financial measure used management assessing performance allocating resources segments management operating income includes certain cost revenues research development expenses sales marketing expenses general administrative expenses direct costs standard costs research development product marketing expenses applied directly operating segment indirect costs manufacturing overhead cost sales allocated based standard costs indirect operating expenses sales business development general administrative expenses allocated operating segment based factors including headcount revenue prior period information included comparative purposes financial information operating segment used management make financial decisions allocate resources follows millions 1 stockbased compensation expense 2005 2004 periods restated result stock option investigation addition prior period amounts reclassified reflect reorganization certain research development activities changes allocation methodologies 2 amount includes amortization expense purchased intangible assets operating expenses costs revenues 3 expense 2006 includes charges restructuring acquisition related charges stock option investigation costs tax related charges well certain restructuring costs included cost revenues expense 2005 includes charges restructuring acquisition related charges patent related charges siemens accounted 14 15 company’s net revenues 2006 2005 2004 respectively revenue attributed significant customer derived sale products services three operating segments company attributes sales geographic theater based customer’s shipto location following table shows net revenue geographic theater millions company tracks assets physical location 90 company’s assets including property equipment december 31 2006 2005 attributable us operations company allocate assets segment note 13 net income per share basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding period diluted net income per share computed giving effect dilutive potential shares outstanding period dilutive potential common shares consist incremental common shares subject repurchase common shares issuable upon exercise stock options shares issuable upon conversion subordinated notes following table presents calculation basic diluted net income per share millions except per share data 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements 2006 company excluded 346 million common stock equivalents consisting convertible debt outstanding stock options rsus shares subject repurchase calculation diluted loss per share securities antidilutive due net loss period years ended 2006 2005 2004 approximately 511 million 288 million 119 million common stock equivalents included computation diluted earnings per share effect would antidilutive note 14 income taxes components loss income provision income taxes summarized follows millions 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements provision income taxes summarized follows millions 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements provision income taxes differs amount computed applying federal statutory rate income loss provision income taxes follows millions 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components deferred tax assets liabilities follows millions 1 see note 2 “restatement consolidated financial statements” notes consolidated financial statements december 31 2006 2005 company valuation allowance us domestic deferred tax assets approximately 387 million 406 million respectively relates capital losses carry forward offset future capital gains valuation allowance decreased 19 million 2247 million 23 million years ended december 31 2006 2005 2004 respectively 2006 reduction attributable use capital losses carryovers 2005 reduction attributable company’s determination valuation allowance longer necessary net us deferred tax assets based available evidence end year determined realization net assets likely 2004 net reduction primarily attributable increase deferred tax liabilities netscreen acquisition increase deferred tax assets related excess tax benefits stock option deductions part restatement company increased deferred tax assets december 31 2005 approximately 213 million benefit change deferred tax assets recorded increase additional paidin capital corresponding amount december 31 2006 company federal california net operating loss carryforwards 443 million 205 million respectively company also federal california tax credit carryforwards approximately 506 million 635 million respectively unused net operating loss research development tax credit carryforwards expire various dates beginning years 2021 2012 respectively company provides us income taxes earnings foreign subsidiaries unless subsidiaries’ earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 2273 million cumulative undistributed earnings certain foreign subsidiaries december 31 2006 company’s intention permanently reinvest earnings distributed company would accrue additional income taxes expense approximately 668 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations american jobs creation act 2004 repatriation foreign earnings american jobs creation act 2004 “jobs act” enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated either fiscal 2004 fiscal 2005 deduction results approximate 525 federal tax rate repatriated earnings 2005 company’s chief executive officer board directors approved domestic reinvestment plan required jobs act repatriate 2250 million foreign earnings 2005 company repatriated 2250 million jobs act 2005 recorded net tax benefit 2005 197 million related repatriation dividend net tax benefit consists federal state tax provision net federal benefit 97 million offset tax benefit 294 million related adjustment deferred tax liabilities unrepatriated earnings note 15 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter last two years millions except per share amounts 1 unaudited selected financial data 2005 interim periods restated reflect adjustments related associated tax impact described note 2 consolidated statement operations quarter ended march 31 2006 restated incremental stockbased compensation expense restatement employee stock options insignificant period therefore recorded fourth quarter 2006 following table presents effects stockbased compensation related tax adjustments upon company’s previously reported condensed consolidated statements operations millions 1 prior period amounts reclassified order conform current year presentation 2 amortization stockbased compensation included following cost expense categories period 1 prior period amounts reclassified order conform current year presentation 2 amortization stockbased compensation included following cost expense categories period following tables summarize impact restatement condensed consolidated balance sheets line items millions certain reclassifications made prior quarter balances order conform current year’s presentation 2005 quarterly results reflect impact acquisitions kagoor redline second quarter peribit third quarter acorn funk fourth quarter ongoing effects operations remainder year basic diluted net losses per share computed independently quarters presented therefore sum quarters may equal full year net income loss per share amounts note 16 subsequent event stock repurchase program february 2007 company’s board approved increase 10 billion stock repurchase program approved july 2006 coupled prior authorization 10 billion announced july 2006 company authorized repurchase total 20 billion common stock purchases plan subject review circumstances place time acquisitions share repurchase program made time permitted securities laws legal requirements program may discontinued time item 9item 8 consolidated financial statements supplementary data management’s annual report internal control financial reporting juniper networks inc’s management responsible establishing maintaining adequate internal control company’s financial reporting assessed effectiveness company’s internal control financial reporting december 31 2007 making assessment used criteria set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment using criteria concluded december 31 2007 juniper networks inc’s internal control financial reporting effective independent registered public accounting firm ernst young llp independently assessed effectiveness company’s internal control financial reporting ernst young issued attestation report concurring management’s assessment included page 65 form 10k please note inherent limitations effectiveness system internal control including possibility human error circumvention overriding controls accordingly even effective internal controls provide reasonable assurances respect financial statement preparation changes conditions effectiveness internal control may vary time index consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2007 2006 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2007 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2007 2006 consolidated results operations cash flows three years period ended december 31 2007 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein discussed note 1 consolidated financial statements juniper networks inc changed method accounting stockbased compensation january 1 2006 method accounting uncertain tax positions january 1 2007 also audited accordance standards public company accounting oversight board united states effectiveness juniper networks inc’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated february 28 2008 expressed unqualified opinion thereon ernst young llp san jose california february 28 2008 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper network inc’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets december 31 2007 2006 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2007 juniper networks inc report dated february 28 2008 expressed unqualified opinion thereon ernst young llp san jose california february 28 2008 juniper networks inc consolidated statements operations see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business juniper networks inc “juniper networks” “company” designs develops sells products services together provide customers highperformance network infrastructure creates responsive trusted environments accelerating deployment services applications single internet protocol “ip”based network company organizes business groups following three reportable segments infrastructure service layer technologies “slt” service company’s infrastructure segment primarily offers scalable router products used control direct network traffic company’s slt segment offers networking solutions meet broad array customers’ priorities securing network data network maximizing existing bandwidth acceleration applications across distributed network together elements provide secure networking solutions enable customers convert legacy networks provide commoditized best efforts services valuable assets provide differentiation value increased reliability performance security end users company’s service segment delivers worldwide services including technical support professional services well number education training programs customers infrastructure slt segments basis presentation consolidated financial statements include company whollyowned subsidiaries intercompany balances transactions eliminated use estimates preparation financial statements related disclosures conformity accounting principles generally accepted united states requires management make estimates judgments affect amounts reported consolidated financial statements accompanying notes estimates used revenue recognition allowance sales returns allowance doubtful accounts allowance contract manufacturer obligations allowance warranty costs stockbased compensation goodwill impairments income taxes litigation settlement costs loss contingencies company bases estimates historical experience also assumptions believes reasonable actual results experienced company may differ materially management’s estimates cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand balances banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company’s investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income loss equity investments juniper networks investments privately held companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company juniper networks inc notes consolidated financial statements continued controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment juniper networks markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary fair value financial instruments carrying value company’s financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments determined using quoted market prices securities similar financial instruments concentrations financial instruments subject juniper networks concentrations credit risk consist primarily cash equivalents investments accounts receivable juniper networks maintains cash equivalents investments fixed income securities highquality institutions invests high quality credit instruments deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits generally deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world juniper networks performs ongoing credit evaluations customers generally require collateral accounts receivable juniper networks maintains reserves potential credit losses historically losses within management’s expectations one customer accounted 128 143 137 total net revenues 2007 2006 2005 respectively company relies sole suppliers certain components applicationspecific integrated circuits “asics” custom sheet metal additionally juniper networks relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements juniper networks could negatively impact future operating results property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally three five years lease term respective assets company depreciates leasehold improvements life lease respective assets whichever shorter land subject depreciation goodwill purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trademarks developed technologies customer maintenance contracts intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based test future goodwill impairment tests could result charge earnings purchased intangible assets finite lives amortized straightline basis respective estimated useful lives ranging two nineteen years juniper networks inc notes consolidated financial statements continued impairment company evaluates longlived assets heldforuse impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized measured amount carrying amount asset exceeds fair market value company assesses recoverability longlived intangible assets determining whether unamortized balances recovered undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows company evaluates goodwill minimum annual basis whenever events changes circumstances indicate carrying amount asset may recoverable impairment goodwill tested reporting unit level comparing reporting unit’s carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income discounted cash flows approach market approach utilizes comparable companies’ data carrying value reporting unit exceeds fair value goodwill considered impaired second step performed measure amount impairment loss discussed note 3 second quarter 2006 company concluded carrying value goodwill impaired recorded impairment charge recording impairment charge juniper networks conducted annual impairment test november 1 2006 november 1 2007 determined carrying value remaining goodwill impaired events circumstances november 1 2007 december 31 2007 would impact assessment future impairment indicators including declines company’s market capitalization decrease revenue profitability levels could require additional impairment charges recorded revenue recognition juniper networks sells products services direct sales force strategic distribution relationships valueadded resellers company’s products integrated software essential functionality equipment additionally company provides unspecified upgrades enhancements related integrated software maintenance contracts products accordingly company accounts revenue accordance statement position 972 software revenue recognition related interpretations company recognizes revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectibility reasonably assured evidence arrangement generally consists customer purchase orders certain instances sales contracts agreements shipping terms related documents written evidence customer acceptance applicable used verify delivery performance instances company outstanding obligations related product delivery final acceptance product revenue deferred delivery acceptance criteria met company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment collectibility assessed based creditworthiness customer determined credit checks customer’s payment history company accounts receivable recorded net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements sales products include services company allocates revenue element using residual method based vendor specific objective evidence fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vendor specific objective evidence fair value based price charged element sold separately vendor specific objective evidence fair value one undelivered items exist revenue deferred recognized earlier delivery elements ii fair value established unless juniper networks inc notes consolidated financial statements continued maintenance undelivered element case entire arrangement fee recognized ratably contractual support period multiple agreements single customer company accounts either one arrangement separate arrangements depending interdependency sales direct endusers valueadded resellers company recognizes product revenue upon transfer title risk loss generally upon shipment company’s practice identify enduser prior shipment valueadded reseller endusers valueadded resellers company significant obligations future performance rights return pricing credits portion company’s sales made distributors agreements allowing pricing credits andor rights return product revenue sales made distributors recognized upon sellthrough reported distributors company sells certain interests accounts receivables nonrecourse basis part distributor accounts receivable financing arrangement established company major financing company accounts receivables sold arrangement advance revenue recognition accounted debt balance 100 million nil december 31 2007 2006 respectively deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sell deferred revenue recorded net related product costs revenue company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time addition company reports revenue net sales taxes shipping charges billed customers included product revenue related shipping costs included cost product revenues costs associated cooperative advertising programs estimated recorded reduction revenue time related sales recognized services include maintenance training professional services addition providing unspecified upgrades enhancements available basis company’s maintenance contracts include 24hour technical support hardware repair replacement parts maintenance offered renewable contracts revenue maintenance contracts deferred generally recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less allowance doubtful accounts allowance doubtful accounts based company’s assessment collectibility customer accounts juniper networks regularly reviews receivables remain outstanding past applicable payment terms establishes allowance potential writeoffs considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customer’s ability pay warranties juniper networks generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty generally includes parts labor obtained company’s 24hour service center occasion specific terms conditions warranties vary company accrues warranty costs based estimates costs may incurred warranty obligations including material costs technical support labor costs associated overhead warranty accrual included company’s cost revenues recorded time revenue recognized factors affect company’s warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimated support labor costs associated overhead juniper networks inc notes consolidated financial statements continued company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary contract manufacturer liabilities inventories company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture company’s products based company’s demand forecasts based company’s estimates future demand company products turn based historical trends analysis company’s sales marketing organizations adjusted overall market conditions company establishes accrued liabilities included current accrued liabilities accompanying consolidated balance sheets carrying charges obsolete material charges excess components purchased based historical trends addition company purchases small amount strategic component inventory included assets stated lower cost market costs distributor inventory yet recognized revenue recorded net related product revenue service related spares demonstration equipment expensed costs service revenue sales marketing expense respectively purchased research development costs research design develop company’s products expensed incurred software development costs capitalized beginning product’s technological feasibility established ending product available general release customers generally juniper networks’ products released soon technological feasibility established result costs subsequent achieving technological feasibility significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 48 million 68 million 66 million 2007 2006 2005 respectively loss contingencies company subject possibility various loss contingencies arising ordinary course business considers likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available management determine whether accruals adjusted whether new accruals required addition time company involved disputes litigation legal actions company records charge equal least minimum estimated liability loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated however actual liability litigation may materially different company’s estimates could result need record additional expenses stockbased compensation january 1 2006 company adopted statement financial accounting standards 123 revised 2004 sharebased payment “fas 123r” requires measurement recognition compensation expense juniper networks inc notes consolidated financial statements continued stockbased awards made employees directors including employee stock options restricted stock units “rsus” purchases company’s employee stock purchase plan based estimated fair values fas 123r supersedes previous accounting principles board opinion 25 accounting stock issued employees “apb 25” allowed statement financial accounting standards 123 accounting stockbased compensation “fas 123” periods beginning 2006 march 2005 securities exchange commission “sec” issued staff accounting bulletin 107 “sab 107” relating fas 123r company applied provisions sab 107 conjunction adoption fas 123r company adopted fas 123r using modified prospective transition method requires application accounting standard january 1 2006 first day company’s fiscal 2006 fas 123r requires companies estimate fair value stockbased awards date grant using optionpricing model company uses blackscholesmerton option pricing model determine fair value stock options fas 123r consistent used pro forma disclosures fas 123 fair value rsu equivalent market price company’s common stock grant date value portion stockbased award ultimately expected vest recognized expense requisite service periods period grant requisite service period provided company’s consolidated statement operations company’s consolidated financial statements years ended december 31 2007 2006 reflect impact fas 123r accordance modified prospective transition method company’s consolidated financial statements 2005 restated reflect include impact fas 123r stockbased compensation expense recognized company’s consolidated statement operations years ended december 31 2007 2006 included compensation expense stockbased awards granted prior yet vested december 31 2005 based grant date fair value estimated accordance provisions fas 123 ii compensation expense stockbased awards granted subsequent december 31 2005 based grant date fair value estimated accordance provisions fas 123r conjunction adoption fas 123r company changed accounting policy attributing fair value stockbased compensation expense accelerated multipleoption approach provided apb 25 allowed fas 123 straightline singleoption approach allowed fas 123r compensation expense expectedtovest stockbased awards granted prior december 31 2005 continue recognized using accelerated attribution method compensation expense expectedtovest stockbased awards granted modified subsequent december 31 2005 recognized straightline basis provided amount compensation cost recognized date less portion grantdate value award vested date fas 123r requires forfeitures estimated time grant revised necessary subsequent periods actual forfeitures differ estimates company’s stockbased compensation expense required apb 25 pro forma information required fas 123 2005 company accounted forfeitures occurred prior adoption fas 123r stockbased compensation expense recognized company’s consolidated statement operations provisions apb 25 accordance apb 25 compensation expense required employee stock purchases company’s employee stock purchase plan stockbased compensation expense 223 million 2005 related employee stockbased awards stock options assumed acquisitions result adopting fas 123r stockbased compensation expense recorded 2007 2006 880 million 876 million respectively stockbased compensation fas 123r 2006 year adoption approximately 744 million higher would reported company continued account stockbased compensation apb 25 net income 2006 approximately 514 million lower would reported company continued account stockbased compensation apb 25 unamortized deferred compensation associated stock options assumed past acquisitions employee stockbased awards 177 million reclassified additional paidin capital company’s consolidated balance sheet upon adoption fas 123r january 1 2006 additional information discussed note 9 “stockholders’ equity” juniper networks inc notes consolidated financial statements continued accordance fas 123r company presented financing cash flows tax benefits resulting tax deductions excess compensation cost recognized options beginning 2006 tax benefits employee stock plans 197 million 97 million related tax deductions excess compensation cost recognized presented financing cash flows 2007 2006 respectively prior adoption fas 123r tax benefits employee stock plans presented operating cash flows additionally accordance fas 123r fas 109 accounting income taxes “fas 109” eitf topic d32 intraperiod tax allocation effect pretax income continuing operations company elected recognize excess income tax benefits stock option exercises additional paidin capital incremental income tax benefit would realized considering tax attributes presently available company following table summarizes pro forma net income earnings per share net related tax effect company applied fair value recognition provisions fas 123 employee stock benefits 2005 millions except per share amounts derivatives periodically company uses derivatives partially offset market exposure fluctuations foreign currencies company enter derivatives speculative trading purposes juniper networks uses foreign currency forward contracts mitigate transaction gains losses generated certain foreign currency denominated monetary assets liabilities derivatives carried fair value changes recorded income expense period changes fair value remeasurement underlying assets liabilities cash flows hedges classified operating activities foreign exchange forward contracts maturities one two months company also uses foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2007 2006 2005 income expense consolidated statements operations cash flows hedges classified operating activities juniper networks inc notes consolidated financial statements continued provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth fas 109 accounting income taxes records valuation allowance reduce deferred tax assets amount believes likely realizable company believes likely forecasted income together tax effects deferred tax liabilities sufficient fully recover remaining deferred tax assets event part net deferred tax assets determined realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due january 1 2007 company adopted financial accounting standards board “fasb” interpretation 48 accounting uncertainty income taxes “fin 48” fin 48 interpretation fasb statement 109 accounting income taxes seeks reduce diversity practice associated certain aspects measurement recognition accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position entity takes expects take tax return additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition fin 48 entity may recognize continue recognize tax positions meet “more likely not” threshold addition application fin 48 may increase entity’s future effective tax rates future intraperiod effective tax rate volatility company’s cumulative effect applying fin 48 192 million increase opening balance accumulated deficit january 1 2007 10 million increase goodwill comprehensive income comprehensive income defined change equity period nonowner sources company presented comprehensive income part consolidated statements stockholders’ equity comprehensive income includes net unrealized gains losses availableforsale securities net foreign currency translation gains losses excluded net income unrealized gains losses derivatives designated cash flow hedges foreign currency translation assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period foreign currency translation gains losses material years ended december 31 2007 2006 2005 effect exchange rate changes cash balances held foreign currencies immaterial years presented recent accounting pronouncements december 2007 fasb issued fas 160 noncontrolling interests consolidated financial statements amendment accounting research bulletin 51 “fas 160” fas 160 addresses accounting reporting standards ownership interests subsidiaries held parties parent juniper networks inc notes consolidated financial statements continued amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated fas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners fas 160 effective fiscal years beginning december 15 2008 adopted company 2009 company currently assessing impact standard future consolidated results operations financial condition december 2007 fasb issued fas 141r business combinations “fas 141r” fas 141r establishes principles requirements acquirer business recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree statement also provides guidance recognizing measuring goodwill acquired business combination determines information disclose enable users financial statement evaluate nature financial effects business combination fas 141r effective financial statements issued fiscal years beginning december 15 2008 accordingly business combinations company engages recorded disclosed following existing gaap january 1 2009 company expects fas 141r impact consolidated financial statements effective nature magnitude specific effects depend upon nature terms size acquisitions consummates effective date company currently assessing impact standard future consolidated results operations financial condition june 2007 fasb ratified eitf 073 accounting nonrefundable advance payments goods services received use future research development activities “eitf 073” eitf 073 requires nonrefundable advance payments goods services used rendered future research development activities deferred capitalized recognized expense goods delivered related services performed eitf 073 effective prospective basis fiscal years beginning december 15 2007 company adopted eitf 073 january 1 2008 expect material impact consolidated results operations financial condition february 2007 fasb issued fas 159 fair value option financial assets financial liabilitiesincluding amendment fasb statement 115 “fas 159” fas 159 expands use fair value accounting affect existing standards require assets liabilities carried fair value objective fas 159 improve financial reporting providing companies opportunity mitigate volatility reported earnings caused measuring related assets liabilities differently without apply complex hedge accounting provisions fas 159 entity may elect use fair value measure eligible items including accounts receivable availableforsale heldtomaturity securities equity method investments accounts payable guarantees issued debt adoption fas 159 expected significant impact company’s consolidated financial statements september 2006 fasb issued fas 157 fair value measurements “fas 157” fas 157 defines fair value establishes framework gives guidance regarding methods used measuring fair value expands disclosures fair value measurements guidance fair value measurements would separately disclosed level within fair value hierarchy fas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years february 2008 fasb issued fasb staff position fas 1572 effective date fasb statement 157 “fsp fas 1572” fsp fas 1572 amends fas 157 delay effective date fas 157 nonfinancial assets nonfinancial liabilities fiscal years beginning november 15 2008 except items recognized disclosed fair value financial statements recurring basis company adopted effective portion fas 157 january 1 2008 expect material impact consolidated results operations financial condition company currently assessing impact applying fas 157 nonfinancial assets liabilities future consolidated results operations financial condition juniper networks inc notes consolidated financial statements continued reclassifications certain reclassifications made prior year balances order conform current year’s presentation note 2 business acquisitions juniper networks completed five purchase acquisitions three years ended december 31 2007 acquisitions 2007 2006 five companies company acquired 2005 included funk software inc “funk” acorn packet solutions inc “acorn” peribit networks inc “peribit” redline networks inc “redline” kagoor networks inc “kagoor” initial purchase price acquisition respective acquisition dates including subsequent escrow adjustments outlined millions total initial purchase price certain acquisitions could increase upon release amounts held escrow indemnity obligations upon additional contingent payments allocation initial purchase consideration company allocated purchase price tangible intangible assets acquired liabilities assumed including iprd based fair values excess purchase price fair values recorded goodwill subject change due release amounts held escrow indemnity obligations additional contingent payments changes acquisition related assets liabilities fair values assigned intangible assets acquired based valuations prepared independent thirdparty appraisal firms juniper networks inc notes consolidated financial statements continued using estimates assumptions provided management summary initial purchase price allocations acquisition follows millions purchased intangible assets following table summarizes details purchased intangible assets acquired business acquisitions millions except years existing technology consists products reached technological feasibility includes products acquired product lines existing technology valued using discounted cash flow “dcf” method calculates value intangible asset present value tax cash flows potentially attributable net return fair value attributable tangible intangible assets patents core technology represent combination processes patents trade secrets used existing inprocess technology value trade name trademarks represented benefit owning intangible assets rather paying royalties use intangible assets valued using royalty savings method estimates value intangible assets capitalizing royalties saved company owns assets relationships customers represent rights granted var distributor resell certain products var distributor relationships valued using avoided cost method takes account cost establishing relationship juniper networks inc notes consolidated financial statements continued maintenance agreements represent revenue generated contracts customers pay annual maintenance support income approach used estimate fair value maintenance agreements includes estimating ongoing aftertax income expected maintenance agreements place time acquisition including expected renewals pro forma results operations presented 2005 acquisitions effects acquisitions material juniper networks either individual aggregate annual basis funk acquisition december 1 2005 company completed acquisition funk leading provider standardsbased network access security solutions developed products technologies protect integrity network ensuring user device meet organization’s security policies granting access purchase price funk included cash payment 1102 million excluded initial purchase price 1113 million balance 122 million held escrow indemnity obligations onehalf expired january 2007 remaining onehalf june 2007 company paid 48 million 66 million january 2007 july 2007 respectively upon resolution certain acquisition related indemnity issues increased goodwill corresponding amounts contingent payments associated future employment conditions recorded compensation expense ratably 13 month period acquisition date december 31 2007 company retained 16 million escrow satisfy potential indemnity obligations acorn acquisition october 20 2005 company completed acquisition acorn’s products technologies provide smooth migration path connecting legacy time division multiplexing “tdm” circuitbased applications across nextgeneration ip networks purchase price acorn included cash payment 40 million excluded initial purchase price 43 million balance 25 million held escrow indemnity earnout obligations expired may 30 2007 company paid 16 million may 2007 upon resolution certain acquisition related indemnity issues increased goodwill corresponding amount contingent payments associated future employment conditions recorded compensation expense ratably 12 month period following acquisition peribit acquisition july 1 2005 company completed acquisition peribit acquisition enabled company secure assure delivery performance applications ip network premium traffic processing purchase price peribit included cash payment 503 million acquisition resulted issuance 113 million shares company’s common stock fair value approximately 2564 million former shareholders peribit approximately 16 million shares fair value 352 million established acquisition date held escrow indemnity obligations prescribed merger agreement common stock issued acquisition valued using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced april 26 2005 company also assumed outstanding peribit stock options fair value approximately 364 million options valued using blackscholes option pricing model volatility assumption 41 expected life 18 years riskfree interest rate 36 market value company’s common stock 2262 per share determined described close acquisition company recorded liability 30 million associated future lease severance contractual obligations march 2009 july 2006 company released 08 million shares valued 103 million former shareholders peribit formerly held escrow remaining shares escrow expired february 1 2007 total 08 million escrow shares distributed february 2007 july 2007 current market value 1915 per share 2722 per share respectively aggregate fair value 148 million escrow amounts excluded initial purchase price 3120 million redline acquisition may 2 2005 company completed acquisition redline pioneer development application front end “afe” technology designed network solutions improve performance flexibility scalability webenabled enterprise data centers public web sites initial purchase price redline included cash payment 975 million 30 million preacquisition loan company redline forgiven assumed stock options aggregate fair value juniper networks inc notes consolidated financial statements continued 211 million stock options valued using blackscholes option pricing model inputs 43 volatility 156 years expected life 35 riskfree interest rate market value juniper networks common stock 2262 per share determined using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced april 26 2005 company also assumed 10 million net liabilities 2006 company recorded additional 132 million cash escrow payment initial purchase price 1231 million related redline’s indemnity obligations expired 2006 escrow payments connection redline acquisition 2007 december 31 2007 company retained 07 million escrow satisfy potential indemnity obligations kagoor acquisition may 1 2005 company completed acquisition kagoor leading provider session border control products voiceoverinternet protocol voip networking initial purchase price kagoor included 582 million cash assumed stock options aggregate fair value 76 million stock options valued using blackscholes option pricing model inputs 43 volatility 158 years expected life 35 riskfree interest rate market value juniper networks common stock 2164 per share determined using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced march 29 2005 excluded initial purchase price 663 million escrow payment 68 million related indemnity obligations associated acquisition 20 million paid 2006 february 2007 company distributed additional 46 million former kagoor stockholders upon final settlement escrow account inprocess research development company’s methodology allocating purchase price purchase acquisitions inprocess research development “iprd” determined established valuation techniques hightechnology communications equipment industry projects qualify iprd represent yet reached technological feasibility alternative future use iprd expensed upon acquisition iprd expense years ended december 31 2007 2006 year ended december 31 2005 total iprd expense 110 million connection funk peribit kagoor acquisitions iprd acorn redline acquisitions funk iprd efforts pertained development radius products including steelbelted radius “sbr” sbr high availability “ha” mobile ip module “mim” ii products funk’s iprd acquisition date also included development new versions endpoint assurance proxy remote control odyssey product families time acquisition estimated development efforts would completed next four months estimated cost approximately 09 million development efforts completed december 31 2007 peribit iprd efforts included development next versions software sequence reducer “sr” family sequence mirror “sm” family central management system “cms” products well hardware program sr sm families time acquisition estimated development efforts would completed next twelve months estimated cost approximately 23 million development efforts completed december 31 2007 kagoor iprd efforts included variety signaling protocols next generation products operating systems time acquisition estimated development efforts would completed next eight months estimated cost approximately 08 million development efforts completed december 31 2007 deferred stockbased compensation unvested stock options valued 132 million 38 million 20 million issued peribit redline kagoor acquisitions respectively unvested portion intrinsic value replacement stock options established acquisition date allocated deferred compensation purchase price allocation amortized expense using gradedvesting method remaining vesting period juniper networks inc notes consolidated financial statements continued note 3 goodwill purchased intangible assets goodwill changes carrying amount goodwill three years ended december 31 2007 follows millions company performed goodwill impairment review november 1 2007 concluded impairment 2007 2006 company concluded carrying value goodwill slt segment impaired recorded impairment charge 12800 million operating expenses goodwill impairment 2005 significant portion goodwill initially recorded based stock prices time related merger agreements executed announced impairment goodwill 2006 primarily attributable decline company’s market capitalization occurred period approximately six months prior impairment review may 31 2006 lesser extent decrease forecasted future cash flows used income approach first step 2006 impairment review compare fair value reporting unit carrying value including goodwill related respective reporting units performing 2006 goodwill impairment review company determined four reporting units time impairment calculation consisting infrastructure service respective segments well security application acceleration two components slt segment company utilized external service provider calculate fair value reporting units using combination income market approaches income approach requires estimates expected revenue gross margin operating expenses order discount sum future cash flows using particular business’ weighted average cost capital company’s growth estimates based historical data internal estimates developed part longterm planning process company tested reasonableness inputs outcomes discounted juniper networks inc notes consolidated financial statements continued cash flow analysis comparing available market data determining carrying value reporting unit company allocated fair values shared tangible net assets reporting unit based revenue derived reporting unit fair values security application acceleration reporting units lower allocated book values goodwill considered impaired result company performed step two goodwill impairment calculation two reporting units within slt segment order calculate extent goodwill impairment second step 2006 goodwill impairment review management calculated fair value company’s tangible intangible net assets assistance external service provider identified intangible assets valued specifically reporting unit tested difference calculated fair value reporting unit sum identified net assets results residual value goodwill future impairment indicators including declines company’s market capitalization could require additional impairment charges 2007 goodwill increased 339 million primarily due payments 328 million upon resolution acquisition related indemnity issues release amount held escrow funds well distribution escrow account approximately 08 million shares common stock aggregate fair value 148 million connection resolution certain indemnity obligations related past acquisitions additionally goodwill increased 10 million company recorded cumulative effect applying fin 48 2007 2006 goodwill increase 250 million primarily attributable settlements company’s escrow obligations company released escrow accounts 08 million shares common stock total market value 103 million 20 million restricted cash indemnity obligations associated past acquisitions company also distributed 131 million restricted cash escrow obligations associated acquisition redline goodwill increased 2005 4703 million 4699 million goodwill acquired 2005 acquisitions 64 million settlement company’s escrow obligation partially offset decrease 60 million reflect misclassified tax benefits deductions stock options assumed acquisitions purchased intangible assets following table presents details company’s purchased intangible assets definite lives millions amortization expense related finitelived purchased intangible assets 914 million 973 million 852 million 2007 2006 2005 respectively amortization expense purchased intangible assets 859 million 55 million included operating expenses cost product revenue 2007 company impairment charges 2006 company recorded impairment charge 34 million operating expenses due significant decrease forecasted revenues associated session border control “sbc” kagoor’s juniper networks inc notes consolidated financial statements continued standalone products 2005 company recorded impairment charge operating expense 59 million due significant decrease forecasted revenues associated kagoor’s products following table summarizes estimated future amortization expense purchased intangible assets definite lives future fiscal years millions note 4 investments availableforsale investments following summary availableforsale investments fair value december 31 2007 millions juniper networks inc notes consolidated financial statements continued following summary availableforsale investments fair value december 31 2006 millions significant realized gain loss sale availableforsale securities 2007 2006 realized losses sale availableforsale securities 09 million 2005 generated cash proceeds 10291 million 6321 million 8050 million sales maturities availableforsale investments 2007 2006 2005 respectively december 31 2007 company approximately 60 investments unrealized loss position december 31 2006 company approximately 250 investments unrealized loss position gross unrealized losses related investments due changes interest rates contractual terms investments permit issuer settle securities price less amortized cost investment given company ability intent hold investments recovery fair values may maturity company consider investments otherthantemporarily impaired december 31 2007 2006 company reviews investments identify evaluate investments indication possible impairment company aggregated investments category length time securities continuous unrealized loss position juniper networks inc notes consolidated financial statements continued following table shows summary fair value unrealized losses investments december 31 2007 millions government securities included governmental sponsored enterprises aggregate cost 542 million aggregate market value 543 million aggregate unrealized gain 02 million december 31 2007 december 31 2006 government securities included governmental sponsored enterprises aggregate cost 2071 million aggregate market value 2061 million unrealized loss 10 million minority equity investments december 31 2007 2006 carrying values company’s minority equity investments privately held companies 233 million 204 million respectively included longterm assets consolidated balance sheets 2007 2006 2005 company invested total 41 million 73 million 110 million privatelyheld companies respectively 2007 one company’s minority equity investments completed initial public offering “ipo” upon completion ipo company reclassified minority equity investment availableforsale investments realized gain 67 million based upon market value time ipo company’s cost basis 2007 subsequent ipo company’s investment publicly traded entity included availableforsale investments availableforsale investments periodically adjusted fair value comprehensive income realized gains losses declines value judged temporary availableforsale investments included interest income consolidated statement operations 2005 company recognized gain 17 million due business combination one portfolio companies cost basis 10 million wrote 04 million investment one privately held companies company’s minority equity investments privately held companies carried cost company controlling interest ability exercise significant influence companies company adjusts minority equity investments impairment fair value exceeds carrying value respective assets juniper networks inc notes consolidated financial statements continued note 5 restructuring acquisition related reserves restructuring charges restructuring charges based juniper networks’ restructuring plans committed management changes estimates executing approved plans reflected company’s results operations following table shows changes restructuring liabilities 2007 millions 2007 company paid 09 million facility charges associated restructuring plans initiated prior years june 2006 company implemented restructuring plan focused infrastructure segment product development cost reduction efforts discontinuation sbc product line approximately 20 million including 06 million severance charges 33 employees paid 2006 addition payments relating 2006 plan company paid 07 million facility charges associated restructuring plans initiated prior 2006 december 31 2007 2006 restructuring reserve 06 million 15 million respectively related future facility charges amounts related net facility charge included accrued liabilities paid remaining respective lease term july 2008 difference actual future rent payments net present value recorded operating expenses incurred acquisition related restructuring acquisition related reserves pertain restructuring reserves established connection company’s past acquisitions conjunction various acquisitions company accrued acquisition related restructuring charges primarily related severance facility charges december 31 2007 approximately 16 million remained unpaid 06 million recorded longterm liabilities consolidated balance sheet december 31 2006 approximately 36 million remained unpaid 15 million recorded longterm liabilities consolidated balance sheet 2007 company reversed 03 million existing acquisition restructuring reserve primarily facility related charges 2006 company paid 30 million primarily facility related charges addition company reversed existing acquisition restructuring reserve 04 million previously accrued unisphere netscreen facilities 2005 company reversed existing acquisition related restructuring reserves 69 million primarily due changes estimates previous accrual netscreen facility following restructuring charges based juniper networks’ restructuring acquisition related restructuring plans committed management changes estimates executing approved juniper networks inc notes consolidated financial statements continued plans reflected juniper networks’ results operations details company’s restructuring reserve acquisition reserve charges recorded operating expense follows millions note 6 debt senior convertible notes 2003 juniper networks received 3928 million net proceeds offering 4000 million aggregate principal amount zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes senior unsecured obligations rank parity right payment company’s existing future senior unsecured debt rank senior company’s existing future debt expressly provides subordinated notes senior notes convertible shares juniper networks common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances company reclassified senior notes longterm liabilities shortterm liabilities condensed consolidated balance sheet second quarter 2007 senior notes due within next 12 months carrying amounts fair values senior notes millions approximately 04 million company’s senior notes converted common shares 2007 2006 2005 immaterial amount company’s senior notes converted common shares credit facility june 2007 company entered senior secured margin lending agreement thirdparty financial institution maximum credit facility 4000 million 90 fair market value underlying collateral establish flexible draw facility fund additional stock repurchases necessary credit facility bore floating interest rate equal threemonth usd libor plus 40 basis points per annum utilized would secured company’s publicly traded fixed income securities portfolio equivalent 111 outstanding balance credit facility terminated september 26 2007 company utilize credit facility time distributor financing arrangement company recognized sale accounts receivable financing provider according financial accounting standard 140 accounting transfers financial assets extinguishment liabilities replacement fas 125 company introduced distributor financing program 2006 strengthen channel business promoting greater distributor volume improved customer service program intended affect timing revenue recognition company recognizes revenue upon sellthrough financing arrangements proceeds financing provider due company 30 days sale receivable company pays financing provider financing fee based juniper networks inc notes consolidated financial statements continued spread libor sibor transactions major financing provider company surrendered control transferred assets accounts receivable isolated company put beyond reach creditors even event bankruptcy purchaser accounts receivable balances right pledge exchange assets transferred company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant receivable financing arrangements sale receivables company sold net receivables 387 million years ended december 31 2006 1304 million year ended december 31 2007 respectively year ended december 31 2007 december 31 2006 company received cash proceeds net financing fee 954 million 240 million respectively amounts owing financing provider recorded accounts receivable company’s consolidated balance sheets december 31 2007 december 31 2006 404 million 130 million respectively company determined portion receivable financed recognized revenue accounted financing pursuant eitf issue 8818 sales future revenues december 31 2007 december 31 2006 estimated amounts cash received financing provider recognized revenue distributors 100 million december 31 2007 nil december 31 2006 note 7 financial information property equipment property equipment consist following millions depreciation expense 1018 million 762 million 536 million 2007 2006 2005 respectively restricted cash restricted cash december 31 2007 consisted escrow accounts required certain 2005 acquisitions directors officers “do” trust juniper networks established trust secure indemnification obligations certain directors officers arising activities event company provide financially incapable providing indemnification 2007 company distributed 115 million 16 million 46 million restricted cash upon settlement certain escrow obligations associated acquisitions funk acorn kagoor respectively 2007 company also added 89 million insurance trust increase coverage due overall growth company 2006 company reduced restricted cash 59 million deposit requirements standby letters credits issued facility leases removed distributed 131 million 20 million restricted cash upon settlement certain escrow obligations associated redline kagoor juniper networks inc notes consolidated financial statements continued acquisitions respectively 2005 company added 122 million 25 million 135 million 69 million restricted cash escrow accounts established connection acquisitions funk acorn redline kagoor respectively deferred revenue amounts billed excess revenue recognized included deferred revenue accounts receivable accompanying consolidated balance sheets product deferred revenue net related cost revenue includes shipments endusers valueadd resellers distributors breakdown company’s deferred revenue millions warranties changes company’s warranty reserve follows millions comprehensive income activity comprehensive income follows millions net gain investment 67 million realized included operating income 2007 reclassified deducted comprehensive income since gain never included comprehensive income unrealized gain period arose juniper networks inc notes consolidated financial statements continued components accumulated comprehensive gain loss follows millions stockbased compensation stockbased compensation relates following categories period millions charges net charges net recognized consist following millions restructuring acquisition related expenses 07 million 2007 primarily consisted 11 million bonus accrual payable employees past acquisition net 04 million adjustments made restructuring reserves restructuring acquisition related expenses 59 million 2006 primarily consisted 56 million bonus earnout accrual associated funk acorn acquisitions 2006 company also recorded 03 million net restructuring charges acquisition related restructuring charges 65 million credit restructuring expense 2005 primarily consisted 69 million reversal adjustment related restructuring accrual company reoccupied portion former netscreen facility previously included acquisitionrelated reserve 2007 2006 company incurred legal professional fees 60 million 205 million respectively connection stock option investigation charges 2005 addition company recognized stock option amendment tax related charges 80 million 101 million 2007 2006 respectively pertaining amendment stock options settlement juniper networks inc notes consolidated financial statements continued internal revenue service “irs” employment tax assessments primarily related timing tax deposits related employee stock option exercises charges 2005 2007 company recorded 53 million net gain connection cash proceeds totaling 62 million legal settlement net related transaction costs 09 million interest income net interest income net consist following millions prior year information reclassified conform current period presentation note 8 commitments contingencies commitments following table summarizes company’s principal contractual obligations december 31 2007 millions operating leases juniper networks leases facilities operating leases expire various times longest expires 2016 rental expense 2007 2006 2005 approximately 487 million 403 million 364 million respectively future minimum payments noncancellable operating leases net committed sublease income totaled 2213 million december 31 2007 rent related expenses paid related party 62 million 49 million 44 million 2007 2006 2005 respectively senior notes december 31 2007 company’s senior notes carrying value 3995 million senior notes due june 15 2008 company reclassified senior notes longterm liabilities shortterm liabilities condensed consolidated balance sheet second quarter 2007 senior notes due within next 12 months juniper networks inc notes consolidated financial statements continued purchase commitments order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders components based company’s build forecasts december 31 2007 ncnr component orders placed contract manufacturers value 1028 million contract manufacturers use components build products based company’s forecasts purchase orders company received customers generally company components title products transfers contract manufacturers company immediately company’s customers upon delivery designated shipment location components go unused products go unsold specified periods time company may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet company’s forecast customer orders december 31 2007 company accrued 222 million based estimate charges tax liabilities december 31 2007 company 415 million included longterm liabilities consolidated balance sheet unrecognized tax positions time company unable make reasonably reliable estimate timing payments individual years beyond 12 months due uncertainties timing tax audit outcomes contractual obligations contractual obligations consist escrow amount 22 million bonus accrual 07 million connection past acquisitions indemnity obligations expired 2007 software subscription requiring payments 50 million january 2008 january 2009 joint development agreement requiring quarterly payments 35 million january 2010 guarantees company entered agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights thirdparty guarantees indemnification arrangements include guarantees product service performance standby letters credit certain lease facilities company recorded liability related indemnification guarantee provisions guarantees indemnification arrangements significant impact company’s financial position results operations cash flows legal proceedings company subject legal claims litigation arising ordinary course business employment intellectual property claims including matters described outcome matters currently determinable although company expect legal claims litigation ultimately material adverse effect consolidated financial position results operations adverse result one matters could negatively affect company’s results period occur federal derivative lawsuits may 24 2006 august 17 2006 seven purported shareholder derivative actions filed united states district court northern district california us certain current former officers directors lawsuits allege officers directors either participated illegal backdating juniper networks inc notes consolidated financial statements continued stock option grants allowed happen october 19 2006 court ordered consolidation actions juniper derivative actions 0603396 appointed lead plaintiffs timothy hill employerteamsters local nos 175 505 pension trust fund indiana state district council laborers hod carriers pension fund lead plaintiffs filed consolidated complaint april 11 2007 consolidated complaint asserts causes action violations federal securities laws violations california securities laws breaches fiduciary duty aiding abetting breaches fiduciary duty abuse control corporate waste breach contract unjust enrichment gross mismanagement insider selling misappropriation information consolidated complaint also demands accounting rescission allegedly improper stock option grants company formed special litigation committee consisting directors michael rose michael lawrie determine whether best interests juniper networks shareholders pursue claims asserted derivative litigation special litigation committee authorized pursue settle release claims state derivative lawsuits california may 24 2006 june 2 2006 two purported shareholder derivative actions filed santa clara county superior court state california company certain company’s current former officers directors two actions consolidated juniper networks derivative litigation 106cv064294 order dated june 20 2006 amended consolidated complaint filed april 9 2007 amended consolidated complaint alleges certain company’s current former officers directors either participated illegal backdating stock options allowed happen complaint asserts causes action unjust enrichment breach fiduciary duties abuse control gross mismanagement waste corporate assets insider selling misappropriation information violations california securities laws plaintiffs also demand accounting rescission allegedly improper stock options grants constructive trust proceeds derived allegedly illicit stock options company formed special litigation committee consisting directors michael rose michael lawrie determine whether best interests juniper networks shareholders pursue claims asserted derivative litigation special litigation committee authorized pursue settle release claims federal securities class action july 14 2006 august 29 2006 two purported class actions filed northern district california company certain company’s current former officers directors november 20 2006 court consolidated two actions juniper networks inc securities litigation c0604327jw appointed new york city pension funds lead plaintiffs lead plaintiffs filed consolidated class action complaint january 12 2007 filed amended consolidated class action complaint april 9 2007 amended consolidated complaint alleges defendants violated federal securities laws manipulating stock option grant dates coincide low stock prices issuing false misleading statements including among others incorrect financial statements due improper accounting stock option grants amended consolidated complaint asserts claims violations securities act 1933 securities exchange act 1934 behalf persons purchased otherwise acquired juniper networks’ publicly traded securities july 12 2001 including august 10 2006 june 7 2007 defendants filed motion dismiss certain claims hearing held september 10 2007 court yet issued ruling calamore proxy statement action march 28 2007 action titled jeanne calamore v juniper networks inc et al c071772jw filed jeanne calamore northern district california company certain company’s current former officers directors complaint alleges proxy statement company’s 2006 annual meeting stockholders contained various false misleading statements failed juniper networks inc notes consolidated financial statements continued disclose stock option backdating information result plaintiff seeks preliminary permanent injunctive relief respect company’s 2006 equity incentive plan including seeking invalidate plan equity awards granted grantable thereunder may 21 2007 company filed motion dismiss plaintiff filed motion preliminary injunction july 19 2007 court issued order denying plaintiff’s motion preliminary injunction dismissing complaint entirety leave amend plaintiff filed amended complaint august 27 2007 defendants filed motion dismiss october 9 2007 plaintiff filed opposition december 21 2007 defendants filed reply january 25 2008 hearing held february 11 2008 court yet issued ruling settlement securities exchange commission sec august 28 2007 company announced commissioners sec authorized settlement company sec regarding previously disclosed sec inquiry company historical stock option granting practices without admitting denying allegations sec’s complaint company agreed settle charges consenting permanent injunction future violations antifraud reporting booksandrecords internal control provisions federal securities laws sec filed complaint sec v juniper networks inc case c 07 4430jw northern district california august 28 2007 company’s consent entry final judgment also filed august 28 2007 monetary penalties assessed company conjunction settlement concludes sec’s formal investigation company respect company’s historical stock option granting practices court entered final judgment december 7 2007 ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” company certain company’s officers action brought behalf purchasers company’s common stock company’s initial public offering june 1999 company’s secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering company’s subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company june 2004 stipulation settlement release claims issuer defendants including company submitted court approval august 31 2005 court preliminarily approved settlement december 2006 appellate court overturned certification classes six test cases selected underwriter defendants plaintiffs coordinated proceedings class certification condition settlement unlikely settlement would receive final court approval juniper networks inc notes consolidated financial statements continued june 25 2007 court entered order terminating proposed settlement based upon stipulation among parties settlement plaintiffs filed amended master allegations amended complaints six focus cases defendants actions moved dismiss plaintiffs also sought class certification six focus cases defendants actions opposed uncertain whether revised future settlement 16b demand october 3 2007 purported juniper networks shareholder filed complaint violation section 16b securities exchange act 1934 prohibits shortswing trading company’s ipo underwriters complaint vanessa simmonds v goldman sachs group et al case c0701577 district court western district washington seeks recovery shortswing profits company named nominal defendant recovery sought company matter irs notices proposed adjustments irs concluded audit company’s federal income tax returns fiscal years 1999 2000 2004 company received notice proposed adjustment “nopa” irs final resolution issues raised nopa uncertain company believe outcome matter material adverse effect consolidated financial position results operations company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits conjunction irs income tax audit certain company’s us payroll tax returns examined fiscal years 1999 2001 company received second nopa amount 117 million employment tax assessments primarily related timing tax deposits related employee stock option exercises company agreed settle issue irs appeals process approximately 27 million made payment second quarter 2007 irs opened examination company’s us federal income tax employment tax returns 2004 fiscal year subsequently irs extended examination company’s employment tax returns include fiscal years 2005 2006 company received nopas related audits note 9 stockholders’ equity stock repurchase activities july 2004 company’s board directors “the board” authorized stock repurchase program authorized repurchases 2500 million company’s common stock 2006 company repurchased 10071100 common shares average price 1851 per share aggregate fair value 1864 million part stock repurchase program december 31 2006 total 12939700 common shares repurchased retired since inception program equating approximately 2500 million average price 1932 per share purchase price shares company’s stock repurchased program reflected reduction retained earnings july 2006 board approved new stock repurchase program “2006 stock repurchase program” authorizing company repurchase 10 billion juniper networks’ common stock program february 2007 board approved increase 10 billion stock repurchase program coupled prior authorization 10 billion announced july 2006 company authorized repurchase total 20 billion common stock 2006 stock repurchase program purchases 2006 stock repurchase program made time permitted securities laws legal requirements subject review circumstances place time 2007 company repurchased total 69443946 shares common stock via open market purchases average price 2337 per share total juniper networks inc notes consolidated financial statements continued purchase price 16232 million 16227 million reflected increase accumulated deficit remainder decrease additional paidin capital common stock repurchases program recorded based upon settlement date applicable trade accounting purposes common shares repurchased program retired december 31 2007 2006 stock repurchase program remaining authorized funds 3768 million additional purchases stock repurchase program may made time subject review circumstances place time program may discontinued time see note 15 discussion stock repurchase activity 2008 stock option plans amended restated 1996 stock plan company’s amended restated 1996 stock plan “1996 plan” provided granting incentive stock options employees nonstatutory stock options employees directors consultants november 3 2005 board adopted amendment 1996 plan add ability issue rsus 1996 plan rsus represent obligation company issue unrestricted shares common stock grantee extent vesting criteria award satisfied case rsus vesting criteria based time conditions specified board authorized committee board however vesting occurs grantee entitled stockholder rights respect unvested shares company authorized 164623039 shares common stock issuance 1996 plan effective may 18 2006 additional equity awards 1996 plan discontinued new equity awards granted 2006 equity incentive plan “2006 plan” remaining authorized shares 1996 plan subject outstanding awards may 18 2006 canceled may 18 2006 1996 plan remain effect outstanding equity awards granted plan prior may 18 2006 1996 plan incentive stock options permitted granted exercise price less fair market value per share common stock date grant company granted incentive stock options since june 1999 nonstatutory stock options permitted granted exercise price determined board committee authorized board vesting exercise provisions permitted determined board committee authorized board options granted 1996 plan generally become exercisable fouryear period beginning date grant maximum term ten years nonstatutory stock option plan july 2000 board adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provided granting nonstatutory stock options employees directors consultants nonstatutory stock options permitted granted terms plan exercise price determined board committee authorized board vesting exercise provisions permitted determined terms plan board authorized committee board options granted 2000 plan generally become exercisable fouryear period beginning date grant maximum term ten years company authorized 90901437 shares common stock issuance 2000 plan effective may 18 2006 additional equity awards 2000 plan discontinued new equity awards granted 2006 plan remaining authorized shares 2000 plan subject outstanding awards may 18 2006 canceled may 18 2006 2000 plan remain effect outstanding equity awards granted plan prior may 18 2006 equity incentive plan may 18 2006 company’s stockholders adopted 2006 plan enable granting incentive stock options nonstatutory stock options rsus restricted stock appreciation rights performance shares juniper networks inc notes consolidated financial statements continued performance units deferred stock units dividend equivalents employees consultants company 2006 plan also provides automatic nondiscretionary award nonstatutory stock options company’s nonemployee member board “outside directors” maximum aggregate number shares authorized 2006 plan 64500000 shares common stock plus addition shares subject outstanding options 1996 plan 2000 plan subsequently expired unexercised may 18 2006 maximum 75000000 additional shares common stock extent 2006 plan award settled cash rather stock cash payment shall reduce number shares available issuance 2006 plan performance shares restricted stock rsus per share unit purchase price lower 100 market price company’s common stock day grant counted plan share reserve two onetenth shares every one share subject award case restricted stock performance share award entire number shares subject award would counted plan share reserve time grant shares could subject vesting provisions based time conditions specified board authorized committee board company would right repurchase unvested shares subject restricted stock performance share award grantee’s service company terminated prior full vesting award repurchased unvested shares would considered outstanding dividend voting purposes incentive nonstatutory stock options may granted exercise price less fair market value company’s common stock date option granted exercise price incentive stock option granted 10 greater stockholder may less 110 fair market value common stock grant date vesting exercise provisions determined board authorized committee board stock options granted 2006 plan generally vest become exercisable four year period restricted stock performance shares rsus deferred stock units vest solely based continuing employment provision services vest full earlier three year anniversary grant date event vesting based factors continued future provision services awards vest full earlier one year anniversary grant date options granted 2006 plan maximum term seven years grant date incentive stock options granted 10 greater stockholder maximum term five years grant date 2006 plan provides nonemployee director automatic grant option purchase 50000 shares common stock upon date individual first becomes director whether election stockholders company appointment board fill vacancy “first option” addition company’s annual stockholder meetings nonemployee director nonemployee director date prior year’s annual stockholder meeting shall automatically granted option purchase 20000 shares common stock ii nonemployee director nonemployee director date prior year’s annual stockholder meeting shall receive option purchase prorata portion 20000 shares common stock determined time elapsed since individual’s first option grant “the annual option” first option vests monthly approximately three years grant date subject nonemployee director’s continuous service board annual option shall vest monthly approximately one year grant date subject nonemployee director’s continuous service board 2006 plan options granted nonemployee directors maximum term seven years restricted stock appreciation right performance unit deferred stock unit dividend equivalent issued december 31 2007 company issued 213 million 43 million stock options rsus respectively 2006 plan december 31 2007 company issued 66 million 07 million stock options rsus respectively 2006 plan december 31 2006 plans assumed upon acquisition connection past acquisitions company assumed options restricted stock plans acquired companies company exchanged options restricted stock juniper networks’ juniper networks inc notes consolidated financial statements continued options restricted stock case options authorized appropriate number shares common stock issuance pursuant options december 31 2007 approximately 37 million common shares subject outstanding awards plans assumed past acquisitions shares restricted stock subject repurchase december 31 2007 2006 december 31 2006 approximately 88 million shares subject outstanding awards plans assumed acquisitions 2007 repurchases shares restricted common stock 2006 333 shares restricted common stock repurchased average price 035 per share connection employee terminations 2005 6517 shares restricted common stock repurchased average price 033 per share connection employee terminations equity award activity 2007 company granted rsus covering approximately 29 million shares common stock employees 2006 plan 2007 company also granted performance share awards eligible executives covering 07 million shares common stock vest 2010 provided certain annual performance targets vesting criteria met rsus generally vest period three four years date grant vested rsus performance share awards voting rights common stock shares underlying awards considered issued outstanding company expenses cost rsus determined fair market value shares company’s common stock date grant ratably period restrictions lapse addition rsus performance share awards 2007 company also granted employee stock options covering 147 million shares common stock 2006 plan company estimated stock compensation expense performance share awards december 31 2007 based vesting criteria recorded 04 million operating expenses 2007 juniper networks inc notes consolidated financial statements continued equity award activities related information three years ended december 31 2007 summarized follows 1 shares available grant 1996 plan 2000 plan 2006 plan applicable 2 canceled expired options 1996 plan 2000 plan stock plans acquired companies longer available future grant plans except shares subject outstanding options 1996 plan 2000 plan subsequently expired unexercised may 18 2006 maximum 75000000 additional shares common stock become available grant 2006 plan 3 authorized shares subject outstanding awards 1996 plan 2000 plan may 18 2006 discontinued 4 rsus performance share awards per share unit purchase price lower 100 fair market value company’s common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award 5 outstanding options 669 million include rsus performance share awards outstanding december 31 2007 see details “restricted stock units performance share awards activities” juniper networks inc notes consolidated financial statements continued following schedule summarizes information stock options outstanding option plans december 31 2007 december 31 2007 approximately 448 million shares common stock exercisable average exercise price 2001 per share december 31 2006 approximately 632 million shares common stock exercisable average exercise price 1892 per share company’s vested expectedtovest stock options exercisable stock options december 31 2007 summarized aggregate intrinsic value represents difference company’s closing stock price last trading day fiscal period 3320 december 31 2007 exercise price multiplied number related options intrinsic value options exercised 2917 million 1078 million 2401 million 2007 2006 2005 respectively intrinsic value represents difference fair market value company’s common stock date exercise price option total fair value options vested 2007 788 million december 31 2007 approximately 1614 million total unrecognized compensation cost related stock options expected recognized weightedaverage period 29 years approximately 440 million total unrecognized compensation cost estimated forfeited prior vesting awards excluded preceding cost juniper networks inc notes consolidated financial statements continued restricted stock units performance share awards activities following schedule summarizes information company’s rsus performance share awards three years ended december 31 2007 weightedaverage grant date fair value rsus granted 2007 2006 2005 2539 1845 2190 per share respectively december 31 2007 approximately 1036 million total unrecognized compensation cost related rsus performance share awards expected recognized weightedaverage period 25 years approximately 313 million total unrecognized compensation cost estimated forfeited prior vesting awards excluded preceding cost company’s vested expectedtovest outstanding rsus performance share awards december 31 2007 summarized immaterial number outstanding rsus vested 2007 juniper networks inc notes consolidated financial statements continued extension stock option exercise periods former employees company could issue securities registration statements form s8 period current sec reporting obligations file periodic reports securities exchange act 1934 result parts 2006 2007 options vested held certain former employees company could exercised completion company’s stock option investigation company’s public filings obligations met “trading blackout period” company extended expiration date stock options april 7 2007 end 30 day period subsequent company’s filing required regulatory reports result extensions fair values stock options reclassified current liabilities subsequent modification subject marktomarket provisions end reporting period earlier final settlement april 7 2007 stock options covering approximately 660000 shares common stock scheduled expire could exercised result trading blackout period restriction first quarter 2007 company measured fair value stock options using blackscholesmerton option valuation model recorded expense approximately 43 million first quarter 2007 addition company recorded expense 44 million first quarter 2007 associated approximately 1446000 shares covered options exercise periods extended 2006 result trading blackout period restriction december 31 2007 extended stock options either exercised expired unexercised previously recorded liabilities associated extensions reclassified additional paidin capital second quarter 2007 amendment certain stock options 2007 company completed tender offer amend certain options granted 1996 plan 2000 plan original exercise prices per share less fair market value per share common stock underlying option’s grant date determined company financial accounting purposes tender offer employees subject taxation united states canada opportunity increase strike price affected options appropriate fair market value per share date grant avoid unfavorable tax consequences united states internal revenue code section 409a “409a issue” canadian tax laws regulations exchange increasing strike price options company committed make cash payment employees participating offer make employees whole incremental strike price compared original option exercise price connection offer company amended options purchase 43 million shares common stock committed make aggregate cash payments 76 million offer participants recorded amount operating expense 2007 addition company entered separate agreement two executives 2007 amend unexercised stock options covering 01 million shares company’s common stock order cure 409a issue associated stock options result company committed make aggregate cash payments 04 million recorded payment liability operating expense 2007 acceleration unvested “outofthemoney” employee stock options december 16 2005 board approved acceleration vesting certain unvested “outofthemoney” stock options exercise price per share equal greater 2200 previously granted stock option plans outstanding december 16 2005 options purchase approximately 212 million shares common stock 493 total outstanding unvested options december 16 2005 accelerated options accelerated excluded options previously granted certain employees including company’s executive officers directors addition acceleration unvested “outofthemoney” options accompanied restrictions imposed shares purchased exercise accelerated options restrictions prevent sale shares prior date shares would originally vested optionee employed date whether optionee actually employee time juniper networks inc notes consolidated financial statements continued purpose acceleration enable company avoid recognizing compensation expense associated options future periods statements operations pursuant fas 123r fas 123r company applied expense recognition provisions relating stock options beginning first quarter fiscal 2006 approving acceleration company’s board considered impact future financial results stockholder value employee retention board believes acceleration unvested “outofthemoney” options best interest stockholders reduce company’s reported compensation expense future periods light accounting regulations result acceleration company expected reduce pretax stock option expense otherwise would required record approximately 1530 million estimated time acceleration subsequent adoption fas 123r beginning 2006 acceleration vesting options result charge results operations 2005 employee stock purchase plan april 1999 board approved adoption juniper networks 1999 employee stock purchase plan “purchase plan” purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year purchase plan implemented series offering periods six months duration shorter period determined board price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day applicable offering period january 2007 board approved delay start next offering period february 1 2007 april 1 2007 offering period ended july 31 2007 compensation expense 76 million recorded 2007 stock costs associated purchase plan 2006 compensation expense related common stock issued purchase plan 66 million compensation expense purchase plan 2005 periods required footnote disclosure prior adoption fas 123r result company’s failure file quarterly reports form 10q second third quarters 2006 company suspended employee payroll withholdings purchase common stock purchase plan august 2006 march 2007 employees purchased approximately 06 million 17 million 09 million shares common stock purchase plan average exercise price 1708 1306 1996 per share fiscal years 2007 2006 2005 respectively 2006 number authorized shares purchase plan increased 3000000 shares december 31 2007 approximately 71 million shares issued 109 million shares remained available future issuance purchase plan december 31 2006 approximately 65 million shares issued 85 million shares remained available future issuance purchase plan common stock reserved future issuance december 31 2007 juniper networks reserved aggregate approximately 1500 million shares common stock future issuance stock option plans 1999 employee stock purchase plan future issuance upon conversion convertible senior notes juniper networks inc notes consolidated financial statements continued stockbased compensation valuation stockbased compensation fas 123r requires use valuation technique optionpricing model calculate fair value stockbased awards company elected use blackscholesmerton optionpricing model incorporates various assumptions including volatility expected life riskfree interest rates expected volatility based implied volatility market traded options company’s common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time 2006 company began granting stock option awards contractual life seven years date grant prior 2006 stock option awards generally ten year contractual life date grant result expected term assumption used year ended december 31 2007 reflects shorter contractual life new option awards granted period assumptions used resulting estimates weightedaverage fair value per share options granted employee stock purchases espp periods summarized follows anticipation adopting fas 123r company refined variables used blackscholesmerton model 2005 result company refined methodology estimating expected term representative future exercise patterns company also refined computation expected volatility considering volatility publicly traded options purchase common stock historical stock volatility weighted average estimated fair value employee stock options granted 2007 2006 2005 803 609 923 per option respectively weighted average estimated fair value shares granted employee stock purchase plan 2007 2006 2005 652 519 636 per share respectively convertible preferred stock 10000000 shares convertible preferred stock par value 000001 per share authorized issuance preferred stock issued outstanding december 31 2007 2006 note 10 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirement defined may contribute juniper networks inc notes consolidated financial statements continued statutory limits year company matched employee contributions since january 1 2001 effective january 1 2005 company increased match 50 100 eligible pay annual maximum 2000 effective january 1 2007 company matches 25 employee contributions matching contributions vest immediately company’s matching contributions plan totaled 95 million 58 million 51 million 2007 2006 2005 respectively note 11 segment information company’s chief operating decision maker “codm” senior management team together “management” allocate resources assess performance based financial information company’s business groups categorized following three reportable segments infrastructure slt service arrangements infrastructure slt products revenue attributed segment based underlying purchase order contract sellthrough report infrastructure segment includes products e mxseries router product families well circuittopacket products slt segment consists primarily firewall virtual private network “firewall” systems appliances secure sockets layer virtual private network “ssl” appliances intrusion detection prevention appliances “idp” application front end platforms jseries router product family wide area network “wan” optimization platforms service segment delivers worldwide services customers infrastructure slt segments primary financial measure used management assessing performance allocating resources segments management operating income includes certain cost revenues research development expenses sales marketing expenses general administrative expenses direct costs operating expenses standard costs research development product marketing expenses generally applied segment indirect costs manufacturing overhead cost sales allocated based standard costs indirect operating expenses sales marketing business development general administrative expenses generally allocated segment based factors including headcount revenue codm allocate stockbased compensation amortization impairment gain loss minority equity investments interest income expense income expense income taxes well certain charges segments management’s organizational alignment initiatives everevolving business environment changes products markets acquisitions longterm growth strategies experience responsibilities senior executives charge company may reorganize segments consistent corresponding changes organizational structure 2008 juniper networks inc notes consolidated financial statements continued financial information segment used management make financial decisions allocate resources summarized follows millions 1 prior period amounts reclassified exclude stockbased compensation related payroll tax expense order conform current year presentation 2 amount includes amortization expense purchased intangible assets operating expenses costs revenues 3 expense 2007 includes charges restructuring acquisition related charges stock option investigation costs well stock amendment tax related charges expense 2006 includes charges restructuring acquisition related charges stock option investigation costs tax related charges well certain restructuring costs included cost revenues expense 2005 includes charges restructuring acquisition related charges patent related charges nokiasiemens networks bv “nsn” predecessor companies accounted 128 143 137 company’s net revenues 2007 2006 2005 respectively revenue attributed significant customer derived sale products services three operating segments juniper networks inc notes consolidated financial statements continued company attributes sales geographic region based customer’s shipto location following table shows net revenue geographic region millions prior year information reclassified conform current year presentation company tracks assets physical location majority company’s assets including property equipment december 31 2007 2006 attributable us operations although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 12 net income per share basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding period diluted net income per share computed giving effect dilutive potential shares outstanding period dilutive potential common shares consist incremental common shares subject repurchase common shares issuable upon exercise stock options shares issuable upon conversion subordinated notes following table presents calculation basic diluted net income loss per share millions except per share data juniper networks inc notes consolidated financial statements continued 2006 company excluded 346 million common stock equivalents consisting convertible debt outstanding stock options rsus shares subject repurchase calculation diluted loss per share securities antidilutive due net loss year years ended 2007 2006 2005 approximately 115 million 511 million 288 million common stock equivalents included computation diluted earnings per share effect would antidilutive note 13 income taxes components loss income provision income taxes summarized follows millions provision income taxes summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes differs amount computed applying federal statutory rate income loss provision income taxes follows millions deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components deferred tax assets liabilities follows millions december 31 2007 2006 company valuation allowance us domestic deferred tax assets approximately 343 million 387 million respectively relates capital losses carry forward offset future capital gains valuation allowance decreased 44 million 19 million years ended december 31 2007 2006 respectively 2007 reduction attributable primarily reversal investment losses previously juniper networks inc notes consolidated financial statements continued disallowed income tax purposes marktomarket company’s investments 2006 reduction attributable use capital losses carryovers december 31 2007 company federal california net operating loss carryforwards 287 million 85 million respectively company also federal california tax credit carryforwards approximately 143 million 840 million respectively approximately 143 million federal tax credit carryforwards 108 million california tax credit carryforwards credited additional paid capital utilized company’s income tax returns since met realization criteria fas 123r unused net operating loss carryforwards research development tax credit carryforwards expire various dates beginning years 2012 2022 respectively california tax credits carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries’ earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 4369 million cumulative undistributed earnings certain foreign subsidiaries december 31 2007 company’s intention permanently reinvest earnings distributed company would accrue additional income taxes expense approximately 1309 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations company adopted provisions fin 48 january 1 2007 first day fiscal 2007 cumulative effect applying fin 48 192 million increase opening balance accumulated deficit january 1 2007 10 million increase goodwill december 31 2007 total amount gross unrecognized tax benefits 947 million approximately 793 million recognized would affect effective tax rate following rollforward company’s total gross unrecognized tax benefit liabilities fiscal 2007 millions accordance company’s accounting policy recognizes accrued interest penalties related unrecognized tax benefits component tax expense consolidated statement operations policy change result adoption fin 48 date adoption company accrued interest expense penalties related unrecognized tax benefits 41 million december 31 2007 company accrued interest expense penalties related unrecognized tax benefits 59 million within longterm liabilities consolidated balance sheets company recorded net interest expense 17 million consolidated income statements 2007 reasonably possible amount liability unrecognized tax benefits may change within next 12 months due audit examinations however estimate range possible change cannot made time due high uncertainty resolution andor closure open audits juniper networks inc notes consolidated financial statements continued company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia us exceptions company longer subject us federal state local nonus income tax examinations years 2003 although carryforward attributes generated prior 2003 may still adjusted upon examination irs attributes either used future period company currently examination irs 2004 tax year german tax authorities 2005 tax year additionally company reached final resolution irs adjustment proposed 1999 2000 tax years company examination major jurisdictions company files income tax returns december 31 2007 possible amount liability unrecognized tax benefits may change within next 12 months however estimate range possible change cannot made time provided uncertain tax positions require fin 48 liability american jobs creation act 2004 repatriation foreign earnings 2005 company’s chief executive officer board directors approved repatriated 2250 million foreign earnings domestic reinvestment plan accordance american jobs creation act 2004 “jobs act” company recorded net tax benefit 2005 197 million related repatriation dividend net tax benefit consists federal state tax provision net federal benefit 97 million offset tax benefit 294 million related adjustment deferred tax liabilities unrepatriated earnings juniper networks inc notes consolidated financial statements continued note 14 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter last two years millions except per share amounts juniper networks inc notes consolidated financial statements continued note 15 subsequent events stock repurchases february 2008 company repurchased 22 million shares common stock 531 million average purchase price 2461 per share 2006 stock repurchase program report filing date company’s 2006 stock repurchase program remaining authorized funds 3238 million purchases plan subject review circumstances place time acquisitions share repurchase program may made time permitted securities laws legal requirements program may discontinued time phase dx products january 2008 company announced plan phase dx product line action material impact company’s consolidated results operations cash flows financial condition year ended december 31 2007 item 9item 8 financial statements supplementary data index consolidated financial statements years ended december 31 2008 2007 2006 report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2008 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2008 2007 consolidated results operations cash flows three years period ended december 31 2008 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein discussed note 1 consolidated financial statements juniper networks inc changed method accounting uncertain tax positions january 1 2007 also audited accordance standards public company accounting oversight board united states juniper networks inc’s internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated march 2 2009 expressed unqualified opinion thereon ernst young llp san jose california march 2 2009 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper network inc’s internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states accompanying consolidated balance sheets december 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2008 juniper networks inc report dated march 2 2009 expressed unqualified opinion thereon ernst young llp san jose california march 2 2009 management’s report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation company’s financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness company’s internal control financial reporting december 31 2008 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework based assessment management concluded december 31 2008 company’s internal control financial reporting effective effectiveness company’s internal control financial reporting december 31 2008 audited ernst young llp independent registered public accounting firm audits company’s consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness company’s internal control financial reporting december 31 2008 juniper networks inc consolidated statements operations see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 summary significant accounting policies description business juniper networks inc “juniper networks” “company” designs develops sells products services together provide customers highperformance network infrastructure creates responsive trusted environments accelerating deployment services applications single internet protocol “ip”based network beginning first quarter 2008 company realigned business groups resulted following two segments infrastructure slt company’s infrastructure segment primarily offers scalable router ethernet switching products used control direct network traffic company’s slt segment offers networking solutions meet broad array customers’ priorities securing network data network maximizing existing bandwidth acceleration applications across distributed network segments offer worldwide services including technical support professional services well educational training programs customers basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles intercompany balances transactions eliminated use estimates preparation financial statements related disclosures requires management make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes estimates used revenue recognition allowance sales returns allowance doubtful accounts allowance contract manufacturer obligations allowance warranty costs stockbased compensation goodwill impairments income taxes litigation settlement costs loss contingencies company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources actual results experienced company may differ materially management’s estimates cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date company’s investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income loss realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company recognizes impairment charge availableforsale investments decline fair value investments cost basis determined temporary company considers various factors determining whether recognize impairment charge including length time juniper networks inc notes consolidated financial statements continued investment loss position extent fair value less company’s cost basis investment’s financial condition nearterm prospects investee company determines decline investment’s fair value temporary difference recognized impairment loss consolidated statements operations company’s nonqualified compensation plan invests mutual funds classified trading securities reported fair value realized unrealized holding gains losses well offsetting compensation expense reported consolidated statements operations privatelyheld equity investments company minority equity investments privatelyheld companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment company markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary fair value measurement company records financial instruments accounted statement financial accounting standards “sfas” 115 accounting certain investments debt equity securities “sfas 115” derivative contracts fair value determination fair value based upon fair value framework established sfas 157 fair value measurements “sfas 157” sfas 157 provides fair value measurement assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability carrying value company’s financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments determined using quoted market prices securities similar financial instruments concentrations financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities money market funds highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable company maintains reserves potential bad debt historically losses within management’s expectations single customer accounted 10 company’s total net revenues 2008 one customer accounted 128 143 total net revenues 2007 2006 respectively company relies sole suppliers certain components asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results juniper networks inc notes consolidated financial statements continued property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally one half five years lease term respective assets company depreciates leasehold improvements lesser expected life lease assets maximum ten years land subject depreciation goodwill purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trademarks developed technologies customer relationships maintenance contracts intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based tests future goodwill impairment tests could result charge earnings purchased intangible assets finite lives amortized straightline basis respective estimated useful lives ranging two nineteen years impairment company evaluates longlived assets held use impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized amount carrying amount asset exceeds fair value company assesses recoverability longlived intangible assets determining whether unamortized balances greater sum undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows company evaluates goodwill minimum annual basis whenever events changes circumstances indicate carrying amount asset may recoverable impairment goodwill tested reporting unit level comparing reporting unit’s carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income approach market approach carrying value reporting unit exceeds fair value goodwill considered impaired second step performed measure amount impairment loss discussed note 5 second quarter 2006 company concluded carrying value goodwill impaired recorded impairment charge period company conducted annual impairment test november 1 2008 2007 2006 determined carrying value remaining goodwill impaired future impairment indicators including sustained declines company’s market capitalization decrease revenue profitability levels could require additional impairment charges recorded revenue recognition juniper networks sells products services direct sales force strategic distribution relationships valueadded resellers company’s products integrated software essential functionality equipment company also provides unspecified upgrades enhancements related integrated software maintenance contracts products accordingly company accounts revenue accordance statement position 972 software revenue recognition related interpretations company recognizes revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectability reasonably assured evidence arrangement generally consists sales contracts agreements customer purchase orders shipping terms related documents written evidence customer acceptance applicable used juniper networks inc notes consolidated financial statements continued verify delivery performance instances company outstanding obligations related product delivery final acceptance product revenue deferred delivery acceptance criteria met company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment collectability assessed based creditworthiness customer determined credit checks customer’s payment history company accounts receivable recorded net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements sales products include services company allocates revenue element using residual method based vsoe fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe fair value based price charged element sold separately vsoe fair value one undelivered items exist revenue deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period company accounts multiple agreements single customer one arrangement contractual terms andor substance agreements indicate may closely related effect parts single arrangement sales direct endusers valueadded resellers company recognizes product revenues upon transfer title risk loss generally upon shipment company’s practice identify enduser prior shipment valueadded reseller endusers valueadded resellers company significant obligations future performance rights return pricing credits portion company’s sales made distributors agreements allowing pricing credits rights return product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenues company sells certain interests accounts receivable nonrecourse basis part distributor accounts receivable financing arrangement primarily one major financing company recognizes sale accounts receivable financing provider according sfas 140 accounting transfers financial assets extinguishment liabilities replacement fas 125 company records cash received arrangement advance revenue recognition shortterm debt balance 330 million 100 million december 31 2008 2007 respectively company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time addition company reports revenues net sales taxes shipping charges billed customers included product revenues related shipping costs included cost product revenues costs associated cooperative advertising programs estimated recorded reduction revenues time related sales recognized services include maintenance training professional services addition providing unspecified upgrades enhancements available basis company’s maintenance contracts include 24hour technical support well hardware repair replacement parts maintenance offered renewable contracts revenue maintenance contracts deferred generally recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less juniper networks inc notes consolidated financial statements continued allowance doubtful accounts allowance doubtful accounts based company’s assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance potential writeoffs considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customer’s ability pay warranties juniper networks generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty generally includes parts labor obtained company’s 24hour service center occasion specific terms conditions warranties vary company accrues warranty costs part cost revenues based associated material costs labor costs customer support overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period factors affect company’s warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimated support labor costs associated overhead company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary contract manufacturer liabilities inventories company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture company’s products based company’s demand forecasts based company’s estimates future demand company products turn based historical trends analysis company’s sales marketing organizations adjusted overall market conditions company establishes accrued liabilities included current accrued liabilities consolidated balance sheets carrying costs obsolete material exposures excess components purchased based historical trends addition company purchases small amount strategic component inventory included assets stated lower cost market costs associated products shipped distributors yet recognized revenue recorded net related deferred product revenue service related spares demonstration equipment expensed costs service revenue sales marketing expense respectively purchased research development costs research design develop company’s products expensed incurred software development costs capitalized beginning product’s technological feasibility established ending product available general release customers generally company’s products released soon technological feasibility established result costs subsequent achieving technological feasibility significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 50 million 48 million 68 million 2008 2007 2006 respectively juniper networks inc notes consolidated financial statements continued loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available management determine whether accruals adjusted whether new accruals required time company involved disputes litigation legal actions company records charge equal least minimum estimated liability loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated actual liability matters may materially different company’s estimates could result need adjust liability record additional expenses stockbased compensation company accounts stockbased compensation accordance sfas 123r requires measurement recognition compensation expense stockbased awards made employees directors including employee stock options restricted stock units “rsus” performance share awards employee stock purchases company’s employee stock purchase plan based estimated fair values sfas 123r requires companies estimate fair value stockbased awards date grant using option pricing model company uses blackscholesmerton option pricing model incorporates monte carlo simulation appropriate determine fair value stockbased awards sfas 123r value portion award ultimately expected vest recognized expense requisite service periods company’s consolidated statements operations years ended december 31 2008 2007 2006 stockbased compensation expense recognized company’s consolidated statements operations years ended december 31 2008 2007 2006 included compensation expense stockbased awards granted prior yet vested december 31 2005 based grantdate fair value estimated accordance provisions sfas 123 ii compensation expense stockbased awards granted subsequent december 31 2005 based grantdate fair value estimated accordance provisions sfas 123r compensation expense expectedtovest stockbased awards granted prior december 31 2005 valued multipleoption approach continue amortized using accelerated attribution method subsequent december 31 2005 compensation expense expectedtovest stockbased awards valued singleoption approach amortized straightline basis net estimated forfeitures derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded interest income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities one two months juniper networks inc notes consolidated financial statements continued company also uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified operating expense line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2008 2007 2006 interest income net consolidated statements operations cash flows hedges classified operating activities provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 extent company believes amounts likely realized company records valuation allowance reduce deferred tax assets company believes likely future income reversal deferred tax liabilities forecasted income sufficient fully recover remaining deferred tax assets event company determines part net deferred tax assets realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due january 1 2007 company adopted financial accounting standards board “fasb” financial interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” change accounting income taxes fin 48 contains twostep approach recognizing measuring uncertain tax positions accounted accordance sfas 109 seeks reduce diversity practice associated certain aspects measurement recognition accounting income taxes first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement additionally fin 48 provides guidance derecognition classification interest penalties accounting interim periods disclosures transition application fin 48 may increase entity’s future effective tax rates future intraperiod effective tax rate volatility january 1 2007 company’s cumulative effect applying fin 48 192 million increase opening balance accumulated deficit 10 million increase goodwill comprehensive income comprehensive income defined change equity period transactions events circumstances nonowner sources company presented comprehensive income part consolidated statements stockholders’ equity comprehensive income includes net unrealized gains losses availableforsale securities net foreign currency translation gains losses excluded net income unrealized gains losses derivatives designated cash flow hedges juniper networks inc notes consolidated financial statements continued foreign currency translation assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using weightedaverage exchange rates period foreign currency translation gains losses material years ended december 31 2008 2007 2006 effect exchange rate changes cash balances held foreign currencies immaterial years presented recent accounting pronouncements december 2008 fasb issued fasb staff position “fsp” fas 1404 fasb interpretation “fin” 46r8 disclosures public entities enterprises transfers financial assets interests variable interest entities “fsp 1404 fin 46r8” amends sfas 140 accounting transfers servicing financial assets extinguishments liabilities “sfas 140” require public entities provide additional disclosures transfers financial assets also amends fin 46 revised december 2003 consolidation variable interest entities “fin 46r” require public enterprises including sponsors variable interest variable interest entity provide additional disclosures involvement variable interest entities provisions fsp amend sfas 140 fin 46r8 effective first reporting period ended december 15 2008 implementation standard impact company’s consolidated results operations financial condition october 2008 fasb issued fsp 1573 determining fair value financial asset market active “fsp 1573” fsp 1573 clarifies application sfas 157 fair value measurements inactive market demonstrates fair value financial asset determined market financial asset inactive fsp 1573 effective upon issuance including prior periods financial statements issued implementation standard impact company’s consolidated results operations financial condition september 2008 fasb issued fsp fas 1331 fin 454 disclosures credit derivatives certain guarantees amendment fasb statement 133 fasb interpretation 45 clarification effective date fasb statement 161 “fsp fas 1331 fin 454” fsp fas 1331 fin 454 amends statement financial accounting standards 133 accounting derivative instruments hedging activities “sfas 133” require disclosures sellers credit derivatives including credit derivatives embedded hybrid instruments fsp fas 1331 fin 454 also amend fin 45 guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others “fin 45” require additional disclosure current status paymentperformance risk guarantee provisions fsp amend sfas 133 fin 45 effective reporting periods ending november 15 2008 fsp fas 1331 fin 454 also clarifies effective date sfas 161 disclosures derivative instruments hedging activities “sfas 161” disclosures required sfas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 company expect adoption fsp fas 1331 fin 454 january 1 2009 impact consolidated results operations financial condition may 2008 fasb issued fsp accounting principles board “apb” 141 accounting convertible debt instruments may settled cash upon conversion including partial cash settlement “fsp apb 141” fsp apb 141 requires issuer certain convertible debt instruments may settled cash assets conversion separately account liability debt equity conversion option components instrument manner reflects issuer’s nonconvertible debt borrowing rate fsp apb 141 must applied retrospectively previously issued convertible instruments may settled cash partial cash well prospectively newly issued instruments fsp apb 141 effective fiscal years beginning december 15 2008 interim periods within fiscal years company evaluated requirements fsp apb 141 determined company’s retired convertible debt subject requirements fsp apb 141 juniper networks inc notes consolidated financial statements continued company expect adoption fsp apb 141 january 1 2009 impact consolidated results operations financial condition may 2008 fasb issued sfas 162 hierarchy generally accepted accounting principles “sfas 162” sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity generally accepted accounting principles gaap hierarchy sfas 162 effective financial statements issued fiscal years interim periods beginning november 15 2008 company expect adoption sfas 162 january 1 2009 impact consolidated results operations financial condition april 2008 fasb issued fsp fas 1423 determination useful life intangible assets “fsp fas 1423” fsp fas 1423 amends factors considered developing renewal extension assumptions used determining useful life recognized intangible asset statement financial accounting standards 142 goodwill intangible assets new guidance applies prospectively intangible assets acquired individually group assets business combinations asset acquisitions fsp fas 1423 effective fiscal years beginning december 15 2008 early adoption prohibited impact fsp fas 1423 depend upon nature terms size acquisitions company consummates effective date march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities amendment fasb statement 133 “sfas 161” sfas 161 enhances required disclosures regarding derivatives hedging activities including enhanced disclosures regarding entity uses derivative instruments b derivative instruments related hedged items accounted sfas 133 c derivative instruments related hedged items affect entity’s financial position financial performance cash flows sfas 161 effective fiscal years beginning november 15 2008 company expect adoption sfas 161 january 1 2009 impact consolidated results operations financial condition february 2008 fasb issued fsp fas 1572 effective date sfas 157 “fsp fas 1572” fsp fas 1572 delays effective date sfas 157 nonfinancial assets nonfinancial liabilities except items recognized disclosed fair value financial statements recurring basis fiscal years beginning november 15 2008 interim periods within fiscal years company expect adoption sfas 157 nonfinancial assets liabilities january 1 2009 impact consolidated results operations financial condition december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statements amendment accounting research bulletin 51 “sfas 160” sfas 160 addresses accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 adoption sfas 160 january 1 2009 material effect company’s consolidated results operations financial condition december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer business recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree statement also provides guidance recognizing measuring goodwill acquired business combination determines information disclose enable users financial statement evaluate nature financial effects business combination sfas 141r effective financial juniper networks inc notes consolidated financial statements continued statements issued fiscal years beginning december 15 2008 earlier application sfas 141r prohibited accordingly business combinations company may engage recorded disclosed following existing gaap january 1 2009 impact sfas 141r depend upon nature terms size acquisitions company consummates effective date reclassifications 2008 company realigned organizational structure include service business component related infrastructure slt business groups prior year amounts reclassified reflect 2008 segment structure includes service revenues operating results infrastructure slt segments accordingly company revised presentation segment information years ended december 31 2007 2006 note 11 segment information none changes impacts company’s previously reported consolidated financial condition results operations cash flows note 2 net income loss per share basic net income loss per share computed dividing income loss available common stockholders weighted average number common shares outstanding period diluted net income per share computed giving effect dilutive potential shares outstanding period dilutive potential common shares consist shares issuable upon conversion senior notes common shares issuable upon exercise stock options vesting restricted stock units following table presents calculation basic diluted net income loss per share millions except per share data company excludes stock options exercise prices greater average market price calculation diluted net income per share effect would antidilutive years ended december 31 2008 2007 approximately 330 million 115 million common stock equivalents respectively excluded computation diluted net income per share effect would antidilutive result net loss year ended december 31 2006 dilutive potential common shares excluded computation diluted net loss per share effect would antidilutive juniper networks inc notes consolidated financial statements continued note 3 cash equivalents investments cash equivalents investments consist following millions juniper networks inc notes consolidated financial statements continued summary investments following table summarizes unrealized gains losses related investments designated availableforsale december 31 2008 millions following table summarizes unrealized gains losses related investments designated availableforsale december 31 2007 millions juniper networks inc notes consolidated financial statements continued 2008 company realized impairment charge 35 million publiclytraded equity security due sustained decline fair value investment cost basis company judged temporary significant realized gain loss sale availableforsale securities 2008 2007 2006 company generated cash proceeds 4994 million 10291 million 6321 million maturities sales availableforsale investments 2008 2007 2006 respectively december 31 2008 company approximately 26 investments unrealized loss position december 31 2007 company approximately 46 investments unrealized loss position gross unrealized losses related investments due changes interest rates contractual terms investments permit issuer settle securities price less amortized cost investment given company ability intent hold investments recovery fair values may maturity company consider investments otherthantemporarily impaired december 31 2008 2007 company reviews investments identify evaluate investments indication possible impairment company aggregated investments category length time securities continuous unrealized loss position following table shows summary fair value unrealized losses company’s investments december 31 2008 millions minority equity investments december 31 2008 2007 carrying values company’s minority equity investments privatelyheld companies 142 million 233 million respectively included longterm assets consolidated balance sheets 2008 2007 2006 company invested total 46 million 41 million 73 million respectively privatelyheld companies company’s minority equity investments privatelyheld companies carried cost company controlling interest ability exercise significant influence companies company adjusts minority equity investments impairment fair value exceeds carrying value respective assets juniper networks inc notes consolidated financial statements continued 2008 company recognized losses 113 million due impairment minority equity investments privatelyheld companies company judged temporary addition company minority equity investment 24 million privatelyheld company acquired third party company received payment 21 million december 31 2008 anticipates receipt remaining 03 million 2009 2007 one company’s minority equity investments completed initial public offering “ipo” upon completion ipo company reclassified minority equity investment availableforsale investments realized gain 67 million based upon market value time ipo company’s cost basis 2007 subsequent ipo company’s investment publiclytraded entity included availableforsale investments note 4 fair value measurements sfas 157 defines fair value price would received sell asset paid transfer liability orderly transaction market participants measurement date sfas 157 assumes transaction sell asset transfer liability occurs principal advantageous market asset liability establishes fair value asset liability shall determined based assumptions market participants would use pricing asset liability fair value hierarchy company determines fair values financial instruments based fair value hierarchy established sfas 157 requires entity maximize use observable inputs minimize use unobservable inputs measuring fair value financial asset liability’s classification within hierarchy based upon lowest level input significant fair value measurement fair value hierarchy prioritizes inputs three broad levels level 1 inputs unadjusted quoted prices active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions juniper networks inc notes consolidated financial statements continued assets liabilities measured fair value recurring basis following table provides assets carried fair value measured recurring basis december 31 2008 millions assets measured fair value recurring basis presented company’s consolidated balance sheet december 31 2008 follows longterm debt reported amortized cost accordance sfas 107 disclosures fair value financial instruments fair value longterm debt based quoted market prices level 1 6592 million december 31 2007 december 31 2008 company’s senior convertible notes settled cash converted shares company’s common stock see note 8 debt note 5 goodwill purchased intangible assets goodwill first quarter 2008 company realigned organizational structure eliminate service segment include service business related infrastructure slt segments result company assistance external service provider reallocated goodwill former service segment infrastructure slt segments based relative fair value approach fair value based comparative juniper networks inc notes consolidated financial statements continued market values discounted cash flows indication impairment goodwill reallocated new reporting segments changes carrying amount goodwill three years ended december 31 2008 follows millions 2008 additions goodwill 2007 goodwill increased 339 million primarily due payments escrow accounts 328 million upon resolution acquisitionrelated indemnity issues well distribution escrow account approximately 08 million shares common stock aggregate fair value 148 million additionally goodwill increased 10 million company recorded cumulative effect applying fin 48 2007 2006 goodwill increase 250 million primarily attributable settlements company’s escrow obligations company released escrow accounts 08 million shares common stock total market value 103 million 20 million restricted cash indemnity obligations associated past acquisitions company also distributed 131 million restricted cash escrow obligations associated acquisition redline company performed goodwill impairment review november 1 2008 2007 2006 concluded impairment 2008 2007 2006 company concluded carrying value goodwill slt segment impaired recorded impairment charge 12800 million included operating expenses significant portion goodwill initially recorded based stock prices time related merger agreements executed announced impairment goodwill 2006 primarily attributable decline company’s market capitalization occurred period approximately six months prior impairment review may 31 2006 lesser extent decrease forecasted future cash flows used income approach juniper networks inc notes consolidated financial statements continued first step 2006 impairment review compare fair value reporting unit carrying value including goodwill related respective reporting units performing 2006 goodwill impairment review company determined four reporting units time impairment calculation consisting infrastructure service respective segments well security application acceleration two components slt segment company assistance external service provider calculated fair value reporting units using combination income market approaches income approach requires estimates expected revenue gross margin operating expenses order discount sum future cash flows using particular business’ weighted average cost capital company’s growth estimates based historical data internal estimates developed part longterm planning process company tested reasonableness inputs outcomes discounted cash flow analysis comparing available market data determining carrying value reporting unit company allocated fair values shared tangible net assets reporting unit based revenue derived reporting unit fair values security application acceleration reporting units lower allocated book values goodwill considered impaired result company performed step two goodwill impairment calculation two reporting units within slt segment order calculate extent goodwill impairment second step 2006 goodwill impairment review management calculated fair value company’s tangible intangible net assets assistance external service provider identified intangible assets valued specifically reporting unit tested difference calculated fair value reporting unit sum identified net assets results residual value goodwill future impairment indicators including sustained declines company’s market capitalization could require additional impairment charges purchased intangible assets following table presents details company’s purchased intangible assets definite lives millions amortization expense related definitelived purchased intangible assets 440 million 914 million 973 million 2008 2007 2006 respectively amortization expense purchased intangible assets 385 million 55 million included operating expenses cost product revenues 2008 company recorded impairment charge 50 million operating expenses due phaseout dx products 2007 company impairment purchased intangible assets 2006 company recorded impairment charge 34 million operating expenses due significant decrease forecasted revenues associated session border control “sbc” products juniper networks inc notes consolidated financial statements continued following table summarizes estimated future amortization expense purchased intangible assets definite lives future fiscal years millions note 6 financial information property equipment property equipment consist following millions depreciation expense 1235 million 1018 million 762 million 2008 2007 2006 respectively restricted cash restricted cash december 31 2008 consisted escrow accounts required certain acquisitions completed 2005 directors officers “do” indemnification trust india gratuity trust india gratuity trust established 2008 cover statutory severance obligations event termination india employees provided five years continuous service trust established secure company’s indemnification obligations certain directors officers specified employees arising activities event company provide financially incapable providing indemnification 2008 company made distributions restricted cash increased restricted cash 81 million fund india gratuity trusts due overall growth company 2007 company distributed 115 million 16 million 46 million restricted cash upon settlement certain escrow obligations associated acquisitions funk software acorn packet solutions kagoor networks respectively company also added 89 million insurance trust increase coverage due overall growth company juniper networks inc notes consolidated financial statements continued 2006 company reduced restricted cash 59 million deposit requirements standby letters credits issued facility leases removed company also distributed 131 million 20 million restricted cash upon settlement certain escrow obligations associated redline networks kagoor networks acquisitions respectively deferred revenue amounts billed excess revenue recognized included deferred revenue accompanying consolidated balance sheets product deferred revenue net related deferred cost revenue includes shipments endusers valueadd resellers distributors breakdown company’s deferred revenue millions accrued warranty company provides estimated cost product warranties time revenue recognized provision reported accrued warranty within current liabilities accompanying consolidated balance sheets changes company’s accrued warranty follows millions juniper networks inc notes consolidated financial statements continued charges net charges net consists following millions company restructuring acquisitionrelated expenses 2008 restructuring acquisitionrelated expenses 07 million 2007 primarily consisted 11 million bonus accrual payable employees past acquisition net 04 million adjustments made restructuring liabilities restructuring acquisitionrelated expenses 59 million 2006 primarily consisted 56 million bonus earnout accrual associated funk acorn acquisitions 03 million net restructuring charges acquisitionrelated restructuring charges 2007 2006 company incurred 60 million 205 million respectively professional fees costs external service providers used completion internal stock option investigation company incur costs 2008 company recognized stock option amendment taxrelated charges 80 million 101 million 2007 2006 respectively pertaining amendment stock options settlement irs employment tax assessments primarily related timing tax deposits related employee stock option exercises company incur charges 2008 company incurred 90 million expense settlement shareholder derivative lawsuits see note 7 commitments contingencies “legal proceedings” 2007 company recorded net legal settlement gain 53 million consisted cash proceeds 62 million net transaction costs 09 million interest income net interest income net consists following millions interest income expense net primarily includes interest income cash equivalents investments shortterm debt expenses debt issuance cost amortization income expense net primarily includes foreign exchange losses miscellaneous expenses bank fees juniper networks inc notes consolidated financial statements continued note 7 commitments contingencies commitments following table summarizes company’s principal contractual obligations december 31 2008 millions operating leases company leases facilities operating leases expire various times longest expires january 2017 future minimum payments noncancelable operating leases net committed sublease income totaled 2086 million december 31 2008 rental expense 2008 2007 2006 approximately 580 million 487 million 403 million respectively purchase commitments order reduce manufacturing lead times ensure adequate component supply company’s contract manufacturers place noncancelable nonreturnable “ncnr” orders components based company’s build forecasts december 31 2008 ncnr component orders placed contract manufacturers value 868 million contract manufacturers use components build products based company’s forecasts purchase orders company received customers generally company components title products transfers contract manufacturers company immediately company’s customers upon delivery designated shipment location components go unused products go unsold specified periods time company may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet company’s forecast customer orders december 31 2008 company accrued 304 million based estimate charges tax liabilities december 31 2008 company 912 million included current longterm liabilities consolidated balance sheet unrecognized tax positions reasonably possible company may reach agreement certain issues result amount liability unrecognized tax benefits may decrease approximately 130 million within next 12 months time company unable make reasonably reliable estimate timing payments related additional 782 million liability due uncertainties timing tax audit outcomes contractual obligations december 31 2008 company indemnityrelated escrow obligations 23 million joint development agreement requiring quarterly payments 35 million january 2010 2008 company entered fiveyear 364 million data center hosting agreement december 31 2008 264 million remained unpaid data center hosting agreement remaining commitment expected paid juniper networks inc notes consolidated financial statements continued end april 2013 additionally 2008 company entered threeyear 227 million software subscription agreement replace previous software subscription requiring payment 50 million january 2009 december 31 2008 227 million remained unpaid software subscription agreement remaining commitment expected paid end january 2011 guarantees letters credit company entered agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product service performance standby letters credit certain lease facilities company recorded liability related indemnification guarantee provisions guarantees indemnification arrangements significant impact company’s consolidated financial condition results operations cash flows legal proceedings company subject legal claims litigation arising ordinary course business employment intellectual property claims including matters described outcome matters currently determinable although company expect legal claims litigation ultimately material adverse effect consolidated financial condition results operations adverse result one matters could negatively affect company’s consolidated financial results period occur federal derivative lawsuits may 24 2006 august 17 2006 seven purported shareholder derivative actions filed united states district court northern district california company certain current former officers directors lawsuits alleged company’s officers directors either participated illegal backdating stock option grants allowed happen october 19 2006 court ordered consolidation actions juniper derivative actions 0603396 appointed lead plaintiffs timothy hill employerteamsters local nos 175 505 pension trust fund indiana state district council laborers hod carriers pension fund lead plaintiffs filed consolidated complaint april 11 2007 consolidated complaint asserted causes action violations federal securities laws violations california securities laws breaches fiduciary duty aiding abetting breaches fiduciary duty abuse control corporate waste breach contract unjust enrichment gross mismanagement insider selling misappropriation information consolidated complaint also demanded accounting rescission allegedly improper stock option grants company formed special litigation committee determine whether best interest juniper networks shareholders pursue claims asserted derivative litigation special litigation committee authorized pursue settle release claims plaintiffs company reached agreement settlement federal derivative litigation state derivative litigation discussed company accrued aggregate 90 million expense paid december 31 2008 connection settlements august 26 2008 plaintiffs filed stipulation settlement motion preliminary approval settlement september 8 2008 court entered order preliminarily approving derivative settlement providing notice shareholders november 13 2008 court entered order granting final approval derivative settlement dismissing federal derivative action juniper networks inc notes consolidated financial statements continued state derivative lawsuits california may 24 2006 june 2 2006 two purported shareholder derivative actions filed santa clara county superior court state california company certain current former officers directors two actions consolidated juniper networks derivative litigation 106cv064294 order dated june 20 2006 amended consolidated complaint filed april 9 2007 amended consolidated complaint alleged certain company’s current former officers directors either participated illegal backdating stock options allowed happen complaint asserted causes action unjust enrichment breach fiduciary duties abuse control gross mismanagement waste corporate assets insider selling misappropriation information violations california securities laws plaintiffs also demanded accounting rescission allegedly improper stock options grants constructive trust proceeds derived allegedly illicit stock options company formed special litigation committee determine whether best interest juniper networks shareholders pursue claims asserted derivative litigation special litigation committee authorized pursue settle release claims plaintiffs company reached agreement settlement federal derivative litigation discussed state derivative litigation company accrued aggregate 90 million expense paid december 31 2008 connection settlements december 3 2008 company’s special litigation committee filed stipulation settlement state derivative actions court approved stipulation december 4 2008 federal securities class action july 14 2006 august 29 2006 two purported class actions filed northern district california company certain company’s current former officers directors november 20 2006 court consolidated two actions juniper networks inc securities litigation c0604327jw appointed new york city pension funds lead plaintiffs lead plaintiffs filed consolidated class action complaint january 12 2007 filed amended consolidated class action complaint april 9 2007 amended consolidated complaint alleges defendants violated federal securities laws manipulating stock option grant dates coincide low stock prices issuing false misleading statements including among others incorrect financial statements due improper accounting stock option grants amended consolidated complaint asserts claims violations securities act 1933 securities exchange act 1934 behalf persons purchased otherwise acquired juniper networks’ publiclytraded securities july 12 2001 including august 10 2006 june 7 2007 defendants filed motion dismiss certain claims hearing held september 10 2007 march 31 2008 court issued order granting part denying part defendants’ motion dismiss order dismissed prejudice plaintiffs’ section 10b claim extent based challenged statements made july 14 2001 order also dismissed leave amend plaintiffs’ section 10b claim pradeep sindhu order upheld plaintiffs’ remaining claims plaintiffs amend complaint defendants filed answer june 23 2008 calamore proxy statement action march 28 2007 action titled jeanne calamore v juniper networks inc et al c071772jw filed jeanne calamore northern district california company certain company’s current former officers directors complaint alleges proxy statement company’s 2006 annual meeting stockholders contained various false misleading statements failed disclose stock option backdating information result plaintiff seeks preliminary permanent injunctive relief respect company’s 2006 equity incentive plan including seeking invalidate plan equity awards granted grantable thereunder may 21 2007 company filed motion dismiss plaintiff filed motion preliminary injunction july 19 2007 court issued order denying plaintiff’s motion preliminary injunction dismissing complaint entirety leave amend plaintiff filed juniper networks inc notes consolidated financial statements continued amended complaint august 27 2007 defendants filed motion dismiss october 9 2007 august 13 2008 court issued order granting defendants’ motion dismiss prejudice entered final judgment favor defendants september 9 2008 plaintiff filed notice appeal united states court appeals ninth circuit plaintiff filed opening appellate brief january 26 2009 defendants’ answering brief due march 11 2009 ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” juniper networks certain juniper networks’ officers action brought behalf purchasers company’s common stock initial public offering june 1999 company’s secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering company’s subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company june 2004 stipulation settlement release claims issuer defendants including company submitted court approval august 31 2005 court preliminarily approved settlement december 2006 appellate court overturned certification classes six test cases selected underwriter defendants plaintiffs coordinated proceedings action involving company one six test cases class certification condition settlement unlikely settlement would receive final court approval june 25 2007 court entered order terminating proposed settlement based upon stipulation among parties settlement plaintiffs filed amended master allegations amended complaints six focus cases march 26 2008 court largely denied defendants’ motion dismiss amended complaints six test cases 16b demand october 3 2007 purported juniper networks shareholder filed complaint violation section 16b securities exchange act 1934 prohibits shortswing trading company’s ipo underwriters complaint vanessa simmonds v goldman sachs group et al case c07015777 district court western district washington seeks recovery shortswing profits company named nominal defendant recovery sought company matter irs notices proposed adjustments 2007 irs opened examination company’s us federal income tax employment tax returns 2004 fiscal year subsequently irs extended examination company’s employment tax juniper networks inc notes consolidated financial statements continued returns include fiscal years 2005 2006 irs yet concluded examinations returns september 2008 part ongoing audit us federal income tax return irs issued notice proposed adjustment “nopa” regarding company’s business credits company considering response proposed adjustment irs company believes adequately provided reasonably foreseeable outcome related proposed adjustment ultimate resolution matter unlikely material effect company’s consolidated financial condition results operations irs concluded audit company’s federal income tax returns fiscal years 1999 2000 2004 company received nopa irs final resolution issues raised nopa uncertain company believe outcome matter material adverse effect company’s consolidated financial condition results operations company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits note 8 debt senior convertible notes 2003 company received 3928 million net proceeds offering 4000 million aggregate principal amount zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes senior unsecured obligations ranked parity right payment company’s existing future senior unsecured debt ranked senior company’s existing future debt expressly provided subordinated notes senior notes bore interest convertible shares company’s common stock subject certain conditions time prior maturity prior repurchase company conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances equivalent conversion price approximately 2014 per share december 31 2007 holders senior notes face value approximately 05 million converted notes shares company’s common stock 2008 holders approximately 3992 million aggregate principal amount senior notes converted notes approximately 198 million shares company’s common stock company settled remaining senior notes face value 03 million principal amount maturity cash december 31 2008 company’s senior notes retired carrying amounts fair values senior notes millions distributor financing arrangement company recognizes sale accounts receivable primarily one major financing provider according sfas 140 company introduced distributor financing program 2006 strengthen channel business promoting greater distributor volume improved customer service program intended affect timing revenue recognition company recognizes revenue upon sellthrough financing arrangements proceeds financing provider due company 30 days sale receivable company pays financing provider financing fee based spread libor sibor transactions major financing provider company surrendered control transferred assets accounts receivable isolated company put beyond reach creditors even event bankruptcy purchaser accounts receivable balances right pledge juniper networks inc notes consolidated financial statements continued exchange assets transferred company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant receivable financing arrangements sale receivables company sold net receivables 4272 million 1304 million 2008 2007 respectively 2008 2007 company received cash proceeds 3927 million 954 million respectively amounts owed financing provider recorded accounts receivable company’s consolidated balance sheets december 31 2008 december 31 2007 739 million 404 million respectively company determined portion receivable financed recognized revenue accounted financing transaction pursuant eitf issue 8818 sales future revenues december 31 2008 december 31 2007 estimated amounts cash received financing provider recognized revenue distributors 330 million 100 million respectively note 9 stockholders’ equity stock repurchase activities 2008 company repurchased 6047 million 251 million shares common stock two stock repurchase programs authorized board directors “board” 20 billion stock repurchase program approved 2006 2007 “2006 stock repurchase program” company repurchased approximately 154 million shares common stock average price 2453 per share total purchase price 3768 million 2008 december 31 2008 company repurchased retired approximately 848 million shares common stock 2006 stock repurchase program average price 2358 per share program remaining authorized funds available future stock repurchases board approved another 10 billion stock repurchase program march 2008 “2008 stock repurchase program” program company repurchased approximately 97 million shares common stock average price 2343 per share total purchase price 2279 million 2008 december 31 2008 stock repurchase program remaining authorized funds 7721 million shares common stock purchased 2006 2008 stock repurchase programs retired future share repurchases company’s 2008 stock repurchase program subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 14 subsequent events discussion stock repurchase activity 2009 convertible preferred stock 10000000 shares convertible preferred stock par value 000001 per share authorized issuance preferred stock issued outstanding december 31 2008 december 31 2007 note 10 employee benefit plans stock option plans equity incentive plan may 18 2006 company’s stockholders adopted company’s 2006 equity incentive plan “2006 plan” enable granting incentive stock options nonstatutory stock options rsus restricted stock appreciation rights performance shares performance units deferred stock units dividend equivalents juniper networks inc notes consolidated financial statements continued employees consultants company 2006 plan also provides automatic nondiscretionary award nonstatutory stock options company’s nonemployee members board maximum aggregate number shares authorized 2006 plan 64500000 shares common stock plus addition shares subject outstanding options company’s amended restated 1996 stock plan “1996 plan” company’s 2000 nonstatutory stock option plan “2000 plan” subsequently expired unexercised may 18 2006 maximum 75000000 additional shares common stock options granted 2006 plan maximum term five seven years grant date generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan restricted stock performance shares rsus deferred stock units vest solely based continuing employment provision services vest full earlier threeyear anniversary grant date event vesting based factors continued future provision services awards vest full earlier oneyear anniversary grant date 2006 plan provides nonemployee director automatic grant option purchase 50000 shares common stock upon date individual first becomes director whether election stockholders company appointment board fill vacancy “first option” addition company’s annual stockholder meetings nonemployee director nonemployee director date prior year’s annual stockholder meeting shall automatically granted rsus number shares equal annual value defined ii nonemployee director nonemployee director date prior year’s annual stockholder meeting shall receive rsu award number shares determined multiplying annual value fraction numerator number days since nonemployee director received first option denominator 365 rounded nearest whole share rsu award specified ii referred herein “annual award” annual value means number rsus equal 125000 divided average daily closing price company’s common stock six month period ending last day fiscal year preceding date grant example period july 1 2008 december 31 2008 annual awards granted may 2009 first option vests monthly approximately three years grant date subject nonemployee director’s continuous service board annual award shall vest approximately one year grant date subject nonemployee director’s continuous service board 2006 plan options granted nonemployee directors maximum term seven years nonstatutory stock option plan july 2000 board adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provided granting nonstatutory stock options employees directors consultants options granted 2000 plan generally become exercisable fouryear period beginning date grant maximum term ten years company authorized 90901437 shares common stock issuance 2000 plan effective may 18 2006 additional equity awards 2000 plan discontinued new equity awards granted 2006 plan remaining authorized shares 2000 plan subject outstanding awards may 18 2006 canceled may 18 2006 2000 plan remain effect outstanding equity awards granted plan prior may 18 2006 amended restated 1996 stock plan 1996 plan provided granting incentive stock options employees nonstatutory stock options employees directors consultants november 3 2005 board adopted amendment 1996 plan add ability issue rsus 1996 plan options granted 1996 plan generally become exercisable fouryear period beginning date grant maximum term ten years juniper networks inc notes consolidated financial statements continued company authorized 164623039 shares common stock issuance 1996 plan effective may 18 2006 additional equity awards 1996 plan discontinued new equity awards granted 2006 plan remaining authorized shares 1996 plan subject outstanding awards may 18 2006 canceled may 18 2006 1996 plan remain effect outstanding equity awards granted plan prior may 18 2006 plans assumed upon acquisition connection past acquisitions company assumed options restricted stock plans acquired companies company exchanged options restricted stock juniper networks’ options restricted stock case options authorized appropriate number shares common stock issuance pursuant options december 31 2008 approximately 26 million common shares subject outstanding awards plans assumed past acquisitions restricted stock subject repurchase december 31 2008 2007 restricted stock repurchases 2008 2007 2006 company repurchased immaterial amount restricted common stock connection employee terminations equity award activity 2008 company granted rsus covering approximately 15 million shares common stock employees 2006 plan performance share awards eligible executives covering approximately 15 million shares common stock rsus generally vest period three five years date grant performance share awards generally vest 2009 2012 provided certain annual performance targets vesting criteria met vested rsus performance share awards voting rights common stock shares underlying awards considered issued outstanding company expenses cost rsus determined fair market value shares company’s common stock date grant ratably period restrictions lapse company estimated stock compensation expense performance share awards based vesting criteria recognized expense portions awards annual targets set company accrued stock compensation expense 22 million operating expenses 2008 connection performance share awards addition rsus performance share awards 2008 company also granted employee stock options covering 157 million shares common stock 2006 plan juniper networks inc notes consolidated financial statements continued equity award activities related information three years ended december 31 2008 summarized follows 1 shares available grant 1996 plan 2000 plan 2006 plan applicable 2 canceled expired options 1996 plan 2000 plan stock plans acquired companies longer available future grant plans except shares subject outstanding options 1996 plan 2000 plan subsequently expired unexercised may 18 2006 maximum 75000000 additional shares common stock become available grant 2006 plan 3 upon adoption 2006 plan may 18 2006 authorized shares subject outstanding awards 1996 plan 2000 plan discontinued juniper networks inc notes consolidated financial statements continued 4 rsus performance share awards per share unit purchase price lower 100 fair market value company’s common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award 5 outstanding options information include rsus performance share awards outstanding december 31 2008 see details “restricted stock units performance share awards activities” 6 aggregate intrinsic value represents difference company’s closing stock price last trading day fiscal period 1751 december 31 2008 exercise price multiplied number related options following schedule summarizes information stock options outstanding option plans december 31 2008 december 31 2008 approximately 472 million shares common stock exercisable average exercise price 2059 per share december 31 2007 approximately 448 million shares common stock exercisable average exercise price 2001 per share company’s vested expectedtovest stock options exercisable stock options december 31 2008 summarized intrinsic value options exercised 667 million 2917 million 1078 million 2008 2007 2006 respectively intrinsic value represents difference fair market value company’s common stock date exercise price option juniper networks inc notes consolidated financial statements continued total fair value options vested 2008 703 million december 31 2008 approximately 1514 million total unrecognized compensation cost adjusted estimated forfeitures related nonvested stock options expected recognized weightedaverage period approximately 29 years restricted stock units performance share awards activities following schedule summarizes information company’s rsus performance share awards three years ended december 31 2008 weightedaverage grantdate fair value rsus performance share awards granted 2008 2007 2006 2451 2539 1845 per share respectively december 31 2008 approximately 622 million unrecognized compensation cost adjusted estimated forfeitures related nonvested rsus nonvested performance share awards expected recognized weightedaverage period approximately 25 years company’s vested expectedtovest outstanding rsus performance share awards december 31 2008 summarized rsus covering approximately 19 million shares common stock became vested 2008 immaterial number outstanding rsus vested 2007 juniper networks inc notes consolidated financial statements continued extension stock option exercise periods former employees company could issue securities registration statements form s8 period current sec reporting obligations file periodic reports securities exchange act 1934 result parts 2006 2007 options vested held certain former employees company could exercised completion company’s stock option investigation company’s public filings obligations met “trading blackout period” company extended expiration date stock options april 7 2007 end 30day period subsequent company’s filing required regulatory reports result extensions fair values stock options reclassified current liabilities subsequent modification subject marktomarket provisions end reporting period earlier final settlement april 7 2007 stock options covering approximately 660000 shares common stock scheduled expire could exercised result trading blackout period restriction first quarter 2007 company measured fair value stock options using blackscholesmerton option valuation model recorded expense approximately 43 million first quarter 2007 addition company recorded expense 44 million first quarter 2007 associated approximately 1446000 shares covered options exercise periods extended 2006 result trading blackout period restriction december 31 2007 extended stock options either exercised expired unexercised previously recorded liabilities associated extensions reclassified additional paidin capital second quarter 2007 amendment certain stock options 2007 company completed tender offer amend certain options granted 1996 plan 2000 plan original exercise prices per share less fair market value per share common stock underlying option’s grant date determined company financial accounting purposes tender offer employees subject taxation united states canada opportunity increase strike price affected options appropriate fair market value per share date grant avoid unfavorable tax consequences united states internal revenue code section 409a “409a issue” canadian tax laws regulations exchange increasing strike price options company committed make cash payment employees participating offer make employees whole incremental strike price compared original option exercise price connection offer company amended options purchase 43 million shares common stock committed make aggregate cash payments 76 million offer participants recorded amount operating expense 2007 addition company entered separate agreement two executives 2007 amend unexercised stock options covering 01 million shares company’s common stock order cure 409a issue associated stock options result company committed make aggregate cash payments 04 million recorded payment liability operating expense 2007 employee stock purchase plan april 1999 board approved adoption juniper networks 1999 employee stock purchase plan “1999 purchase plan” 1999 purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year 1999 purchase plan implemented series offering periods six months duration shorter period determined board price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day applicable offering period result company’s failure file quarterly reports form 10q second third quarters 2006 company suspended employee payroll juniper networks inc notes consolidated financial statements continued withholdings purchase common stock 1999 purchase plan august 2006 march 2007 january 2007 board approved delay start next offering period february 1 2007 april 1 2007 offering period ended july 31 2007 compensation expense related common stock issued 1999 purchase plan 132 million 76 million 66 million 2008 2007 2006 respectively employees purchased approximately 16 million 06 million 17 million shares common stock 1999 purchase plan average exercise price 2257 1708 1306 per share fiscal years 2008 2007 2006 respectively december 31 2008 approximately 81 million shares issued since inception 123 million shares remained available future issuance 1999 purchase plan 1999 purchase plan discontinued effective february 1 2009 december 31 2007 approximately 71 million shares issued 109 million shares remained available future issuance 1999 purchase plan may 2008 company’s stockholders approved adoption juniper networks 2008 employee stock purchase plan “2008 purchase plan” 2008 purchase plan replaced 1999 purchase plan terminated immediately following conclusion offering period ended january 30 2009 board reserved aggregate 12000000 shares company’s common stock issuance 2008 purchase plan 2008 purchase plan generally similar 1999 purchase plan except 2008 purchase plan increases number shares reserved issuance must approved company’s stockholders first offering period 2008 purchase plan commenced first trading day february 1 2009 common stock reserved future issuance december 31 2008 company reserved aggregate approximately 1212 million shares common stock future issuance stock option plans 1999 employee stock purchase plan stockbased compensation stockbased compensation expense incurred three years ended december 31 2008 summarized follows millions valuation stockbased compensation sfas 123r requires use valuation technique optionpricing model calculate fair value stockbased awards company elected use blackscholesmerton optionpricing model incorporates various assumptions including volatility expected life dividend riskfree interest rates expected volatility based implied volatility market traded options company’s common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time juniper networks inc notes consolidated financial statements continued since 2006 company began granting stock option awards contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant 2007 government india implemented new fringe benefit tax applies equity awards granted india taxpayers fringe benefit tax payable issuer equity awards however issuer allowed recover individual award holders fringe benefit taxes issuer paid applicable equity awards beginning january 2008 company amended equity award agreements future stockbased awards made employees india provide company reimbursed fringe benefit taxes paid relation applicable equity awards company elected use blackscholesmerton optionpricing model incorporates monte carlo simulation calculate fair value stockbased awards issued amended equity award agreements assumptions used resulting estimates weightedaverage fair value per share options granted employee stock purchases espp periods summarized follows 1 range assumptions expressed 2007 2006 one purchase period years due temporary suspension espp august 2006 march 2007 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirement defined may contribute statutory limits year company matched employee contributions since january 1 2001 effective january 1 2007 company matches 25 eligible employee contributions annual maximum 3750 matching contributions vest immediately company’s matching contributions plan totaled 107 million 95 million 58 million 2008 2007 2006 respectively deferred compensation plan july 2008 company formed nonqualified compensation plan “nqdc” unfunded unsecured deferred compensation arrangement nqdc officers senior employees may elect defer portion compensation contribute amounts one investment funds plan assets included within investments offsetting obligations included within accrued compensation consolidated balance sheet investments considered trading securities reported fair value realized unrealized holding gains losses related investments well offsetting compensation juniper networks inc notes consolidated financial statements continued expense recorded results operations deferred compensation liability plan approximately 10 million december 31 2008 note 11 segment information company’s chief operating decision maker “codm” allocates resources assesses performance based financial information company’s business groups 2008 company realigned organizational structure include service business component related infrastructure slt business groups accordingly previously reported service segment combined company’s two reportable segments follows infrastructure slt infrastructure segment includes products e mx tseries router product families exseries switching products well circuittopacket products slt segment consists primarily firewall virtual private network “firewall” systems appliances ssl vpn appliances intrusion detection prevention appliances “idp” jseries router product family wide area network “wan” optimization platforms primary financial measure used codm assessing performance segments segment operating income includes certain cost revenues research development expenses sales marketing expenses general administrative expenses 2008 codm allocate certain miscellaneous expenses segments even though expenses included company’s management operating income arrangements infrastructure slt products services revenue attributed segment based underlying purchase order contract sellthrough report direct costs operating expenses standard costs research development expenses product marketing expenses generally applied segment indirect costs manufacturing overhead cost revenues allocated based standard costs indirect operating expenses sales marketing business development general administrative expenses generally allocated segment based factors including headcount usage revenue codm allocate stockbased compensation amortization purchased intangible assets impairment gain loss equity investments interest income expense income expense income taxes well certain charges segments juniper networks inc notes consolidated financial statements continued changes organizational structure may result changes segments disclosed company restated previously reported segment revenues segment operating results reflect changes segments financial information segment used codm summarized follows millions 1 prior period amounts reclassified reflect 2008 segment structure includes service revenues operating results infrastructure slt segments 2 corporate charges include workforcerebalancing charges primarily severance related costs workforcerebalancing costs included company’s segment operating income 3 amount includes amortization expense purchased intangible assets operating expenses costs revenues 4 charges net 2008 includes loss litigation settlement charges net 2007 includes charges restructuring acquisitionrelated charges stock option investigation costs well stock option amendment taxrelated charges net 2006 includes charges restructuring acquisitionrelated charges stock option investigation costs taxrelated charges well certain restructuring costs included cost revenues juniper networks inc notes consolidated financial statements continued single customer accounted 10 company’s total net revenues 2008 nokiasiemens networks bv “nsn” predecessor companies accounted 128 143 company’s net revenues 2007 2006 respectively revenue attributed significant customer derived sale products services infrastructure slt segments company attributes sales geographic regions based customer’s shipto location following table shows net revenues geographic region millions company tracks assets physical location majority company’s assets including property equipment december 31 2008 2007 attributable us operations although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 12 income taxes components income loss provision income taxes summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate income loss provision income taxes follows millions juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities follows millions december 31 2008 2007 company valuation allowance us domestic deferred tax assets approximately 415 million 343 million respectively relates capital losses carry forward offset future capital gains valuation allowance increased 72 million decreased 44 million years ended december 31 2008 2007 respectively 2008 increase attributable primarily investment losses currently disallowed income tax purposes 2007 reduction attributable primarily reversal investment losses previously disallowed income tax purposes december 31 2008 company federal california net operating loss carryforwards approximately 203 million 212 million respectively company also federal california tax credit carryforwards approximately 119 million 1007 million respectively benefits approximately 119 million federal tax credit carryforwards 123 million california tax credit carryforwards credited additional paid capital utilized company’s income tax returns since met utilization criteria sfas 123r unused net operating loss carryforwards expire various dates beginning year 2012 federal tax credits expire 2029 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries’ earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 7052 million cumulative undistributed earnings certain foreign subsidiaries december 31 2008 company’s intention permanently reinvest earnings distributed company would accrue additional income taxes expense juniper networks inc notes consolidated financial statements continued approximately 2143 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations december 31 2008 2007 total amount gross unrecognized tax benefits 1135 million 947 million respectively december 31 2008 approximately 977 million 1135 million gross unrecognized tax benefits recognized would affect effective tax rate following rollforward company’s total gross unrecognized tax benefit liabilities years ended december 31 millions december 31 2008 2007 company accrued interest expense penalties related unrecognized tax benefits 87 million 59 million respectively within longterm liabilities consolidated balance sheets accordance company’s accounting policy accrued interest penalties related unrecognized tax benefits recognized component tax expense consolidated statements operations company recognized net interest expense 29 million 17 million consolidated statements operations years ending december 31 2008 2007 respectively company engages continuous discussion negotiation tax authorities regarding tax matters various jurisdictions result reasonably possible amount liability unrecognized tax benefits may change within next 12 months company expect complete resolution irs audits within significant foreign state jurisdictions within next 12 months however reasonably possible certain issues related company’s business credits foreign audits may resolved next 12 months accordingly company believes existing unrecognized tax benefits may reduced approximately 130 million next 12 months company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2003 although carryforward attributes generated prior 2003 may still adjusted upon examination irs attributes either used future period company currently examination irs 2004 tax year indian tax authorities 2004 tax year german tax authorities 2005 tax year additionally company reached final resolution irs adjustment proposed 1999 2000 tax years company examination major jurisdictions company files income tax returns december 31 2008 juniper networks inc notes consolidated financial statements continued september 2008 part ongoing 2004 irs audit company received proposed adjustment related business credit carryforwards agreed would reduce business credit carryforwards december 2008 company received proposed adjustment indian tax authorities related 2004 tax year company pursuing available administrative procedures relative matters december 2008 company reached tentative settlement german tax authorities 2005 tax year company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations note 13 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter two years ended december 31 2008 millions except per share amounts juniper networks inc notes consolidated financial statements continued note 14 subsequent events stock repurchases end february 2009 company repurchased 73 million shares common stock 1168 million average purchase price 1605 per share 2008 stock repurchase program february 28 2009 company’s 2008 stock repurchase programs remaining authorized funds 6554 million purchases program subject review circumstances place time acquisitions company’s share repurchase program may made time permitted securities laws legal requirements program may discontinued time item 9item 8 financial statements supplementary data index consolidated financial statements years ended december 31 2009 2008 2007 contents report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2009 2008 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2009 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2009 2008 consolidated results operations cash flows three years period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states juniper networks inc’s internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 26 2010 expressed unqualified opinion thereon ernst young llp san jose california february 26 2010 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks inc’s internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2009 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2009 2008 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2009 juniper networks inc report dated february 26 2010 expressed unqualified opinion thereon ernst young llp san jose california february 26 2010 management’s report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation company’s financial statements external purposes accordance us generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness company’s internal control financial reporting december 31 2009 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework based assessment management concluded december 31 2009 company’s internal control financial reporting effective effectiveness company’s internal control financial reporting december 31 2009 audited ernst young llp independent registered public accounting firm audits company’s consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness company’s internal control financial reporting december 31 2009 juniper networks inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets thousands except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 summary significant accounting policies description business juniper networks inc “juniper networks” “company” designs develops sells innovative products services together provide customers highperformance network infrastructure creates responsive trusted environments accelerating deployment services applications single network company following two segments infrastructure service layer technologies “slt” infrastructure segment primarily offers scalable internet protocol “ip”router ethernet switching products used control direct network traffic slt segment offers networking solutions meet broad array customers’ priorities securing network data network maximizing existing bandwidth acceleration applications across distributed network segments offer worldwide services including technical support professional services well educational training programs customers basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated information included annual report form 10k read conjunction “management’s discussion analysis financial condition results operations” “risk factors” “quantitative qualitative disclosures market risk” 2009 company held majority interest joint venture nokia siemens networks bv “nsn” december 31 2009 company owned 60 percent interest joint venture given company’s majority ownership interest joint venture accounts joint venture consolidated accounts company noncontrolling interest recorded noncontrolling investor’s interests net assets operations joint venture use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources critical accounting policies described significantly affected critical accounting estimates accounting policies require significant judgments assumptions estimates used preparation consolidated financial statements actual results could differ materially amounts reported based policies extent material differences estimates actual results future consolidated results operations may affected cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash investments availableforsale trading securities management determines appropriate classification securities time purchase reevaluates classification balance sheet date company’s investments publiclytraded debt equity juniper networks inc notes consolidated financial statements continued securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income loss realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company recognizes impairment charge availableforsale investments decline fair value investments cost basis determined temporary company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less company’s cost basis investment’s financial condition nearterm prospects investee company determines decline investment’s fair value temporary difference recognized impairment loss consolidated statements operations company’s nonqualified compensation plan invests mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses well offsetting compensation expense reported consolidated statements operations privatelyheld equity investments company minority equity investments privatelyheld companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment company markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary realized gains losses reported consolidated statements operations fair value measurement company records financial instruments derivative contracts fair value fair value assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability carrying value company’s financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments determined using quoted market prices securities similar financial instruments concentrations financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities money market funds highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts juniper networks inc notes consolidated financial statements continued receivable company maintains reserves potential bad debt historically losses within management’s expectations att inc accounted 104 company’s total net revenues 2009 single customer accounted 10 company’s total net revenues 2008 nsn accounted 128 total net revenues 2007 company relies sole suppliers certain components asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally one half five years lease term respective assets company depreciates leasehold improvements lesser expected life lease assets maximum ten years land subject depreciation goodwill purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trademarks developed technologies customer relationships maintenance contracts intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based tests future goodwill impairment tests could result charge earnings purchased intangible assets finite lives amortized straightline basis respective estimated useful lives ranging two nineteen years impairment company evaluates longlived assets held use impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized amount carrying amount asset exceeds fair value company assesses recoverability longlived intangible assets determining whether unamortized balances greater sum undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows company evaluates goodwill minimum annual basis whenever events changes circumstances indicate carrying amount asset may recoverable impairment goodwill tested reporting unit level comparing reporting unit’s carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income approach market approach carrying value reporting unit exceeds fair value goodwill considered impaired second step performed measure amount impairment loss company conducted annual impairment test november 1 2009 2008 2007 determined carrying value remaining goodwill impaired future impairment indicators including sustained declines company’s market capitalization decrease revenue profitability levels could require additional impairment charges recorded juniper networks inc notes consolidated financial statements continued revenue recognition company’s products generally integrated software essential functionality equipment additionally company provides unspecified upgrades enhancements related integrated software maintenance contracts products revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance instances company outstanding obligations related product delivery final acceptance product revenue deferred delivery acceptance criteria met • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customer determined credit checks customer’s payment history company records accounts receivable net allowance doubtful accounts estimated customer returns pricing credits arrangements multiple elements sales products include services company allocates revenue element using residual method based vendorspecific objective evidence “vsoe” fair value undelivered items residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe fair value based price charged element sold separately company recognizes revenue deliverable accordance policies product service revenue recognition determining vsoe require substantial majority selling prices fall within reasonable range based historical discounting trends specific products services vsoe fair value one undelivered items exist revenue deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period company accounts multiple agreements single customer one arrangement contractual terms andor substance agreements indicate may closely related effect parts single arrangement ability recognize revenue future may affected actual selling prices significantly less fair value addition company’s ability recognize revenue future could impacted conditions imposed customers sales direct endusers valueadded resellers oem partners company recognizes product revenue upon transfer title risk loss generally upon shipment company’s practice identify enduser prior shipment valueadded reseller oem partner company’s endusers valueadded resellers significant obligations future performance rights return pricing credits company’s agreements oem partners may allow future rights returns pricing credits portion company’s sales made distributors agreements allowing pricing credits rights return product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions juniper networks inc notes consolidated financial statements continued based historical sales returns price protection credits specific criteria included rebate agreements factors known time actual product returns pricing adjustments differ estimates additional reductions revenue may required addition company reports revenues net sales taxes service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less company sells certain interests accounts receivable nonrecourse basis part customer financing arrangement primarily one major financing company cash received arrangement advance revenue recognition recorded shortterm debt allowance doubtful accounts allowance doubtful accounts based company’s assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance potential writeoffs considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customer’s ability pay warranty costs juniper networks generally offers oneyear warranty hardware products 90day warranty media contains software embedded products company accrues warranty costs part cost sales based associated material costs labor costs customer support overhead time revenue recognized material cost estimated primarily based upon historical costs repair replace product returns within warranty period technical support labor overhead cost estimated primarily based upon historical trends cost support customer cases within warranty period although engage extensive product quality programs processes warranty obligation affected product failure rates use materials technical labor costs associated overhead incurred actual product failure rates use materials service delivery costs differ estimates may incur additional warranty costs could reduce gross margin contract manufacturer liabilities company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture company’s products based company’s demand forecasts based company’s estimates future demand company products turn based historical trends analysis company’s sales marketing organizations adjusted overall market conditions company establishes provision inventory carrying costs obsolete material exposures excess components purchased based historical trends actual component usage product demand significantly lower forecasted may caused factors outside company’s control could adverse impact company’s gross margins profitability supply chain management remains area focus company balances risk material obsolescence supply chain flexibility order reduce lead times juniper networks inc notes consolidated financial statements continued research development costs research design develop company’s products expensed incurred software development costs capitalized beginning product’s technological feasibility established ending product available general release customers generally company’s products released soon technological feasibility established result costs subsequent achieving technological feasibility significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 114 million 50 million 48 million 2009 2008 2007 respectively loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company records charge equal minimum estimated liability loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required time company involved disputes litigation legal actions company aggressively defending current litigation matters however many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur company’s business financial condition results operations cash flows could adversely affected actual liability matters may materially different company’s estimates could result need adjust liability record additional expenses stockbased compensation company recognizes stockbased compensation expense sharebased payment awards including employee stock options restricted stock units “rsus” performance share awards purchases company’s employee stock purchase plan accordance financial accounting standards board “fasb” accounting standards codification “asc” topic 718 “asc topic 718” formerly sfas 123r sharebased payment stockbased compensation expense expectedtovest stockbased awards valued singleoption approach amortized straightline basis net estimated forfeitures value portion award ultimately expected vest recognized expense requisite service periods company’s consolidated statements operations years ended december 31 2009 2008 2007 utilize blackscholesmerton “bsm” optionpricing model determining fair value stockbased awards bsm model requires various highly subjective assumptions including volatility expected option life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life juniper networks inc notes consolidated financial statements continued award based historical experience terms conditions stock awards granted employees well potential effect options exercised time assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties application management’s judgment factors change use different assumptions stockbased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense expectedtovest shares actual forfeiture rate materially different estimate recorded stockbased compensation expense could different derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded interest income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities approximately two months company also uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified operating expense line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2009 2008 2007 interest income net consolidated statements operations cash flows hedges classified operating activities provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth fasb asc topic income taxes “fasb asc topic 740” formerly sfas 109 accounting income taxes financial interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 extent company believes amounts likely realized company records valuation allowance reduce deferred tax assets company believes likely future income reversal deferred tax liabilities forecasted income sufficient fully recover remaining deferred tax assets event company determines part net deferred tax assets realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting adjustment earnings period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due juniper networks inc notes consolidated financial statements continued comprehensive income loss comprehensive income loss defined change equity period transactions events circumstances nonowner sources company presented comprehensive income loss part consolidated statements stockholders’ equity comprehensive income loss includes net unrealized gains losses availableforsale securities net foreign currency translation gains losses excluded net income unrealized gains losses derivatives designated cash flow hedges foreign currency translation assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using weightedaverage exchange rates period foreign currency translation gains losses material years ended december 31 2009 2008 2007 effect exchange rate changes cash balances held foreign currencies immaterial years presented recent accounting pronouncements june 2009 fasb issued asu 200901 topic 105 generally accepted accounting principles amendments based upon statement financial accounting standards 168 fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162 “asu 200901” asu 20091 establishes fasb asc single source authoritative accounting principles applied financial statements nongovernmental entities conformity us gaap asu 20091 effective financial statements issued interim annual periods ending september 15 2009 company’s adoption asu 200901 affect consolidated results operations financial condition december 2009 fasb issued accounting standards update “asu” 200917 topic 810 improvements financial reporting enterprises involved variable interest entities “asu 200917” incorporated revised accounting guidance variable interest entities initially issued fasb june 2009 fasb asc topic 810 consolidation revised guidance eliminates qualifying specialpurpose entities “qspe” concept amends provisions determining whether entity variable interest entity would require consolidation requires additional disclosures guidance effective entity’s first annual reporting period begins november 15 2009 interim periods within first annual reporting period interim annual reporting periods thereafter earlier application prohibited accordingly company adopt guidance january 1 2010 impact adoption company’s consolidated results operations financial condition depend upon involvement variable interest entities subsequent adoption date december 2009 fasb issued asu 200916 accounting transfers financial assets “asu 200916” incorporated revised accounting guidance transfers financial assets initially issued fasb june 2009 fasb asc topic 860 transfers servicing revised guidance eliminates concept qspe removes scope exception qspe applying accounting guidance related variable interest entities changes requirements derecognizing financial assets requires additional disclosures accounting guidance effective entity’s first annual interim reporting periods begin november 15 2009 accounting guidance applied transfers financial assets occurring effective date earlier application prohibited impact adoption company’s consolidated results operations financial condition depend upon level activity financial asset transfers company may consummate effective date october 2009 fasb issued asu 200914 software topic 985 certain arrangements contain software elements consensus fasb emerging issues task force “eitf” “asu 200914” juniper networks inc notes consolidated financial statements continued asu 200914 amends scope software revenue guidance fasb asc subtopic 985605 softwarerevenue recognition exclude tangible products containing software nonsoftware components function together deliver product’s essential functionality asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb eitf “asu 200913” asu 200913 eliminates residual method allocation requires relative selling price method allocating deliverables multipledeliverable revenue arrangement asu 200913 specifies best estimate selling price consistent used determine price sell deliverable standalone basis asu 200914 asu 200913 effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 must adopted period using transition method adoption elected period beginning fiscal year amendments standards must applied retrospectively beginning fiscal year full retrospective application amendments prior fiscal years optional companies may elect early adoption standards company currently assessing timing adoption evaluating impact asu 200914 asu 200913 consolidated results operations financial condition august 2009 fasb issued asu 200905 fair value measurements disclosures topic 820 measuring liabilities fair value “asu 200905” amends fair value measurements liabilities within fasb asc topic 820 asu 200905 provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using one following techniques 1 valuation technique uses quoted price identical liability traded asset quoted prices similar liabilities similar liabilities traded assets 2 another valuation technique consistent principles fasb asc topic 820 guidance asu 200905 effective interim annual reporting periods beginning issuance adoption asu 200905 material impact company’s consolidated results operations financial condition april 2009 fasb issued fsp fas 1152 fas 1242 recognition presentation otherthantemporary impairments “fsp fas 1152 fas 1242” subsequently incorporated fasb asc topic 320 investments debt equity securities asc 320 amended otherthantemporary accounting debt securities make operational improve presentation disclosure otherthantemporary impairments debt equity securities provisions effective interim annual reporting periods ending june 15 2009 company’s adoption asc 320 affect consolidated results operations financial condition note 2 net income per share basic net income per share computed dividing net income available common stockholders weighted average number common shares outstanding period diluted net income per share computed giving effect dilutive potential common shares outstanding period weighted average basis dilutive potential common shares consist shares issuable upon conversion senior notes various employee stock awards including common shares issuable upon exercise stock options vesting rsus vesting performance shares juniper networks inc notes consolidated financial statements continued following table presents calculation basic diluted net income per share attributable juniper networks millions except per share amounts employee stock awards approximately 389 million shares 330 million shares company’s common stock included computation diluted earnings per share years ended december 31 2009 december 31 2008 respectively effect would antidilutive note 3 cash equivalents investments cash equivalents following table summarizes company’s cash equivalents millions juniper networks inc notes consolidated financial statements continued investments availableforsale trading securities following table summarizes company’s unrealized gains losses fair value investments designated trading availableforsale december 31 2009 2008 millions juniper networks inc notes consolidated financial statements continued following table presents company’s maturities availableforsale investments trading securities december 31 2009 2008 millions following table presents company’s trading availableforsale investments unrealized loss position december 31 2009 millions 1 investments consist us foreign government securities company impairment charges publiclytraded equity investments 2009 2008 company realized impairment charge 35 million publiclytraded equity security due sustained decline fair value investment cost basis company judged temporary charges incurred 2007 material realized gains losses sale availableforsale securities 2009 2008 2007 company generated cash proceeds 6838 million 4994 million 10291 million maturities sales availableforsale investments 2009 2008 2007 respectively juniper networks inc notes consolidated financial statements continued company 52 26 investments unrealized loss position december 31 2009 december 31 2008 respectively gross unrealized losses related investments due changes interest rates contractual terms investments permit issuer settle securities price less amortized cost investment fixed income securities unrealized losses company determined intent sell investments ii likely required sell investments recovery entire amortized cost basis company consider investments otherthantemporarily impaired december 31 2009 december 31 2008 respectively company reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation restricted cash restricted cash december 31 2009 consisted escrow accounts required certain acquisitions completed 2005 indemnification trust india gratuity trust india gratuity trust established 2008 cover statutory severance obligations event termination india employees provided five years continuous service trust established secure company’s indemnification obligations certain directors officers specified employees arising activities event company provide financially incapable providing indemnification 2009 company distributed 10 million restricted cash connection escrow fund associated acquisition funk software company also increased restricted cash aggregate 113 million fund india gratuity trusts due overall growth company 2008 company made distributions restricted cash increased restricted cash aggregate 81 million fund india gratuity trusts due overall growth company following table summarizes company’s restricted cash reported consolidated balance sheets millions december 31 2009 2008 unrealized gain losses related restricted investments immaterial juniper networks inc notes consolidated financial statements continued privatelyheld equity investments company’s minority equity investments privatelyheld companies carried cost company controlling interest ability exercise significant influence companies company adjusts privatelyheld equity investments impairment fair value exceeds carrying value respective assets december 31 2009 2008 carrying values company’s minority equity investments privatelyheld companies 139 million 142 million respectively included longterm assets consolidated balance sheets 2009 2008 2007 company invested total 72 million 46 million 41 million respectively privatelyheld companies due events circumstances significantly affected fair value three privatelyheld equity investments 2009 normally carried cost company measured fair value privatelyheld equity investments using analysis financial condition nearterm prospects investees including recent financing activities capital structure result year ended december 31 2009 company recognized loss 55 million due impairment minority equity investments privatelyheld companies company judged temporary addition year ended december 31 2009 company minority equity investment 20 million privatelyheld company acquired publiclytraded company received 10 million cash 10 million common stock acquiring company 2008 company recognized losses 113 million due impairment minority equity investments privatelyheld companies company judged temporary addition company minority equity investment 24 million privatelyheld company acquired third party company received payment 21 million 2008 03 million 2009 note 4 fair value measurements fair value hierarchy company determines fair values financial instruments based fair value hierarchy requires entity maximize use observable inputs minimize use unobservable inputs measuring fair value fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value assumes transaction sell asset transfer liability occurs principal advantageous market asset liability establishes fair value asset liability shall determined based assumptions market participants would use pricing asset liability classification financial asset liability within hierarchy based upon lowest level input significant fair value measurement fair value hierarchy prioritizes inputs three levels may used measure fair value level 1 inputs unadjusted quoted prices active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based company’s assumptions juniper networks inc notes consolidated financial statements continued assets liabilities measured fair value recurring basis following tables provide summary assets liabilities measured fair value recurring basis millions 1 balance includes 198 million restricted investments measured fair market value related company’s directors officers “do” indemnification trust additional information regarding trust see note 3 cash equivalents investments heading “restricted cash” restricted investments included restricted cash balance consolidated balance sheet 2 balance includes 301 million restricted investments measured fair market value related company’s trust juniper networks inc notes consolidated financial statements continued 1 balance includes 16 million restricted investments measured fair market value related acquisition completed 2005 2 balance includes 200 million restricted investments measured fair market value related company’s trust 3 balance includes 60 million restricted investments measured fair market value related company’s trust 4 balance includes 150 million restricted investments measured fair market value related company’s trust assets liabilities measured fair value recurring basis presented company’s consolidated balance sheets follows millions juniper networks inc notes consolidated financial statements continued assets measured fair value nonrecurring basis following table presents company’s assets measured fair value nonrecurring basis related impairment charges recorded loss minority equity investments year ended december 31 2009 millions year ended december 31 2009 due events circumstances significantly affected fair value three privatelyheld equity investments normally carried cost company measured fair value privatelyheld equity investments time impairment using analysis financial condition nearterm prospects investees including recent financing activities capital structure result company recognized impairment loss 55 million year ended december 31 2009 classified investments level 3 asset due absence quoted market prices inherent lack liquidity company liabilities measured fair value nonrecurring basis year ended december 31 2009 juniper networks inc notes consolidated financial statements continued note 5 goodwill purchased intangible assets goodwill changes carrying amount goodwill two years ended december 31 2009 follows millions 2009 2008 additions goodwill first quarter 2008 company realigned organizational structure eliminate service segment include service business related infrastructure slt segments result company assistance external service provider reallocated goodwill former service segment infrastructure slt segments based relative fair value approach fair value based comparative market values discounted cash flows indication impairment goodwill reallocated new reporting segments company performed goodwill impairment reviews november 1 2009 2008 concluded impairment years ended 2009 2008 purchased intangible assets following table presents company’s purchased intangible assets definite lives millions amortization purchased intangible assets included operating expenses cost product revenues totaled 154 million 440 million 2009 2008 respectively 2008 company recorded juniper networks inc notes consolidated financial statements continued impairment charge 50 million included amortization purchased intangible assets due phaseout dx products 2009 2007 company impairment purchased intangible assets estimated future amortization expense purchased intangible assets definite lives future periods follows millions note 6 financial information property equipment property equipment consist following millions depreciation expense 1330 million 1235 million 1018 million 2009 2008 2007 respectively deferred revenue amounts billed excess revenue recognized included deferred revenue accompanying consolidated balance sheets product deferred revenue net related deferred cost revenue includes juniper networks inc notes consolidated financial statements continued shipments endusers valueadded resellers distributors breakdown company’s deferred revenue millions warranties company provides estimated cost product warranties time revenue recognized provision reported accrued warranty within current liabilities consolidated balance sheets changes company’s accrued warranty follows millions restructuring liabilities 2009 company implemented restructuring plan “2009 restructuring plan” effort better align business operations current market macroeconomic conditions restructuring plan included restructuring certain business functions resulted reductions workforce facilities company recorded 195 million restructuring charges year ended december 31 2009 associated 2009 restructuring plan company paid 75 million severance related charges associated 2009 restructuring plan year ended december 31 2009 years ended december 31 2008 2007 company incurred restructuring charges nil 07 million respectively associated past restructuring plans company expects incur additional charges approximately 8 million 10 million relating additional facilities employee restructuring 2009 restructuring plan 2010 restructuring charges based company’s restructuring plans committed management changes estimates executing approved plans reflected company’s results juniper networks inc notes consolidated financial statements continued operations following tables illustrate changes restructuring liabilities 2009 2008 respectively millions litigation settlements 2009 company incurred 1690 million expense related company’s agreement principle reached february 2010 settle securities class action litigations pending company certain current former officers directors related historical stock option granting practices 130 million expense legal settlement regarding menlo equity arbitration 03 million expense related settlement another matter recorded fourth quarter 2009 see note 13 commitments contingencies heading “legal proceedings” 2008 company incurred 90 million expense settlement shareholder derivative lawsuits 2007 company recorded net litigation settlement gain 53 million consisted cash proceeds 62 million net transaction costs 09 million charges 2007 company incurred 60 million professional fees costs external service providers used completion internal stock option investigation company incur costs 2009 2008 addition company recognized stock option amendment taxrelated charges 80 million 2007 pertaining amendment stock options settlement internal revenue service “irs” employment tax assessments primarily related timing tax deposits related employee stock option exercises company incur charges 2009 2008 interest income net interest income net consists following millions juniper networks inc notes consolidated financial statements continued interest income expense net primarily includes interest income company’s cash equivalents investments well customer financing charges income expense net primarily includes foreign exchange gains losses miscellaneous expenses bank fees note 7 financing arrangements company customer financing arrangements sell accounts receivable major thirdparty financing provider program intended affect timing revenue recognition company recognizes revenue upon sellthrough financing arrangements proceeds financing provider due company 30 days sale receivable transactions financing provider company surrendered control transferred assets accounts receivable isolated company put beyond reach creditors even event bankruptcy company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant financing arrangements sale receivables company sold net receivables 4498 million 4272 million 2009 2008 respectively 2009 2008 company received cash proceeds 4263 million 3927 million respectively amounts owed financing provider recorded accounts receivable company’s consolidated balance sheets december 31 2009 december 31 2008 898 million 739 million respectively portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities consolidated balance sheet december 31 2009 december 31 2008 estimated amounts cash received financing provider recognized revenue distributors 526 million 330 million respectively note 8 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes cash flow hedges company uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating cost services operating expenses derivatives intended protect us dollar equivalent company’s planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified cost services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments immaterial three years ended december 31 2009 interest income net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income loss expected reclassified income within next 12 months nondesignated hedges company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies hedges qualify special hedge accounting treatment derivatives carried fair value changes recorded interest income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities derivatives maturities approximately two months juniper networks inc notes consolidated financial statements continued following table summarizes total fair value company’s derivative instruments december 31 2009 millions following represents company’s top three outstanding derivative positions currency december 31 2009 millions effective portion company’s derivative instruments consolidated statements operations year ended december 31 2009 follows millions ineffective portion company’s derivative instruments consolidated statements operations immaterial year ended december 31 2009 gains company’s nondesignated derivative instruments recognized consolidated statements operations year ended december 31 2009 follows millions juniper networks inc notes consolidated financial statements continued note 9 stockholders’ equity stock repurchase activities march 2008 company’s board directors “board” approved 10 billion stock repurchase program “2008 stock repurchase program” program company repurchased approximately 207 million shares common stock average price 2191 per share total purchase price 4535 million 2009 december 31 2009 2008 stock repurchase program remaining authorized funds 3186 million 2008 company repurchased 6047 million 251 million shares common stock average purchase price 2410 per share 2008 stock repurchase program 20 billion stock repurchase program approved 2006 2007 “2006 stock repurchase program” december 31 2008 2006 stock repurchase program remaining authorized funds available future stock repurchases shares common stock purchased 2006 2008 stock repurchase programs retired future share repurchases company’s 2008 stock repurchase program subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 16 subsequent events discussion stock repurchase activity 2010 convertible preferred stock 10000000 shares convertible preferred stock par value 000001 per share authorized issuance preferred stock issued outstanding december 31 2009 december 31 2008 note 10 employee benefit plans stock option plans equity incentive plan may 18 2006 company’s stockholders adopted company’s 2006 equity incentive plan “2006 plan” enable granting incentive stock options nonstatutory stock options rsus restricted stock appreciation rights performance shares performance units deferred stock units dividend equivalents employees consultants company 2006 plan also provides automatic nondiscretionary awards nonstatutory stock options rsus company’s nonemployee members board maximum aggregate number shares authorized 2006 plan 64500000 shares common stock plus addition shares subject outstanding options company’s amended restated 1996 stock plan “1996 plan” company’s 2000 nonstatutory stock option plan “2000 plan” extent expire unexercised may 18 2006 maximum 75000000 additional shares common stock options granted 2006 plan maximum term seven years grant date generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan restricted stock performance shares rsus deferred stock units vest solely based continuing employment provision services vest full earlier threeyear anniversary grant date event vesting based factors continued future provision services awards vest full earlier oneyear anniversary grant date 2006 plan provides nonemployee director automatic grant option purchase 50000 shares common stock date individual first becomes director whether election stockholders company appointment board fill vacancy “first option” addition company’s annual stockholder meetings nonemployee director nonemployee director juniper networks inc notes consolidated financial statements continued date prior year’s annual stockholder meeting shall automatically granted rsus number shares equal annual value defined ii nonemployee director nonemployee director date prior year’s annual stockholder meeting shall receive rsu award number shares determined multiplying annual value fraction numerator number days since nonemployee director received first option denominator 365 rounded nearest whole share rsu award specified ii referred herein “annual award” annual value means number rsus equal 125000 divided average daily closing price company’s common stock six month period ending last day fiscal year preceding date grant first option vests monthly approximately three years grant date subject nonemployee director’s continuous service board annual award shall vest approximately one year grant date subject nonemployee director’s continuous service board 2006 plan options granted nonemployee directors maximum term seven years nonstatutory stock option plan july 2000 board adopted 2000 plan 2000 plan provided granting nonstatutory stock options employees directors consultants options granted 2000 plan generally become exercisable fouryear period beginning date grant maximum term ten years company authorized 90901437 shares common stock issuance 2000 plan effective may 18 2006 additional equity awards 2000 plan discontinued new equity awards granted 2006 plan remaining authorized shares 2000 plan subject outstanding awards may 18 2006 canceled may 18 2006 2000 plan remain effect outstanding equity awards granted plan prior may 18 2006 amended restated 1996 stock plan 1996 plan provided granting incentive stock options employees nonstatutory stock options employees directors consultants november 3 2005 board adopted amendment 1996 plan add ability issue rsus 1996 plan options granted 1996 plan generally become exercisable fouryear period beginning date grant maximum term ten years company authorized 164623039 shares common stock issuance 1996 plan effective may 18 2006 additional equity awards 1996 plan discontinued new equity awards granted 2006 plan remaining authorized shares 1996 plan subject outstanding awards may 18 2006 canceled may 18 2006 1996 plan remain effect outstanding equity awards granted plan prior may 18 2006 plans assumed upon acquisition connection past acquisitions company assumed options restricted stock plans acquired companies company exchanged options restricted stock juniper networks’ options restricted stock case options authorized appropriate number shares common stock issuance pursuant options december 31 2009 approximately 20 million shares common stock subject outstanding awards plans assumed past acquisitions restricted stock subject repurchase december 31 2009 2008 restricted stock repurchases 2009 2008 2007 juniper networks inc notes consolidated financial statements continued stock option activities summary company’s stock option activity related information three years ended december 31 2009 set forth following table aggregate intrinsic value represents difference company’s closing stock price last trading day fiscal period 2667 december 31 2009 exercise price multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 836 million 667 million 2917 million 2009 2008 2007 respectively total fair value options vested 2009 2008 2007 889 million 703 million 788 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes information stock options outstanding option plans december 31 2009 december 31 2009 approximately 440 million shares common stock exercisable average exercise price 2091 per share december 31 2008 approximately 472 million shares common stock exercisable average exercise price 2059 per share juniper networks inc notes consolidated financial statements continued restricted stock units performance share awards activities rsus generally vest period three four years date grant performance share awards granted generally vest 2009 2012 provided certain annual performance targets vesting criteria met vested rsus performance share awards voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes information company’s rsus performance share awards three years ended december 31 2009 three years ended december 31 2009 2008 2007 company granted rsus covering approximately 18 million 15 million 29 million shares common stock respectively additionally company granted performance shares covering approximately 30 million 15 million 07 million shares common stock three years ended december 31 2009 2008 2007 respectively number shares subject performance share awards granted represents maximum number shares may issued pursuant award full term employee stock purchase plan april 1999 board approved adoption juniper networks 1999 employee stock purchase plan “1999 purchase plan” 1999 purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year 1999 purchase plan implemented series offering periods six months duration shorter period determined board price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day applicable offering period result company’s failure file quarterly reports form 10q second third quarters 2006 company suspended employee payroll withholdings purchase common stock 1999 purchase plan august 2006 march 2007 january 2007 board approved delay start offering period february 1 2007 april 1 2007 offering period ended july 31 2007 juniper networks inc notes consolidated financial statements continued may 2008 company’s stockholders approved adoption juniper networks 2008 employee stock purchase plan “2008 purchase plan” replaced 1999 purchase plan board reserved aggregate 12000000 shares company’s common stock issuance 2008 purchase plan 2008 purchase plan generally similar 1999 purchase plan except 2008 purchase plan increases number shares reserved issuance must approved company’s stockholders first offering period 2008 purchase plan commenced first trading day february 1 2009 employees purchased approximately 32 million 16 million 06 million shares common stock 2008 purchase plan 1999 purchase plan average exercise price 1216 2257 1708 per share fiscal years 2009 2008 2007 respectively december 31 2009 approximately 16 million shares issued 2008 purchase plan 104 million shares remained available future issuance 2008 purchase plan december 31 2008 approximately 81 million shares issued since inception 123 million shares remained available future issuance 1999 purchase plan effective february 1 2009 immediately following conclusion offering period ended january 30 2009 1999 purchase plan discontinued shares remained available future issuance plan shares available grant following table presents total number shares available grant 2006 plan december 31 2009 1 rsus performance share awards per share unit purchase price lower 100 fair market value company’s common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject performance share awards granted represents maximum number shares may issued pursuant award full term 2 includes canceled expired options 1996 plan 2000 plan expired unexercised may 18 2006 common stock reserved future issuance december 31 2009 company reserved aggregate approximately 1048 million shares common stock future issuance stock awards plans 2008 purchase plan stockbased compensation expense company elected use bsm optionpricing model incorporates various assumptions including volatility riskfree interest rate expected life dividend yield calculate fair value stock option awards common shares issues 1999 2008 purchase plans expected volatility based implied volatility market traded options company’s common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options expected life award based historical juniper networks inc notes consolidated financial statements continued experience terms conditions stock awards granted employees well potential effect options exercised time 2007 government india implemented new fringe benefit tax applies equity awards granted india taxpayers fringe benefit tax payable issuer equity awards however issuer allowed recover individual award holders fringe benefit taxes issuer paid applicable equity awards beginning january 2008 company amended equity award agreements future stockbased awards made employees india provide company reimbursed fringe benefit taxes paid relation applicable equity awards company elected use bsm optionpricing model incorporated monte carlo simulation calculate fair value stockbased awards issued amended equity award agreements august 2009 government india repealed fringe benefit tax applied equity awards granted india taxpayers effective date repeal company discontinued monte carlo simulation bsm optionpricing model calculate fair value stockbased awards granted india employees subsequent repeal assumptions used resulting estimates fair value employee stock options three years ended december 31 2009 assumptions used resulting estimates weighted average fair value per share employee stock purchase plan three years ended december 31 2009 company determines fair value rsus performance share awards based upon fair market value shares company’s common stock date grant company expenses cost rsus ratably period restrictions lapse addition company estimates stock compensation expense performance share awards based vesting criteria recognized expense portions awards annual targets set weighted average fair value per share rsus performance share awards granted periods juniper networks inc notes consolidated financial statements continued company’s stockbased compensation expense associated stock options employee stock purchases rsus performance share awards recorded following cost expense categories three years ended december 31 2009 millions three years ended december 31 2009 2008 2007 company recorded stockbased compensation expense related employee stock options amount 812 million 597 million 582 million respectively december 31 2009 approximately 1294 million unrecognized compensation cost adjusted estimated forfeitures related unvested stock options recognized weighted average period approximately 25 years company recorded stockbased compensation expense related employee stock purchase plans amount 144 million 132 million 76 million three years ended december 31 2009 2008 2007 respectively company recognized stock compensation expense 441 million 352 million 222 million three years ended december 31 2009 2008 2007 respectively connection rsus performance share awards december 31 2009 approximately 609 million unrecognized compensation cost adjusted estimated forfeitures related unvested rsus unvested performance share awards recognized weightedaverage period approximately 22 years extension stock option exercise periods former employees company could issue securities registration statements form s8 period current sec reporting obligations file periodic reports securities exchange act 1934 result parts 2007 options vested held certain former employees company could exercised completion company’s stock option investigation company’s public filings obligations met “trading blackout period” company extended expiration date stock options april 7 2007 end 30day period subsequent company’s filing required regulatory reports result extensions fair values stock options reclassified current liabilities subsequent modification subject marktomarket provisions end reporting period earlier final settlement april 7 2007 stock options covering approximately 660000 shares common stock scheduled expire could exercised result trading blackout period restriction first quarter 2007 company measured fair value stock options using bsm option valuation model recorded expense approximately 43 million first quarter 2007 addition company recorded expense 44 million first quarter 2007 associated approximately 1446000 shares covered options exercise periods extended 2006 result trading blackout period restriction december 31 2007 extended stock options either exercised expired unexercised previously recorded liabilities associated extensions reclassified additional paidin capital second quarter 2007 juniper networks inc notes consolidated financial statements continued amendment certain stock options 2007 company completed tender offer amend certain options granted 1996 plan 2000 plan original exercise prices per share less fair market value per share common stock underlying option’s grant date determined company financial accounting purposes tender offer employees subject taxation united states canada opportunity increase strike price affected options appropriate fair market value per share date grant avoid unfavorable tax consequences united states internal revenue code section 409a “409a issue” canadian tax laws regulations exchange increasing strike price options company committed make cash payment employees participating offer make employees whole incremental strike price compared original option exercise price connection offer company amended options purchase 43 million shares common stock committed make aggregate cash payments 76 million offer participants recorded amount operating expense 2007 addition company entered separate agreement two executives 2007 amend unexercised stock options covering 01 million shares company’s common stock order cure 409a issue associated stock options result company committed make aggregate cash payments 04 million recorded payment liability operating expense 2007 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirement defined may contribute statutory limits year company matched employee contributions since january 1 2001 company currently matches 25 eligible employee contributions matching contributions vest immediately company’s matching contributions plan totaled 119 million 107 million 95 million 2009 2008 2007 respectively deferred compensation plan july 2008 company formed nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds plan assets included within investments offsetting obligations included within accrued compensation consolidated balance sheet investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded interest income net offsetting compensation expense recorded operating expenses consolidated statements operations december 31 2009 2008 deferred compensation liability plan approximately 47 million 10 million respectively note 11 segment information company’s chief operating decision maker “codm” allocates resources assesses performance based financial information company’s business groups company’s operations organized two reportable segments infrastructure slt infrastructure segment includes products e mx tseries router product families exseries switching products well circuittopacket products slt segment consists primarily firewall virtual private network “firewall” systems appliances srx services gateways secure socket layer “ssl” virtual private network “vpn” appliances intrusion detection prevention “idp” appliances jseries router product family wide area network “wan” optimization platforms juniper networks inc notes consolidated financial statements continued primary financial measure used codm assessing performance segments segment operating income includes certain cost revenues rd expenses sales marketing expenses general administrative expenses codm allocate certain miscellaneous expenses segments even though expenses included company’s management operating income arrangements infrastructure slt products services revenue attributed segment based underlying purchase order contract sellthrough report direct costs operating expenses standard costs research development “rd” product marketing expenses generally applied segment indirect costs manufacturing overhead cost revenues allocated based standard costs indirect operating expenses sales marketing business development general administrative expenses generally allocated segment based factors including headcount usage revenue codm allocate stockbased compensation amortization purchased intangible assets restructuring impairment charges gains losses equity investments net income expense income taxes well certain charges segments following table summarizes financial information segment used codm millions juniper networks inc notes consolidated financial statements continued 1 corporate charges include severance related costs associated workforcerebalancing activities included business segment results 2 amount includes amortization expense purchased intangible assets operating expenses costs revenues 3 charges 2007 includes stock option amendment taxrelated charges 2009 2008 att inc accounted 104 company’s total net revenues 2009 single customer accounted 10 company’s total net revenues 2008 nsn predecessor companies accounted 128 company’s net revenues 2007 company attributes revenues geographic regions based customer’s shipto location following table presents net revenues geographic region millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2009 2008 attributable us operations december 31 2009 2008 property equipment held us percentage total property equipment 81 82 respectively although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 12 income taxes components income loss provision income taxes noncontrolling interest summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate income loss provision income taxes follows millions juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities follows millions december 31 2009 2008 company valuation allowance us domestic deferred tax assets approximately 1128 million 415 million respectively balance december 31 2009 consisted approximately 707 million certain california deferred assets approximately 421 million relates capital losses carry forward offset future capital gains valuation allowance increased 713 million year ended december 31 2009 increase primarily due changes california income tax law impacted future taxable income within california tax rates apply taxable income years deferred tax assets expected realized settled valuation allowance increased 72 million year ended december 31 2008 primarily due investment losses currently disallowed income tax purposes december 31 2009 company federal california net operating loss carryforwards approximately 118 million 212 million respectively company also california tax credit carryforwards approximately 1200 million approximately 125 million benefit california tax credit carryforwards credited additional paidin capital utilized company’s income tax returns since met utilization criteria asc topic 718 unused net operating loss carryforwards expire various dates beginning year 2012 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries’ earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 9029 million cumulative undistributed earnings certain foreign subsidiaries december 31 2009 company’s intention permanently reinvest juniper networks inc notes consolidated financial statements continued earnings distributed company would accrue additional income taxes expense approximately 2745 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations december 31 2009 2008 total amount gross unrecognized tax benefits 1836 million 1135 million respectively december 31 2009 approximately 1186 million 1836 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount company’s total gross unrecognized tax benefits years ended december 31 2009 2008 follows millions december 31 2009 2008 company accrued interest expense penalties related unrecognized tax benefits 235 million 87 million respectively within longterm liabilities consolidated balance sheets accordance company’s accounting policy accrued interest penalties related unrecognized tax benefits recognized component tax expense consolidated statements operations company recognized net interest penalties expense 148 million 29 million consolidated statements operations years ending december 31 2009 2008 respectively company engages continuous discussion negotiation tax authorities regarding tax matters various jurisdictions result reasonably possible amount liability unrecognized tax benefits may change within next 12 months however estimate range possible change cannot made time due high uncertainty resolution andor closure open audits company expect complete resolution irs audits within significant foreign state jurisdictions within next 12 months 2009 company recorded unrecognized tax benefits related sharebased compensation due decision reached us court appeals ninth circuit “the court” xilinx inc v commissioner january 13 2010 court withdrew decision oneline order court indicated taking actions case indicate actions intended take timing actions several possible actions court may take including issue another order affirms lower tax court’s decision b issue new opinion either affirms tax court decision reverses tax court decision eg based different analysis c grant xilinx’s petition rehearing en banc rehearing threejudge panel issued original ninth circuit court ruling time company indication options court pursue given holding articulated court’s withdrawn opinion possible court pursue course action ultimately hold xilinx result company’s judgment changed regard particular unrecognized tax benefit court conclude matter within next 12 months reasonably possible company’s unrecognized tax benefits change approximately 73 million juniper networks inc notes consolidated financial statements continued company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 although carryforward attributes generated prior 2004 may still adjusted upon examination irs attributes either used future period company currently examination irs 2004 2006 tax years company also subject two separate ongoing examinations india tax authorities 2004 2008 tax years respectively received inquiry hong kong tax authorities 2002 2006 tax years additionally company reached final resolution irs adjustment proposed 1999 2000 tax years company aware examination taxing authorities major jurisdictions files income tax returns december 31 2009 part ongoing 2004 irs audit company received proposed adjustment related license acquired intangibles intercompany rd cost sharing arrangement march 2009 company received assessment hong kong tax authorities specifically related inquiry 2002 tax year december 2008 company received proposed adjustment india tax authorities related 2004 tax year july 2009 india tax authorities commenced separate investigation 2004 2008 tax returns disputing company’s determination taxable income due cost basis certain fixed assets company recorded 46 million penalties interest 2009 relevant matter company understands india tax authorities may issue initial assessment substantially higher amount result accordance administrative judiciary process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative procedures relative matters referenced company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations information please see note 13 commitments contingencies heading “irs notices proposed adjustments” juniper networks inc notes consolidated financial statements continued note 13 commitments contingencies commitments following table summarizes company’s principal contractual obligations december 31 2009 millions operating leases company leases facilities operating leases expire various times longest expires november 2022 future minimum payments noncancelable operating leases net committed sublease income totaled 3033 million december 31 2009 rent expense 2009 2008 2007 approximately 566 million 580 million 487 million respectively october 2009 company amended three existing leases company’s corporate headquarters facilities sunnyvale california lease amended extend underlying lease term ii establish new monthly base rent payments periods november 1 2009 new monthly base rent payments represent significant reduction base rent would payable previously remaining terms underlying leases purchase commitments order reduce manufacturing lead times ensure adequate component supply contract manufacturers utilized company place noncancelable nonreturnable “ncnr” orders components based company’s build forecasts december 31 2009 ncnr component orders placed contract manufacturers value 1395 million contract manufacturers use components build products based company’s forecasts purchase orders company received customers generally company components title products transfers contract manufacturers company immediately company’s customers upon delivery designated shipment location components remain unused products remain unsold specified periods company may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet company’s forecast customer orders december 31 2009 company accrued 278 million based estimate charges tax liabilities december 31 2009 company 1770 million included current longterm liabilities consolidated balance sheet unrecognized tax positions reasonably possible company may reach agreement certain issues result amount liability unrecognized tax benefits may decrease approximately 15 million within next 12 months time company unable make reasonably reliable estimate timing payments related additional 1755 million liability due uncertainties timing tax audit outcomes juniper networks inc notes consolidated financial statements continued contractual obligations december 31 2009 contractual obligations consists indemnityrelated escrow amount 13 million fiveyear 364 million data center hosting agreement threeyear 227 million software subscription joint development agreement thirdparty development networkrelated technology requires quarterly payments 35 million january 2010 company records quarterly payment thirdparty developer rd expense consolidated statements operations technology development reached technological feasibility pursuant joint development agreement exchange party’s respective contributions development effort well consideration payable company party obtain license technology result development use certain respective product lines december 31 2009 191 million remained unpaid data center hosting agreement remaining commitment expected paid end april 2013 154 million remained unpaid software subscription agreement remaining commitment expected paid end january 2011 35 million remained joint development agreement guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product service performance guarantees related thirdparty customer financing arrangements standby letters credit certain lease facilities december 31 2009 company 340 million guarantees standby letters credit recorded liability 219 million related thirdparty customerfinancing guarantee december 31 2008 company recorded liability related guarantees indemnification arrangements legal proceedings company subject legal claims litigation arising ordinary course business employment intellectual property claims including matters described outcome matters currently determinable although company expect legal claims litigation ultimately material adverse effect consolidated financial condition results operations adverse result one matters could negatively affect company’s consolidated financial results period occur federal securities class action july 14 2006 august 29 2006 two purported class actions filed northern district california company certain company’s current former officers directors november 20 2006 court consolidated two actions juniper networks inc securities litigation c0604327jw appointed new york city pension funds lead plaintiffs lead plaintiffs filed consolidated class action complaint january 12 2007 filed amended consolidated class action complaint april 9 2007 amended consolidated complaint alleges defendants violated federal securities laws manipulating stock option grant dates coincide low stock prices issuing false misleading statements including among others incorrect financial statements due improper accounting stock option grants amended consolidated complaint asserts claims violations securities act 1933 securities exchange act 1934 behalf persons purchased otherwise acquired juniper networks’ publiclytraded securities july 12 2001 including august 10 2006 plaintiffs seek unspecified damages unspecified amount june 7 2007 defendants filed motion dismiss certain claims hearing held september 10 2007 march 31 2008 court issued order granting juniper networks inc notes consolidated financial statements continued part denying part defendants’ motion dismiss order dismissed prejudice plaintiffs’ section 10b claim extent based challenged statements made july 14 2001 order also dismissed leave amend plaintiffs’ section 10b claim pradeep sindhu order upheld plaintiffs’ remaining claims plaintiffs amend complaint september 25 2009 court certified plaintiff class consisting persons entities purchased otherwise acquired company’s securities july 11 2003 august 10 2006 inclusive damaged thereby including received acquired juniper networks’ common stock issued pursuant registration statement sec form s4 dated march 10 2004 company’s merger netscreen technologies inc purchasers zero coupon convertible senior notes due june 15 2008 issued pursuant registration statement sec form s3 dated november 20 2003 excluded class defendants current former officers directors company immediate families heirs successors assigns entity controlled person february 5 2010 company lead plaintiffs entered agreement principle settle claims company’s current former officers directors settlement contingent upon approval boards trustees lead plaintiffs approval court proposed settlement claims company officers directors dismissed prejudice released exchange 1690 million cash payment company considers proposed payment probable reasonably estimable therefore recorded cash settlement amount pretax operating expense consolidated statement operations fourth quarter ended december 31 2009 calamore proxy statement action march 28 2007 action titled jeanne calamore v juniper networks inc et al c071772jw filed jeanne calamore northern district california company certain company’s current former officers directors complaint alleges proxy statement company’s 2006 annual meeting stockholders contained various false misleading statements failed disclose stock option backdating information result plaintiff seeks preliminary permanent injunctive relief respect company’s 2006 equity incentive plan including seeking invalidate plan equity awards granted grantable thereunder may 21 2007 company filed motion dismiss plaintiff filed motion preliminary injunction july 19 2007 court issued order denying plaintiff’s motion preliminary injunction dismissing complaint entirety leave amend plaintiff filed amended complaint august 27 2007 defendants filed motion dismiss october 9 2007 august 13 2008 court issued order granting company’s motion dismiss prejudice entered final judgment favor company september 9 2008 plaintiff filed notice appeal united states court appeals ninth circuit plaintiff’s appeal fully briefed court appeals heard oral argument appeal october 7 2009 february 5 2010 ninth circuit issued memorandum decision affirming district court’s dismissal prejudice february 19 2010 plaintiff filed petition rehearing suggestion rehearing en banc ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” juniper networks certain juniper networks’ officers action brought behalf purchasers company’s common stock initial public offering june 1999 company’s secondary offering september 1999 juniper networks inc notes consolidated financial statements continued specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering company’s subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company june 2004 stipulation settlement release claims issuer defendants including company submitted court approval august 31 2005 court preliminarily approved settlement december 2006 appellate court overturned certification classes six test cases selected underwriter defendants plaintiffs coordinated proceedings action involving company one six test cases class certification condition settlement unlikely settlement would receive final court approval june 25 2007 court entered order terminating proposed settlement based upon stipulation among parties settlement plaintiffs filed amended master allegations amended complaints six focus cases march 26 2008 court largely denied defendants’ motion dismiss amended complaints six test cases parties reached global settlement litigation october 5 2009 court entered opinion order granting final approval settlement insurers pay full amount settlement share allocated company bear financial liability company well officer director defendants previously dismissed action pursuant tolling agreements receive complete dismissals case certain objectors appealed court’s october 5 2009 final order second circuit court appeals 16b demand october 3 2007 purported juniper networks shareholder filed complaint violation section 16b securities exchange act 1934 prohibits shortswing trading company’s ipo underwriters complaint vanessa simmonds v goldman sachs group et al case c07015777 district court western district washington seeks recovery shortswing profits company named nominal defendant recovery sought company matter menlo equities december 2008 menlo equities development company ii llc “menlo equities” initiated arbitration proceeding company menlo equities company members menlojuniper networks llc parties operating agreement development services agreement relating certain real estate sunnyvale california purchased 2000 dispute related whether company would obligated pay menlo equities certain fees agreements real estate developed sold menlo equities asserted entitled immediate payment damages approximately 290 million plus attorney’s fees result repudiation breach agreements company denied menlo equities’ allegations arbitration hearing conducted june 2009 arbitrator issued interim decision september ruled menlo’s favor areas december 28 2009 parties resolved dispute amendment underlying agreements whereby company acquired menlo equities’ interest llc pursuant amended buy provisions operating agreement 130 million juniper networks inc notes consolidated financial statements continued company recorded litigation settlement charges within operating expenses consolidated statement operations year ended december 31 2009 party relieved obligations development services agreement addition company released claims parties agreed terminate arbitration irs notices proposed adjustments 2007 irs opened examination company’s us federal income tax employment tax returns 2004 fiscal year subsequently irs extended examination company’s employment tax returns include fiscal years 2005 2006 december 31 2009 irs yet concluded examinations returns september 2008 part ongoing audit us federal income tax return irs issued notice proposed adjustment “nopa” regarding company’s business credits company believes adequately provided reasonable foreseeable outcome related proposed adjustment july 2009 company received nopa irs claiming company owes additional taxes plus interest possible penalties 2004 tax year based transfer pricing transaction related license acquired intangibles intercompany rd cost sharing arrangement asserted changes company’s 2004 tax year would affect company’s income tax liabilities tax years subsequent 2003 nopa estimated incremental tax liability would approximately 8070 million excluding interest penalties company filed protest proposed deficiency irs cause matter referred appeals division irs company strongly believes irs’ position regard matter inconsistent applicable tax laws existing treasury regulations previously reported income tax provision year question appropriate however assurance matter resolved company’s favor regardless whether matter resolved company’s favor final resolution matter could expensive timeconsuming defend andor settle company believes provided adequately matter still possibility adverse outcome matter could material effect results operations financial condition company reached final resolution irs adjustment irs proposed 1999 2000 tax years company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits note 14 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter two years ended december 31 2009 millions except per share amounts juniper networks inc notes consolidated financial statements continued juniper networks inc notes consolidated financial statements continued note 15 joint venture 2009 company entered agreement form joint venture provide combined carrier ethernetbased solution nsn inception company contributed 66 million 60 percent interest joint venture nsn juniper networks entitled appoint two board members board joint venture board shall consist four board members times given company’s majority ownership interest joint venture’s financial results consolidated accounts company noncontrolling interest recorded reflect noncontrolling investor’s interest venture’s results intercompany transactions eliminated exception noncontrolling interest note 16 subsequent event stock repurchases subsequent december 31 2009 filing report company repurchased 21 million shares common stock 553 million average purchase price 2628 per share 2008 stock repurchase program filing annual report form 10k company’s 2008 stock repurchase programs remaining authorized funds 2633 million purchases program subject review circumstances place time acquisitions company’s share repurchase program may made time permitted securities laws legal requirements program may discontinued time juniper networks inc notes consolidated financial statements continued february 2010 company’s board approved new stock repurchase program authorized company repurchase 10 billion common stock new authorization addition company’s 2008 stock repurchase program share repurchases company’s stock repurchase programs subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements programs may discontinued time item 9item 8 financial statements supplementary data index consolidated financial statements years ended december 31 2010 2009 2008 contents page report independent registered public accounting firm report independent registered public accounting firm managements report internal control financial reporting consolidated statements operations consolidated balance sheets consolidated statements cash flows consolidated statements changes equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2010 2009 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2010 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2010 2009 consolidated results operations cash flows three years period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k fiscal year 2010 juniper networks inc changed method accounting revenue recognition adoption amendments financial accounting standards board fasb accounting standards codification asc resulting accounting standards update 200913 multipledeliverable revenue arrangements accounting standards update 200914 certain revenue arrangements include software elements adopted effective january 1 2010 also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 25 2011 expressed unqualified opinion thereon ernst young llp san jose california february 25 2011 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2010 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2010 2009 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2010 juniper networks inc report dated february 25 2011 expressed unqualified opinion thereon ernst young llp san jose california february 25 2011 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2010 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework based assessment management concluded december 31 2010 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2010 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2010 juniper networks inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets thousands except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statement changes equity thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated company holds 60 percent interest joint venture nokia siemens networks bv “nsn” given companys majority ownership interest joint venture accounts joint venture consolidated accounts company noncontrolling interest recorded noncontrolling investors interests net assets operations joint venture reclassifications first quarter 2010 company reclassified certain selling marketing costs previously reported cost service revenues sales marketing expense accordingly 251 million 291 million costs reported years ended december 31 2009 2008 respectively reclassified cost service revenues sales marketing expense conform current periods presentation reclassification impact companys previously reported net revenues segment results operating income net income earnings per share note 2 summary significant accounting policies use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences estimates actual results future consolidated results operation may affected cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash investments availableforsale trading securities management determines appropriate classification securities time purchase reevaluates classification balance sheet date companys investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income loss realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company recognizes impairment charge availableforsale investments decline fair value investments cost basis determined temporary company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments fair value temporary difference recognized impairment loss consolidated statements operations companys nonqualified compensation plan invests mutual funds classified trading securities reported juniper networks inc notes consolidated financial statements continued fair value consolidated balance sheets realized unrealized holding gains losses well offsetting compensation expense reported consolidated statements operations privatelyheld equity investments company minority equity investments privatelyheld companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment company markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary realized gains losses reported consolidated statements operations fair value measurement company records financial instruments derivative contracts fair value fair value assumes transaction sell asset transfer liability occurs principal market asset liability absence principal market advantageous market asset liability carrying value companys financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments derivatives determined using quoted market prices securities similar financial instruments concentrations financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities money market funds highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable company maintains reserves potential bad debt historically losses within managements expectations verizon communications inc att inc accounted 106 104 companys total net revenues 2010 2009 respectively december 31 2010 2009 significant accounts receivable customers single customer accounted 10 companys total net revenues 2008 company relies sole suppliers certain components asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life lease term respective assets company depreciates leasehold improvements lesser expected life lease assets maximum ten years estimated useful life land improvements generally ten fifteen years estimated useful life depreciable assets generally one half five years goodwill purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based upon fair value assets received identifiable intangible assets comprised purchased trademarks developed technologies customer relationships maintenance contracts juniper networks inc notes consolidated financial statements continued intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based tests future goodwill impairment tests could result charge earnings purchased intangible assets finite lives amortized straightline basis respective estimated useful lives ranging two nineteen years impairment company evaluates longlived assets held use impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized amount carrying amount asset exceeds fair value company assesses recoverability longlived intangible assets determining whether unamortized balances greater sum undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows company evaluates goodwill minimum annual basis whenever events changes circumstances indicate carrying amount asset may recoverable impairment goodwill tested reporting unit level comparing reporting units carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income approach market approach carrying value reporting unit exceeds fair value goodwill considered impaired second step performed measure amount impairment loss company conducted annual impairment test november 1 2010 2009 2008 determined carrying value remaining goodwill impaired future impairment indicators including sustained declines companys market capitalization decrease revenue profitability levels could require impairment charges recorded revenue recognition october 2009 financial accounting standards board “fasb” issued accounting standards update “asu” 200913 topic 605 multipledeliverable revenue arrangements “asu 200913” asu 200913 changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price new standard company allocates total arrangement consideration separable element arrangement based upon relative selling price element arrangement consideration allocated undelivered elements deferred delivery concurrently issuing asu 200913 fasb also issued asu 200914 topic 985 certain revenue arrangements include software elements “asu 200914” asu 200914 excludes software contained tangible product scope software revenue guidance software component nonsoftware component function together deliver tangible products essential functionality company early adopted standards prospective basis beginning fiscal 2010 new materially modified arrangements originating december 31 2009 result adoption asu 200913 asu 200914 net revenue year ended december 31 2010 approximately 237 million higher net revenue would recorded previous accounting rules increase revenue due recognition revenue products shipped period included approximately 183 million year ended december 31 2010 related undelivered product commitments unable demonstrate fair value pursuant previous accounting standards remainder increase revenue year due products sold multipleyear service arrangements recognized ratably previous accounting standards change allocation methodology residual method relative selling price method prescribed asu 200913 revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance • sales price fixed determinable company assesses whether sales price fixed determinable based juniper networks inc notes consolidated financial statements continued payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories company records accounts receivable net allowance doubtful accounts estimated customer returns pricing credits fiscal 2010 future periods pursuant guidance asu 200913 sales arrangement contains multiple elements software nonsoftware components function together deliver tangible products essential functionality company allocates revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing products similar functionality typically cannot obtained additionally company unable reliably determine competitors products selling prices standalone basis company typically able determine tpe best estimate selling price established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using guidance recognizing software revenue amended company limits amount revenue recognition delivered elements amount contingent future delivery products services future performance obligation subject customerspecific return refund privileges company evaluates deliverable arrangement determine whether represent separate units accounting deliverable constitutes separate unit accounting standalone value customernegotiated refunds return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially companys control delivered element constitutes separate unit accounting circumstances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration revenue recognition determined combined unit single unit allocation consideration determined arrangement inception basis units relative selling price new standards generally change units accounting companys revenue transactions entered prior january 1 2010 revenue arrangements multiple elements sales products include services allocated element using residual method based vsoe fair value undelivered items pursuant accounting standard codification asc topic 985605 software revenue recognition residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period company accounts multiple agreements single customer one arrangement contractual terms andor substance agreements indicate may closely related effect parts single arrangement sales direct endusers valueadded resellers original equipment manufacturer oem partners company recognizes product revenue upon transfer title risk loss generally upon shipment companys practice identify enduser prior shipment valueadded reseller companys endusers valueadded resellers significant obligations future performance rights return companys agreements juniper networks inc notes consolidated financial statements continued oem partners may allow future rights returns pricing credits portion companys sales made distributors agreements allowing pricing credits rights return product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less company sells certain interests accounts receivable nonrecourse basis part customer financing arrangements primarily one major financing company cash received arrangement advance revenue recognition recorded shortterm debt allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance potential writeoffs considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty costs company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs accrued part companys cost sales based associated material costs labor costs customer support overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period customer support labor overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers produce companys products using design specifications quality assurance programs standards established company procure components manufacture products based companys demand forecasts companys estimates future demand products based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions company establishes provision inventory carrying costs obsolete material exposures excess components purchased based historical trends research development costs research design develop companys products expensed incurred software development costs capitalized beginning products technological feasibility established ending product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 171 million 114 juniper networks inc notes consolidated financial statements continued million 50 million 2010 2009 2008 respectively loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company records charge equal minimum estimated liability loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company recognizes sharebased compensation expense sharebased payment awards including employee stock options restricted stock units “rsus” performance share awards psas purchases companys employee stock purchase plan espp accordance asc topic 718 compensation stock compensation asc topic 718 sharebased compensation expense expectedtovest sharebased awards valued singleoption approach amortized straightline basis net estimated forfeitures value portion award ultimately expected vest recognized expense requisite service periods companys consolidated statements operations years ended december 31 2010 2009 2008 company utilizes blackscholesmerton “bsm” optionpricing model order determine fair value stock options bsm model requires various highly subjective assumptions represents managements best estimates volatility expected option life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded interest income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities approximately two months company also uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified operating expense line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2010 2009 2008 interest income net consolidated statements operations cash flows hedges classified operating activities provision income taxes deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth asc topic income taxes “asc topic 740” extent company believes juniper networks inc notes consolidated financial statements continued amounts likely realized company records valuation allowance reduce deferred tax assets company believes likely future income reversal deferred tax liabilities forecasted income sufficient fully recover remaining deferred tax assets event company determines part net deferred tax assets realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting adjustment earnings period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due comprehensive income loss comprehensive income loss defined change equity period transactions events circumstances nonowner sources company includes components comprehensive income loss part consolidated statements changes equity accumulated comprehensive income loss includes net unrealized gains losses availableforsale securities net foreign currency translation gains losses unrealized gains losses derivatives designated cash flow hedges excluded net income foreign currency translation assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using weightedaverage exchange rates period foreign currency translation gains losses material years ended december 31 2010 2009 2008 effect exchange rate changes cash balances held foreign currencies immaterial years presented recent accounting standards december 2010 fasb issued asu 201029 topic 805 business combinations disclosure supplementary pro forma information business combinations “asu 201029” provides comparative disclosure guidance expands pro forma disclosure requirements asc topic 805 guidance effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 early adoption permitted asu 201029 relates disclosure requirements impact companys consolidated results operations financial condition december 2010 fasb issued asu 201028 topic 350 intangibles goodwill perform step 2 goodwill impairment test reporting units zero negative carrying amounts “asu 201028” modifies step 1 goodwill impairment test reporting units zero negative amounts reporting units entity required perform step 2 goodwill impairment test likely goodwill impairment exist guidance effective fiscal years interim periods within years beginning december 15 2011 companys adoption asu 201028 expected impact consolidated results operations financial condition january 2010 fasb issued asu 201006 topic 820 improving disclosures fair value measurements “asu 201006” provides additional fair value measurement disclosures clarifies certain existing disclosure requirements except requirement disclose purchases sales issuances settlements level 3 measurements gross basis disclosure clarification requirements effective interim annual reporting periods beginning december 15 2009 requirement separately disclose purchases sales issuances settlements recurring level 3 measurements gross basis effective fiscal years beginning december 15 2010 interim periods within fiscal years asu 201006 relates disclosure requirements impact companys consolidated results operations financial condition note 3 business combinations year ended december 31 2010 company completed acquisitions ankeena networks inc “ankeena” smobile systems inc “smobile” altor networks inc altor trapeze networks trapeze juniper networks inc notes consolidated financial statements continued ankeena acquisition april 19 2010 company acquired 100 equity securities ankeena privatelyheld provider new media infrastructure technology acquisition ankeena provide company strong video delivery capabilities ankeenas products optimize webbased video delivery provide key components content delivery network architecturesolution improve consumers online video experience reduce service provider carrier service provider infrastructure costs providing webbased video connection acquisition ankeena company acquired net assets 36 million including cash equivalents 23 million recognized goodwill 531 million assigned companys infrastructure segment prior acquisition company 20 million 77 ownership interest ankeena accounted privatelyheld equity investment acquisitiondate fair value equity interest ankeena 52 million based noncontrolling interest fair value included purchase price company recognized 32 million gain reported within gain loss equity investments consolidated statement operations smobile acquisition july 30 2010 company acquired 100 equity securities smobile privatelyheld software company focused solely smartphone tablet security solutions enterprise service provider consumer markets acquisition smobile allow company extend security focus integration smobiles product portfolio junos® pulse connection acquisition smobile company assumed net liabilities 52 million including cash equivalents 04 million recognized goodwill 481 million assigned companys service layer technology slt segment altor acquisition december 6 2010 company acquired 100 equity securities altor privatelyheld provider virtualization security acquisition altor provide company data center cloud security solutions including products optimize webbased video delivery provide key components content delivery network architecturesolution improve consumers online video experience reduce service provider carrier service provider infrastructure costs providing webbased video connection acquisition altor company acquired net assets 45 million including cash equivalents 64 million recognized goodwill 782 million assigned companys slt segment prior acquisition company 20 million 50 ownership interest altor accounted privatelyheld equity investment acquisitiondate fair value equity interest altor 41 million based noncontrolling interest fair value included purchase price company recognized 21 million gain reported within gain loss equity investments consolidated statement operations trapeze acquisition december 16 2010 company acquired 100 equity securities trapeze subsidiary belden inc provider enterprise wireless local area network wlan solutions acquisition make wlan infrastructure key part junipers portfolio accelerate growth enterprise market connection acquisition trapeze company acquired net assets 59 million including cash equivalents 08 million recognized goodwill 898 million assigned companys infrastructure segment companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material company continues juniper networks inc notes consolidated financial statements continued evaluate certain balances related business combinations completed 2010 additional information existing acquisition dates unknown company may become known remainder measurement period exceed 12 months acquisition date may result changes amounts allocations recorded total purchase consideration acquisitions summarized follows millions 1 fair value stock option rsu awards assumed based acquired companys determined value acquisition date allocation purchase consideration acquisitions completed year ended december 31 2010 summarized follows millions goodwill recognized attributable primarily expected synergies acquired assembled workforce economies scale expected combining operations 2010 acquisitions company certain amounts acquired goodwill expected deductible income tax purposes however unable estimate total amount time company recognized 63 million acquisitionrelated costs 2010 costs expensed period incurred reported companys consolidated statement operations acquisitionrelated charges acquisitions acquisition related charges incurred company 2009 2008 following table presents details intangible assets acquired business combinations completed year ended december 31 2010 millions except years acquired inprocess research development “iprd” consists existing research development projects time acquisition projects qualify iprd assets represent yet reached technological feasibility juniper networks inc notes consolidated financial statements continued alternative future use initial recognition acquired iprd assets accounted indefinitelived intangible assets development costs incurred acquisition acquired development projects expensed incurred upon completion development acquired iprd assets considered amortizable finitelived assets december 31 2010 iprd related ankeena acquisition completed development considered amortizable finitelived assets total iprd assets related altor acquisition 79 million estimated future cost complete iprd projects 18 million note 4 net income per share basic net income per share computed dividing net income available common stockholders weighted average number common shares outstanding period diluted net income per share computed giving effect dilutive potential common shares outstanding period dilutive potential common shares consist shares issuable upon exercise stock options vesting rsus vesting psas following table presents calculation basic diluted net income per share attributable juniper networks millions except per share amounts company excludes outstanding stock options exercise prices greater average market price calculation diluted net income per share effect would antidilutive company includes common shares underlying psas calculation diluted net income per share become contingently issuable excludes shares contingently issuable employee stock option awards psas covering approximately 140 million 389 million shares companys common stock outstanding included computation diluted earnings per share years ended december 31 2010 2009 respectively effect would antidilutive juniper networks inc notes consolidated financial statements continued note 5 cash equivalents investments cash equivalents following table summarizes companys cash equivalents millions investments availableforsale trading securities following table summarizes companys unrealized gains losses fair value investments designated availableforsale trading securities december 31 2010 2009 millions juniper networks inc notes consolidated financial statements continued following table presents maturities companys availableforsale trading securities december 31 2010 2009 millions juniper networks inc notes consolidated financial statements continued following tables presents companys availableforsale investments unrealized loss position december 31 2010 2009 millions 1 balance includes investments immaterial unrealized loss position 12 months greater december 31 2010 1 investments consist us foreign government securities company investments publiclytraded equity securities december 31 2010 company impairment charges publiclytraded equity investments 2009 2008 company realized impairment charge 35 million publiclytraded equity security due sustained decline fair value investment cost basis company judged temporary material realized gains losses sale availableforsale securities 2010 2009 2008 company generated cash proceeds 16244 million 6838 million 4994 million maturities sales availableforsale investments 2010 2009 2008 respectively company 73 52 investments unrealized loss position december 31 2010 2009 respectively gross unrealized losses related investments due changes interest rates contractual terms investments permit issuer settle securities price less amortized cost investment fixed income securities unrealized losses company determined intent sell investments ii likely required sell investments recovery entire amortized cost basis company consider investments temporarily impaired december 31 2010 december 31 2009 respectively company reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation privatelyheld equity investments companys minority equity investments privatelyheld companies carried cost company controlling interest ability exercise significant influence companies company adjusts privatelyheld equity investments impairment fair value exceeds carrying value respective assets december 31 2010 2009 carrying values companys privatelyheld equity investments 221 million 139 million respectively included longterm assets consolidated balance sheets 2010 2009 2008 company invested total 133 million 72 million 46 million respectively privatelyheld equity juniper networks inc notes consolidated financial statements continued investments 2010 result acquisitions ankeena altor company recognized gain 32 million 21 million respectively minority equity investments companies 2009 company minority equity investment privatelyheld company acquired publiclytraded company received cash payment 10 million common stock acquiring company 10 million classified availableforsale investment additionally company minority equity investment privatelyheld company acquired third party company received payment 21 million 2008 03 million 2009 company measures fair value privatelyheld equity investments using analysis financial condition nearterm prospects investees including recent financing activities capital structure 2010 company determined impairments privatelyheld equity investments years ended december 31 2009 2008 company recognized impairment loss 55 million 113 million respectively minority equity investments privatelyheld companies determined temporary restricted cash restricted cash consists amounts held escrow accounts required certain acquisitions completed 2005 2010 ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust 2010 company increased restricted cash 2619 million primarily escrow accounts required acquisitions completed 2010 lesser extent israel retirement trust established first quarter 2010 increases restricted cash partially offset distributions approximately 1965 million mainly related 2010 acquisitions connection ankeena acquisition company agreed pay 107 million escrow represents cash value unvested restricted shares ankeena april 8 2010 certain former ankeena employees december 31 2010 company expects release 61 million escrow restricted shares vest next two years 2009 company distributed 10 million restricted cash connection escrow fund associated acquisition funk software company also increased restricted cash aggregate 113 million 2009 fund india gratuity trusts due overall growth company following table summarizes companys restricted cash reported consolidated balance sheets millions december 31 2010 2009 unrealized gain losses related restricted investments immaterial juniper networks inc notes consolidated financial statements continued note 6 fair value measurements fair value hierarchy company determines fair values financial instruments based fair value hierarchy requires entity maximize use observable inputs minimize use unobservable inputs measuring fair value fair value defined price would received sell asset paid transfer liability orderly transaction market participants measurement date fair value assumes transaction sell asset transfer liability occurs principal advantageous market asset liability establishes fair value asset liability shall determined based assumptions market participants would use pricing asset liability classification financial asset liability within hierarchy based upon lowest level input significant fair value measurement fair value hierarchy prioritizes inputs three levels may used measure fair value level 1 inputs unadjusted quoted prices active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based companys assumptions inputs valued using internal financial models assets liabilities measured fair value recurring basis following tables provide summary assets measured fair value recurring basis presentation company’s consolidated balance sheets millions 1 balance includes 06 million restricted investments measured fair market value related acquisition completed 2005 additional information regarding companys restricted investments see note 5 cash equivalents investments heading “restricted cash” restricted investments included restricted cash balance consolidated balance sheet juniper networks inc notes consolidated financial statements continued 2 balance includes 27 million restricted investments measured fair market value related companys india gratuity trust 3 balance includes 1143 million restricted investments measured fair market value related companys trust december 31 2010 2009 company 26 million 15 million respectively derivative liabilities measured fair value recurring basis company recorded derivative liabilities related foreign exchange contracts within accrued liabilities consolidated balance sheets liabilities measured using significant observable remaining inputs level 2 pursuant fair value hierarchy companys policy recognize asset liability transfers among level 1 level 2 level 3 actual date events change circumstances caused transfer years ended december 31 2010 2009 company transfers levels fair value hierarchy assets liabilities measured fair value assets liabilities measured fair value nonrecurring basis companys assets measured fair value nonrecurring basis least annually quarterly basis impairment indicated december 31 2010 december 31 2009 carrying value privatelyheld equity investments measured fair value nonrecurring basis 08 million 05 million respectively privatelyheld equity investments normally carried cost measured fair value due events circumstances company identified significantly impacting fair value investments company measured fair value privatelyheld equity investments using analysis financial condition nearterm prospects investee including recent financing activities capital structure result company recognized impairment loss 55 million year ended december 31 2009 classified investments level 3 assets due absence quoted market prices inherent lack liquidity company impairment charges privatelyheld equity investments year ended december 31 2010 company liabilities measured fair value nonrecurring basis years ended december 31 2010 2009 juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill changes carrying amount goodwill two years ended december 31 2010 follows millions year ended december 31 2010 company recorded goodwill 531 million 481 million 782 million 898 million result acquisitions ankeena smobile altor trapeze respectively discussion see note 3 business combinations company performed goodwill impairment reviews november 1 2010 2009 concluded impairment goodwill years ended december 31 2010 2009 juniper networks inc notes consolidated financial statements continued purchased intangible assets following table presents companys purchased intangible assets millions year ended december 31 2010 company recorded 122 million 266 million 213 million 564 million purchased intangible assets result acquisitions ankeena smobile altor trapeze discussion see note 3 business combinations amortization purchased intangible assets included operating expenses cost product revenues totaled 86 million 154 million 2010 2009 respectively company determined impairment intangible assets december 31 2010 2009 estimated future amortization expense purchased intangible assets definite lives future periods follows millions juniper networks inc notes consolidated financial statements continued note 8 financial information property equipment property equipment consist following millions depreciation expense 1468 million 1330 million 1235 million 2010 2009 2008 respectively deferred revenue amounts billed excess revenue recognized included deferred revenue accompanying consolidated balance sheets product deferred revenue net related deferred cost revenue includes shipments endusers valueadded resellers distributors following table provides breakdown companys deferred revenue millions juniper networks inc notes consolidated financial statements continued warranties company provides estimated cost product warranties time revenue recognized provision reported accrued warranty within current liabilities consolidated balance sheets changes companys accrued warranty follows millions restructuring liabilities 2009 company implemented restructuring plan “2009 restructuring plan” effort better align business operations current market macroeconomic conditions restructuring plan included restructuring certain business functions resulted reductions workforce facilities company recorded 108 million 195 million restructuring charges years ended december 31 2010 2009 respectively associated 2009 restructuring plan company incurred restructuring charges year ended december 31 2008 restructuring charges based companys restructuring plans committed management changes estimates executing approved plans reflected companys results operations following tables illustrate changes restructuring liabilities 2010 2009 respectively millions interest income net interest income net consists following millions interest income expense net primarily includes interest income companys cash equivalents juniper networks inc notes consolidated financial statements continued investments well customer financing charges income expense net primarily includes foreign exchange gains losses miscellaneous expenses bank fees note 9 financing arrangements company customer financing arrangements sell accounts receivable major thirdparty financing provider program intended affect timing revenue recognition company recognizes revenue upon sellthrough financing arrangements proceeds financing provider due company 30 days sale receivable transactions financing provider company surrendered control transferred assets accounts receivable isolated company put beyond reach creditors even event bankruptcy company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant financing arrangements sale receivables company sold net receivables 6375 million 4498 million 2010 2009 respectively 2010 2009 company received cash proceeds 5957 million 4263 million respectively amounts owed financing provider recorded accounts receivable companys consolidated balance sheets december 31 2010 december 31 2009 1274 million 898 million respectively portion financed receivable recognized revenue accounted financing arrangement included accrued liabilities consolidated balance sheet december 31 2010 december 31 2009 estimated amounts cash received financing provider recognized revenue distributors 491 million 526 million respectively note 10 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating cost services operating expenses derivatives intended protect us dollar equivalent companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities less one year effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified cost services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments interest income net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income loss expected reclassified earnings within next 12 months total fair value company’s derivative assets located current assets consolidated balance sheets december 31 2010 2009 04 million 02 million respectively total fair value company’s derivative liabilities located accrued liabilities consolidated balance sheets december 31 2010 2009 26 million 15 million respectively juniper networks inc notes consolidated financial statements continued year ended december 31 2010 company recognized loss 30 million accumulated comprehensive income effective portion derivative instruments reclassified loss 21 million comprehensive income operating expense consolidated statements operations company recognized gain 06 million accumulated comprehensive income effective portion derivative instruments reclassified gain 42 million comprehensive income operating expense consolidated statements operations year ended december 31 2009 ineffective portion companys hedging instruments recognized consolidated statements operations immaterial three years ended december 31 2010 nondesignated hedges company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies hedges qualify special hedge accounting treatment derivatives carried fair value changes recorded interest income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities derivatives maturities approximately two months company recognized loss 03 million gain 49 million nondesignated derivative instruments within interest income net consolidated statements operations years ended december 31 2010 2009 respectively note 11 equity stock repurchase activities february 2010 company’s board directors “board” approved new stock repurchase program “2010 stock repurchase program” authorized company repurchase 10 billion common stock new authorization addition stock repurchase program approved board march 2008 “2008 stock repurchase program” also enabled company repurchase 10 billion company’s common stock two stock repurchase programs company repurchased approximately 197 million shares common stock average price 2867 per share total purchase price 5635 million year ended december 31 2010 approximately 207 million shares common stock average price 2191 per share total purchase price 4535 million year ended december 31 2009 december 31 2010 remaining authorized funds 2008 stock repurchase program 7551 million remaining authorized funds 2010 stock repurchase program addition repurchases company’s stock repurchase programs also brokertransacted repurchases common stock companys employees connection net issuance shares satisfy tax withholding obligations vesting certain rsus psas brokertransacted repurchases approximately 01 million shares common stock average price 2575 per share aggregate purchase price 19 million connection net issuances year ended december 31 2010 immaterial amount brokertransacted repurchases common stock companys employees connection net issuance shares year ended december 31 2009 shares common stock repurchased company’s 2008 2010 stock repurchase programs employees connection net issuances retired future share repurchases company’s 2010 stock repurchase program subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 18 subsequent events discussion companys stock repurchase activity 2011 juniper networks inc notes consolidated financial statements continued comprehensive income comprehensive income attributable juniper networks consists following millions note 12 employee benefit plans stock option plans 2006 equity incentive plan may 18 2006 companys stockholders adopted companys 2006 equity incentive plan “2006 plan” enable granting incentive stock options nonstatutory stock options rsus restricted stock appreciation rights performance shares performance units deferred stock units dividend equivalents employees consultants company 2006 plan also provides automatic nondiscretionary awards nonstatutory stock options rsus companys nonemployee members board maximum aggregate number shares authorized 2006 plan 645 million shares common stock plus addition shares subject outstanding options companys amended restated 1996 stock plan “1996 plan” companys 2000 nonstatutory stock option plan “2000 plan” extent expire unexercised may 18 2006 maximum 750 million additional shares common stock second quarter 2010 companys stockholders approved amendment 2006 plan increased number shares reserved issuance thereunder additional 300 million shares options granted 2006 plan maximum term seven years grant date generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan restricted stock performance shares rsus deferred stock units vest solely based continuing employment provision services vest full earlier threeyear anniversary grant date event vesting based factors continued future provision services awards vest full earlier oneyear anniversary grant date 2006 plan provides nonemployee director automatic grant option purchase 50000 shares common stock date individual first becomes director whether election stockholders company appointment board fill vacancy “first option” addition companys annual stockholder meetings nonemployee director nonemployee director date prior years annual stockholder meeting shall automatically granted rsus number shares equal annual value defined ii nonemployee director nonemployee director date prior years annual stockholder meeting shall receive rsu award number shares determined multiplying annual value fraction numerator number days since nonemployee director received first option denominator 365 rounded nearest whole share rsu award specified ii referred herein “annual award” annual value means number rsus equal 125000 divided average daily closing price companys common stock six month period ending last day fiscal year preceding date grant first option vests monthly approximately three years grant date subject nonemployee directors continuous service juniper networks inc notes consolidated financial statements continued board annual award shall vest approximately one year grant date subject nonemployee directors continuous service board 2006 plan options granted nonemployee directors maximum term seven years 2000 nonstatutory stock option plan july 2000 board adopted 2000 plan 2000 plan provided granting nonstatutory stock options employees directors consultants options granted 2000 plan generally become exercisable fouryear period beginning date grant maximum term ten years company authorized 909 million shares common stock issuance 2000 plan effective may 18 2006 additional equity awards 2000 plan discontinued new equity awards granted 2006 plan remaining authorized shares 2000 plan subject outstanding awards may 18 2006 canceled may 18 2006 2000 plan remain effect outstanding equity awards granted plan prior may 18 2006 amended restated 1996 stock plan 1996 plan provided granting incentive stock options employees nonstatutory stock options employees directors consultants november 3 2005 board adopted amendment 1996 plan add ability issue rsus 1996 plan options granted 1996 plan generally became exercisable fouryear period beginning date grant maximum term ten years company authorized 1646 million shares common stock issuance 1996 plan effective may 18 2006 additional equity awards 1996 plan discontinued new equity awards granted 2006 plan remaining authorized shares 1996 plan subject outstanding awards may 18 2006 canceled may 18 2006 1996 plan remain effect outstanding equity awards granted plan prior may 18 2006 plans assumed upon acquisition connection recent past acquisitions company assumed options rsus stock plans acquired companies company exchanged options restricted stock juniper networks options restricted stock case options authorized appropriate number shares common stock issuance pursuant options december 31 2010 approximately 21 million shares common stock subject outstanding awards plans assumed past acquisitions restricted stock subject repurchase december 31 2010 2009 restricted stock repurchases 2010 2009 2008 juniper networks inc notes consolidated financial statements continued stock option activities summary companys stock option activity related information three years ended december 31 2010 set forth following table 1 stock options assumed connection acquisition ankeena altor aggregate intrinsic value represents difference companys closing stock price last trading day fiscal period 3692 december 31 2010 exercise price multiplied number related options pretax intrinsic value options exercised representing difference fair market value companys common stock date exercise price option 2603 million 836 million 667 million 2010 2009 2008 respectively total fair value options vested 2010 2009 2008 832 million 889 million 703 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes information stock options outstanding option plans december 31 2010 december 31 2010 approximately 321 million shares common stock exercisable weightedaverage exercise price 2096 per share december 31 2009 approximately 440 million shares common stock exercisable average exercise price 2091 per share juniper networks inc notes consolidated financial statements continued restricted stock units performance share award activities rsus generally vest period three four years date grant psas granted generally vest 2010 2013 provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes information companys rsus psas three years ended december 31 2010 1 rsus assumed connection acquisitions ankeena altor 2 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 15 million shares depending achievement performance goals range shares could issued awards 0 37 million shares employee stock purchase plan april 1999 board approved adoption juniper networks 1999 employee stock purchase plan “1999 purchase plan” 1999 purchase plan permits eligible employees acquire shares companys common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year 1999 purchase plan implemented series offering periods six months duration shorter period determined board price common stock may purchased 85 lesser fair market value companys common stock first day applicable offering period last day applicable offering period juniper networks inc notes consolidated financial statements continued may 2008 companys stockholders approved adoption juniper networks 2008 employee stock purchase plan “2008 purchase plan” replaced 1999 purchase plan board reserved aggregate 120 million shares companys common stock issuance 2008 purchase plan 2008 purchase plan generally similar 1999 purchase plan except 2008 purchase plan increases number shares reserved issuance must approved companys stockholders first offering period 2008 purchase plan commenced first trading day february 1 2009 employees purchased approximately 20 million 32 million 16 million shares common stock 2008 purchase plan 1999 purchase plan average exercise price 2120 1216 2257 per share fiscal years 2010 2009 2008 respectively december 31 2010 approximately 36 million shares issued 2008 purchase plan 84 million shares remained available future issuance effective february 1 2009 immediately following conclusion offering period ended january 30 2009 1999 purchase plan discontinued shares remained available future issuance plan shares available grant following table presents total number shares available grant 2006 plan december 31 2010 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 includes canceled expired options 1996 plan 2000 plan expired unexercised may 18 2006 become available grant 2006 plan according terms common stock reserved future issuance december 31 2010 company reserved aggregate approximately 1027 million shares common stock future issuance stock awards plans 2008 purchase plan sharebased compensation expense company determines fair value stock options utilizing bsm optionpricing model incorporates various assumptions including volatility riskfree interest rate expected life dividend yield expected volatility based implied volatility market traded options companys common stock adjusted relevant factors including historical volatility companys common stock recent period commensurate estimated expected life companys stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant company determines fair value rsus psas based upon fair market value companys common stock date grant juniper networks inc notes consolidated financial statements continued assumptions used resulting estimates fair value employee stock options espp three years ended december 31 2010 company expenses cost stock options straightline basis vesting period expenses cost rsus ratably vesting period company recognizes psa expense vesting period beginning period performance conditions set companys sharebased compensation expense associated stock options espp rsus psas recorded following cost expense categories three years ended december 31 2010 millions 1 prior period information reclassified conform current periods presentation 2010 sharebased compensation expense includes value vested restricted shares paid certain former ankeena employees additional information see note 5 cash equivalents investments heading restricted cash juniper networks inc notes consolidated financial statements continued following table summarizes sharebased compensation expense award type three years ended december 31 2010 millions december 31 2010 approximately 1093 million unrecognized compensation cost adjusted estimated forfeitures related unvested stock options recognized weightedaverage period approximately 23 years approximately 1512 million unrecognized compensation cost adjusted estimated forfeitures related unvested rsus psas recognized weightedaverage period approximately 23 years 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirement defined may contribute statutory limits year company matched employee contributions since january 1 2001 company currently matches 25 eligible employee contributions matching contributions vest immediately companys matching contributions plan totaled 132 million 119 million 107 million 2010 2009 2008 respectively deferred compensation plan july 2008 company formed nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds plan assets included within investments offsetting obligations included within accrued compensation consolidated balance sheet investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded interest income net offsetting compensation expense recorded operating expenses consolidated statements operations december 31 2010 2009 deferred compensation liability plan approximately 81 million 47 million respectively note 13 segment information companys chief operating decision maker “codm” allocates resources assesses performance based financial information provided companys business groups company’s operations organized two reportable segments infrastructure slt infrastructure segment includes products e mx series router product families ex series switching products well circuittopacket products slt segment consists primarily srx service gateways firewall virtual private network “firewall” systems appliances secure socket layer “ssl” virtual private network “vpn” appliances j series router product family intrusion detection prevention “idp” appliances wide area network “wan” optimization platforms primary financial measure used codm assessing performance segments segment operating income includes certain cost revenues rd expenses sales marketing expenses general administrative expenses codm allocate certain miscellaneous expenses segments even though expenses included companys management operating income arrangements infrastructure slt products services revenue attributed segment based underlying purchase order contract sellthrough report direct costs operating expenses standard costs research development “rd” product marketing expenses generally applied segment indirect costs juniper networks inc notes consolidated financial statements continued manufacturing overhead cost revenues allocated based standard costs indirect operating expenses sales marketing business development general administrative expenses generally allocated segment based factors including headcount usage revenue codm allocate sharebased compensation amortization purchased intangible assets restructuring impairment charges gains losses equity investments net income expense income taxes well certain charges segments following table summarizes financial information used codm segment millions 1 corporate charges include severance related costs associated workforcerebalancing activities included business segment results 2 amount includes amortization expense purchased intangible assets operating expenses costs revenues depreciation expense allocated infrastructure segment 1089 million 940 million 863 million years ended december 31 2010 2009 2008 respectively depreciation expense allocated slt segment 379 million 390 million 372 million years ended december 31 2010 2009 2008 respectively juniper networks inc notes consolidated financial statements continued company attributes revenues geographic regions based customers shipto location following table presents net revenues geographic region millions verizon communications inc accounted 106 companys total net revenues 2010 att inc accounted 104 companys total net revenues 2009 single customer accounted 10 companys total net revenues 2008 company tracks assets physical location majority companys assets excluding cash equivalents investments december 31 2010 2009 attributable us operations december 31 2010 2009 property equipment held us percentage total property equipment 80 81 respectively although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 14 income taxes components income provision income taxes noncontrolling interest summarized follows millions provision income taxes summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows millions deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities follows millions december 31 2010 2009 company valuation allowance us domestic deferred tax assets approximately 1222 million 1128 million respectively balance december 31 2010 consisted approximately 806 million companys california deferred assets approximately 416 million related losses capital nature carry forward offset future capital gains valuation allowance increased 94 million 713 million years ended december 31 2010 2009 respectively 2010 2009 increases primarily due changes california income tax law impacted future taxable income within california tax rates would apply taxable income years deferred tax assets expected realized settled based upon estimates companys future california taxable income company provided valuation allowance remaining california deferred tax assets 119 million year ended december 31 2010 december 31 2010 company federal california net operating loss carryforwards approximately 370 million 444 million respectively company also california tax credit carryforwards approximately 1384 million approximately 182 million benefit california tax credit carryforwards credited additional juniper networks inc notes consolidated financial statements continued paidin capital realized companys income tax returns since met recognition criteria set forth asc topic 718 unused net operating loss carryforwards expire various dates beginning year 2012 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 12000 million cumulative undistributed earnings certain foreign subsidiaries december 31 2010 companys intention permanently reinvest earnings distributed company would accrue additional income taxes expense approximately 3679 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations december 31 2010 2009 2008 total amount gross unrecognized tax benefits 1164 million 1836 million 1135 million respectively december 31 2010 approximately 1002 million 1164 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits years ended december 31 2010 2009 2008 follows millions december 31 2010 2009 2008 company accrued interest penalties related unrecognized tax benefits 189 million 235 million 87 million respectively within longterm liabilities consolidated balance sheets accordance companys accounting policy accrued interest penalties related unrecognized tax benefits recognized component tax expense consolidated statements operations company recognized benefit net interest penalties 46 million expense 148 million 29 million consolidated statements operations years ending december 31 2010 2009 2008 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions reasonably possible balance gross unrecognized tax benefits decrease approximately 81 million within next twelve months due potential settlements tax authorities lapses applicable statutes limitations time company unable make reasonably reliable estimate timing payments related remaining unrecognized tax liabilities due uncertainties timing tax audit outcomes 2010 company recognized approximately 734 million tax benefits related share based compensation company previously recorded unrecognized tax benefits 2009 march 22 2010 court overturned may 27 2009 decision xilinx v commissioner affirmed original us tax court decision held favor taxpayer juniper networks named party case courts decision eliminates uncertainty regarding benefit tax position taken company certain years prior fiscal 2004 relative allocable transfer price sharebased compensation related companys intangible development costs courts decision affirms value sharebased compensation related sharebased compensation grants made prior 2004 required included cost sharing agreements related parties light courts decision company determined tax benefit recognized prior tax position likely sustained company conducts business globally result juniper networks one subsidiaries files income tax juniper networks inc notes consolidated financial statements continued returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 although carryforward attributes generated prior 2004 may still adjusted upon examination internal revenue service irs attributes either used future period company currently examination irs 2004 2006 tax years china tax authorities 2009 tax year france tax authorities 2007 2009 tax years company also subject two separate ongoing examinations india tax authorities 2004 tax year 2004 2008 tax years respectively received inquiry hong kong tax authorities 2002 2008 tax years additionally company reached final resolution irs adjustment proposed 1999 2000 tax years company aware examination taxing authorities major jurisdictions files income tax returns december 31 2010 2009 part ongoing 2004 irs audit company received proposed adjustment related license acquired intangibles intercompany rd cost sharing arrangement 2009 april 2010 company received assessments hong kong tax authorities specifically related inquiries 2002 2003 tax years respectively 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 relevant matter company understands india tax authorities may issue initial assessment substantially higher amount result accordance administrative judiciary process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative procedures relative matters referenced company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations information please see note 15 commitments contingencies heading “irs notices proposed adjustments” note 15 commitments contingencies commitments following table summarizes companys principal contractual obligations december 31 2010 millions operating leases company leases facilities operating leases expire various times longest expires november 22 2022 future minimum payments noncancelable operating leases totaled 2963 million december 31 2010 rent expense 2010 2009 2008 approximately 559 million 566 million 580 million respectively juniper networks inc notes consolidated financial statements continued october 2009 company amended three existing leases companys corporate headquarters facilities sunnyvale california lease amended extend underlying lease term ii establish new monthly base rent payments periods november 1 2009 new monthly base rent payments represent significant reduction base rent would payable previously remaining terms underlying leases purchase commitments order reduce manufacturing lead times ensure adequate component supply contract manufacturers utilized company place noncancelable nonreturnable “ncnr” orders components based companys build forecasts december 31 2010 ncnr component orders placed contract manufacturers value 1986 million contract manufacturers use components build products based companys forecasts purchase orders company received customers generally company components title products transfers contract manufacturers company immediately companys customers upon delivery designated shipment location components remain unused products remain unsold specified periods company may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet companys forecast customer orders december 31 2010 company accrued 227 million based estimate charges tax liabilities december 31 2010 company 1039 million included longterm liabilities consolidated balance sheet unrecognized tax positions time company unable make reasonably reliable estimate timing payments related 1039 million liability due uncertainties timing tax audit outcomes contractual obligations december 31 2010 contractual obligations primarily consisted 650 million indemnityrelated service related escrows required certain acquisitions completed 2005 2010 132 million remaining balance data center hosting agreement requires payments end april 2013 92 million license service agreements 77 million software subscription agreement requires payments end january 2011 guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged companys products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product service performance guarantees related thirdparty customer financing arrangements standby letters credit certain lease facilities december 31 2010 company 216 million guarantees standby letters credit december 31 2009 company 340 million guarantees standby letters credit legal proceedings time company involved disputes litigation legal actions including matters described company aggressively defending current litigation matters however outcome matters currently determinable many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution future intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses federal securities class action july 14 2006 august 29 2006 two purported class actions filed northern district california company certain companys current former officers directors november 20 2006 court consolidated two actions juniper networks inc securities litigation c0604327jw appointed new juniper networks inc notes consolidated financial statements continued york city pension funds lead plaintiffs lead plaintiffs filed consolidated class action complaint january 12 2007 filed amended consolidated class action complaint april 9 2007 amended consolidated complaint alleges defendants violated federal securities laws manipulating stock option grant dates coincide low stock prices issuing false misleading statements including among others incorrect financial statements due improper accounting stock option grants amended consolidated complaint asserts claims violations securities act 1933 securities exchange act 1934 behalf persons purchased otherwise acquired juniper networks publiclytraded securities july 12 2001 including august 10 2006 plaintiffs seek unspecified damages unspecified amount june 7 2007 defendants filed motion dismiss certain claims hearing held september 10 2007 march 31 2008 court issued order granting part denying part defendants motion dismiss order dismissed prejudice plaintiffs section 10b claim extent based challenged statements made july 14 2001 order also dismissed leave amend plaintiffs section 10b claim pradeep sindhu order upheld plaintiffs remaining claims plaintiffs amend complaint september 25 2009 court certified plaintiff class consisting persons entities purchased otherwise acquired companys securities july 11 2003 august 10 2006 inclusive damaged thereby including received acquired juniper networks common stock issued pursuant registration statement sec form s4 dated march 10 2004 companys merger netscreen technologies inc purchasers zero coupon convertible senior notes due june 15 2008 issued pursuant registration statement sec form s3 dated november 20 2003 excluded class defendants current former officers directors company immediate families heirs successors assigns entity controlled person february 5 2010 company lead plaintiffs entered agreement principle settle claims company companys current former officers directors august 31 2010 court issued order granting final approval settlement issuing order dismissal prejudice terms settlement claims company officers directors dismissed prejudice released exchange 1690 million cash payment company considered proposed payment probable reasonably estimable therefore recorded cash settlement amount pretax operating expense consolidated statement operations fourth quarter ended december 31 2009 ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” juniper networks certain juniper networks officers action brought behalf purchasers companys common stock initial public offering june 1999 companys secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold companys initial public offering companys subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss february 19 2003 court granted part denied part motion dismiss declined dismiss claims company parties reached global settlement litigation october 5 2009 court entered opinion order granting final approval settlement insurers pay full amount settlement share allocated company bear financial liability company defendants receive complete dismissals case certain objectors appealed courts october 5 2009 final order second circuit court appeals plaintiffs filed motions dismiss appeals juniper networks inc notes consolidated financial statements continued irs notices proposed adjustments 2007 irs opened examination companys us federal income tax employment tax returns 2004 fiscal year subsequently irs extended examination companys employment tax returns include fiscal years 2005 2006 december 31 2010 irs yet concluded examinations returns september 2008 part ongoing audit us federal income tax return irs issued notice proposed adjustment “nopa” regarding companys business credits company believes adequately provided reasonable foreseeable outcome related proposed adjustment 2009 company received nopa irs claiming company owes additional taxes plus interest possible penalties 2004 tax year based transfer pricing transaction related license acquired intangibles intercompany rd cost sharing arrangement asserted changes companys 2004 tax year would affect companys income tax liabilities tax years subsequent 2003 nopa estimated incremental tax liability would approximately 807 million excluding interest penalties company filed protest proposed deficiency irs referred appeals division irs december 31 2010 appeals conference yet scheduled company strongly believes irs position regard matter inconsistent applicable tax laws existing treasury regulations companys previously reported income tax provision year question appropriate however assurance matter resolved companys favor regardless whether matter resolved companys favor final resolution matter could expensive timeconsuming defend andor settle company believes provided adequately matter still possibility adverse outcome matter could material effect results operations financial condition company reached final resolution irs adjustment irs proposed 1999 2000 tax years company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits note 16 joint venture 2009 company entered agreement form joint venture provide combined carrier ethernetbased solution nsn inception company contributed 66 million 60 percent interest joint venture nsn juniper networks entitled appoint two board members board joint venture board consist four board members times given companys majority ownership interest joint venture ventures financial results consolidated accounts company noncontrolling interest recorded reflect noncontrolling investors interest ventures results intercompany transactions eliminated exception noncontrolling interest juniper networks inc notes consolidated financial statements continued note 17 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter two years ended december 31 2010 millions except per share amounts juniper networks inc notes consolidated financial statements continued note 18 subsequent event stock repurchases subsequent december 31 2010 filing report company repurchased 48 million shares common stock 2003 million average purchase price 4214 per share 2010 stock repurchase program filing annual report form 10k companys 2010 stock repurchase program remaining authorized funds 5548 million purchases companys 2010 stock repurchase program subject review circumstances place time made time permitted securities laws legal requirements program may discontinued time item 9item 8 financial statements supplementary data index consolidated financial statements years ended december 31 2011 2010 2009 contents page report independent registered public accounting firm report independent registered public accounting firm managements report internal control financial reporting consolidated statements operations consolidated balance sheets consolidated statements cash flows consolidated statements changes equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2011 2010 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2011 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2011 2010 consolidated results operations cash flows three years period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 summary significant accounting policies notes consolidated financial statements item 8 part ii annual report form 10k fiscal year 2010 juniper networks inc changed method accounting revenue recognition adoption amendments financial accounting standards board fasb accounting standards codification asc resulting accounting standards update 200913 multipledeliverable revenue arrangements accounting standards update 200914 certain revenue arrangements include software elements adopted effective january 1 2010 also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 24 2012 expressed unqualified opinion thereon ernst young llp san jose california february 24 2012 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2011 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2011 2010 related consolidated statements operations stockholders equity cash flows three years period ended december 31 2011 juniper networks inc report dated february 24 2012 expressed unqualified opinion thereon ernst young llp san jose california february 24 2012 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2011 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework based assessment management concluded december 31 2011 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2011 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2011 juniper networks inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets thousands except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes equity thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services together provide customers highperformance network infrastructure built simplicity security openness scale company serves highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated december 31 2011 company owned 60 percent interest joint venture nokia siemens networks bv “nsn” given companys majority ownership interest joint venture accounts joint venture consolidated accounts company noncontrolling interest recorded noncontrolling investors interests net assets operations joint venture july 2011 nsn company entered agreement cease operation terminate joint venture subsequently nsn assumed activities joint venture company process winding joint venture termination joint venture expected material effect companys financial position results operations foreign currency translations assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period foreign currency translation gains losses material years ended december 31 2011 2010 2009 reclassifications first quarter 2010 company reclassified certain selling marketing costs previously reported cost service revenues sales marketing expense accordingly 251 million costs reported year ended december 31 2009 reclassified cost service revenues sales marketing expense conform current periods presentation reclassification impact companys previously reported net revenues segment results operating income net income earnings per share note 2 summary significant accounting policies use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences estimates actual results future consolidated results operation may affected fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use juniper networks inc notes consolidated financial statements continued pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models cash equivalents investments cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash investments availableforsale trading securities investments stated maturities greater three months classified shortterm longterm investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date companys investments publiclytraded debt securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income loss realized gains losses determined based specific identification method reported consolidated statements operations company recognizes impairment charge availableforsale investments decline fair value investments cost basis determined temporary company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments fair value temporary difference recognized impairment loss consolidated statements operations companys nonqualified compensation plan invests mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations privatelyheld investments company investments privatelyheld companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment company markets may never significant company measures fair value privatelyheld investments using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations derivatives juniper networks inc notes consolidated financial statements continued company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities one year less company also uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified operating expense line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2011 2010 2009 expense income net consolidated statements operations cash flows hedges classified operating activities concentrations financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities money market funds several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable company maintains reserves potential bad debt historically losses within managements expectations single customer accounted 10 companys total net revenues 2011 verizon communications inc att inc accounted 106 104 companys total net revenues 2010 2009 respectively company relies sole suppliers certain components asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives assets one half years five years computers equipment software five years furniture fixtures seven forty years building improvements ten forty years land improvements leasehold improvements amortized using straightline method lease term maximum ten years construction progress related construction development property equipment yet placed service intended use depreciation equipment commences placed service depreciation buildings leasehold improvements commences ready intended use goodwill longlived assets goodwill represents purchase price estimated fair value net assets businesses acquired business combination goodwill intangible assets acquired business combination determined indefinite useful life amortized instead tested impairment least annually fourth quarter goodwill intangible assets may also tested impairment annual tests presence impairment indicators limited significant adverse change legal factors business climate b substantial decline market capitalization c adverse action assessment regulator unanticipated competition e loss key personnel f likelythannot expectation sale disposal reporting unit significant portion thereof g realignment resources restructuring existing businesses response changes industry market conditions h testing juniper networks inc notes consolidated financial statements continued recoverability significant asset group within reporting unit higher discount rate used impairment analysis impacted increase interest rates company performs annual goodwill impairment analysis reporting unit level one level operating segment level fourth quarter year fair value companys reporting units determined using income market valuation approaches income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publicly traded companies similar lines business application income market valuation approaches company required make estimates future operating trends judgments discount rates variables actual future results related assumed variables could differ estimates longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events circumstances include limited significant decrease fair value underlying business significant decrease benefits realized acquired business difficulties delays integrating business significant change operations acquired business recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories company records accounts receivable net allowance doubtful accounts estimated customer returns pricing credits 2010 company adopted prospective basis financial accounting standards board “fasb” issued accounting standards update “asu” 200913 topic 605 multipledeliverable revenue arrangements “asu 200913” asu 200913 changes requirements establishing separate units accounting multiple element arrangement requires allocation arrangement consideration deliverable based relative selling price concurrently issuing asu 200913 fasb also issued asu 200914 topic 985 certain revenue arrangements include software elements “asu 200914” asu 200914 excludes software contained tangible product scope software revenue guidance software component nonsoftware component function together deliver tangible products essential functionality company applied two standards new materially modified arrangements originating december 31 2009 sales arrangement contains multiple elements software nonsoftware components function together deliver tangible products essential functionality company allocates revenue element based selling price hierarchy selling price deliverable based vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting juniper networks inc notes consolidated financial statements continued trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing products similar functionality typically cannot obtained additionally company unable reliably determine competitors products selling prices standalone basis company typically able determine tpe esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using guidance recognizing software revenue company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company evaluates deliverable arrangement determine whether represent separate units accounting deliverable constitutes separate unit accounting standalone value customernegotiated refunds return rights delivered elements arrangement includes customernegotiated refund return right relative delivered item delivery performance undelivered item considered probable substantially companys control delivered element constitutes separate unit accounting circumstances aforementioned criteria met deliverable combined undelivered elements allocation arrangement consideration revenue recognition determined combined unit single unit allocation consideration determined arrangement inception basis units relative selling price new standards generally change units accounting companys revenue transactions prior 2010 current software sales company allocated revenue element using residual method vsoe fair value undelivered items arrangements multiple elements sales products include services software exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period company accounts multiple agreements single customer one arrangement contractual terms andor substance agreements indicate may closely related effect parts single arrangement sales direct endusers valueadded resellers original equipment manufacturer oem partners company recognizes product revenue upon transfer title risk loss generally upon shipment companys practice identify enduser prior shipment valueadded reseller companys endusers valueadded resellers significant obligations future performance rights return companys agreements oem partners may allow future rights returns pricing credits portion companys sales made distributors agreements allowing pricing credits rights return product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less company sells certain interests accounts receivable nonrecourse basis part customer financing arrangements juniper networks inc notes consolidated financial statements continued primarily one major financing company cash received arrangement advance revenue recognition recorded secured borrowing within current liabilities allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance potential writeoffs considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs accrued part companys cost sales based associated material costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers produce companys products using design specifications quality assurance programs standards established company procure components manufacture products based companys demand forecasts companys estimates future demand products based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions company establishes provision inventory carrying costs obsolete material exposures excess components purchased based historical trends research development costs research design develop companys products expensed incurred software development costs capitalized beginning products technological feasibility established ending product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 172 million 171 million 114 million 2011 2010 2009 respectively loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company records charge equal minimum estimated liability loss contingency following conditions met information available prior issuance consolidated financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company utilizes blackscholesmerton “bsm” optionpricing model order estimate fair value share juniper networks inc notes consolidated financial statements continued based payment awards date grant sharebase compensation expense expectedtovest sharebased awards valued singleoption approach amortized straightline basis net estimated forfeitures rsus psas amortized ratable basis net estimated forfeitures value portion award ultimately expected vest recognized expense requisite service period bsm model requires various highly subjective assumptions represents managements best estimates volatility expected option life riskfree interest rate expected volatility based implied volatility market traded options common stock adjusted relevant factors including historical volatility common stock recent period commensurate estimated expected life stock options expected life award based historical experience terms conditions stock awards granted employees well potential effect options exercised time provision income taxes deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income extent company believes amounts likely realized reversal deferred tax liabilities future income company records valuation allowance reduce deferred tax assets event company determines part net deferred tax assets realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting adjustment earnings period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes measures potential liabilities based estimate whether extent additional taxes due comprehensive income loss comprehensive income loss defined change equity period transactions events circumstances nonowner sources company includes components comprehensive income loss part consolidated statements changes equity accumulated comprehensive income loss includes net unrealized gains losses availableforsale securities derivatives designated cash flow hedges excluded net income net foreign currency translations recent accounting pronouncements may 2011 financial accounting standards board fasb issued asu 201104 topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrss “asu 201104” amends current fair value measurement disclosure guidance converge international financial reporting standards ifrs provides increased transparency around valuation inputs investment categorization guidance effective fiscal years interim periods beginning december 15 2011 early application public companies permitted companys adoption asu 201104 impact consolidated results operations financial condition june 2011 fasb issued asu 201105 topic 220 presentation comprehensive income “asu 201105” requires entity present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements eliminates option present components comprehensive income part statement changes stockholders equity guidance effective fiscal years interim periods beginning december 15 2011 companys adoption asu 201105 impact consolidated results operations financial condition september 2011 fasb issued asu 201108 topic 350 intangibles goodwill asu 201108 amends topic 350 allow entity first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test entity would required calculate fair value reporting unit unless entity determines based qualitative assessment likely fair value less carrying amount guidance effective annual interim goodwill tests performed years beginning december 15 juniper networks inc notes consolidated financial statements continued 2011 early adoption permitted companys adoption asu 201108 expected impact consolidated results operations financial condition december 2011 fasb issued accounting standards update asu 201112 topic 220 comprehensive income asu 201112 indefinitely deferred certain provisions asu 201105 including requirement present reclassification adjustments accumulated comprehensive income component statement net income presented statement comprehensive income presented amendment effective annual interim financial statements beginning december 15 2011 companys adoption asu 201112 impact consolidated results operations financial condition december 2011 fasb issued asu 201111 topic 2010 balance sheet asu 201111 contains new disclosure requirements regarding nature entitys rights set related arrangements associated financial instruments derivative instruments us gaap certain derivative repurchase agreement arrangements granted exceptions general offsetting model facilitate comparison financial statements prepared us gaap ifrs new disclosure requirement provide financial statement users information regarding gross net exposures guidance effective annual interim financial statements beginning january 1 2013 retrospective application required company set related arrangements associated financial instruments derivative instruments adoption asu 201111 expected impact consolidated results operations financial condition juniper networks inc notes consolidated financial statements continued note 3 net income per share company computed basic diluted net income per share attributable juniper networks common stockholders follows millions except per share amounts basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options employee stock purchase plan vesting restricted stock units rsus vesting performance share awards psas company excludes outstanding stock options exercise prices greater average market price rsus grant date fair market value greater average market price calculation diluted net income per share effect would antidilutive company includes common shares underlying psas calculation diluted net income per share become contingently issuable excludes shares contingently issuable potentially dilutive common shares approximately 174 million 140 million 389 million shares outstanding included computation diluted earnings per share years ended december 31 2011 2010 2009 respectively note 4 cash equivalents investments cash equivalents following table summarizes companys cash equivalents millions juniper networks inc notes consolidated financial statements continued investments availableforsale trading securities following table summarizes unrealized gains losses related companys investments stated maturities greater three months designated availableforsale trading securities december 31 2011 2010 millions 1 balance includes companys nonqualified deferred compensation plan assets additional information see note 12 employee benefits plans section deferred compensation plan juniper networks inc notes consolidated financial statements continued 1 balance includes companys nonqualified deferred compensation plan assets additional information see note 12 employee benefits plans section deferred compensation plan following table presents maturities companys availableforsale securities december 31 2011 millions following tables present companys availableforsale investments unrealized loss position december 31 2011 december 31 2010 millions balance includes investments immaterial unrealized loss position december 31 2011 juniper networks inc notes consolidated financial statements continued balance includes investments immaterial unrealized loss position december 31 2010 material realized gains losses sale availableforsale trading securities 2011 2010 2009 company generated cash proceeds 19266 million 16244 million 6838 million maturities sales availableforsale investments 2011 2010 2009 respectively company 135 73 investments unrealized loss positions december 31 2011 december 31 2010 respectively gross unrealized losses related investments primarily due changes market interest rates fixed income securities unrealized losses company determined intent sell investments ii likely required sell investments recovery entire amortized cost basis company consider investments otherthantemporarily impaired december 31 2011 december 31 2010 company reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation restricted cash investments company classifies cash investments restricted cash investments consolidated balance sheet amounts held escrow accounts required certain acquisitions ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust year ended december 31 2011 company distributed approximately 420 million restricted cash mainly related 2010 acquisitions 2010 company increased restricted cash investments 2619 million primarily escrow accounts required acquisitions completed 2010 lesser extent israel retirement trust established first quarter 2010 increases restricted cash partially offset distributions approximately 1965 million mainly related 2010 acquisitions connection 2010 acquisition ankeena networks inc ankeena company agreed pay escrow total amount 107 million representing cash value unvested restricted shares ankeena common stock april 8 2010 held certain former ankeena employees december 31 2011 company released 98 million escrow expects release remaining 09 million escrow next nine months following table summarizes companys cash investments classified restricted cash investments consolidated balance sheets millions juniper networks inc notes consolidated financial statements continued december 31 2011 2010 unrealized gains losses related restricted investments immaterial privatelyheld investments company reviews investments identify evaluate investments indication possible impairment company adjusts privatelyheld equity investments impairment fair value less carrying value respective assets otherthantemporary basis december 31 2011 december 31 2010 carrying values company’s privatelyheld equity investments 518 million 221 million respectively included longterm assets consolidated balance sheets 2011 2010 2009 company invested total 331 million 133 million 72 million respectively privatelyheld equity investments 2010 result acquisitions ankeena altor networks inc altor company recognized gain 32 million 21 million respectively minority equity investments companies year ended december 31 2011 company recognized loss 18 million impairment privatelyheld investment company judged temporary partially offset gains privatelyheld investments 2010 company determined impairments privatelyheld equity investments year ended december 31 2009 company recognized impairment loss 55 million investments privatelyheld companies determined temporary note 5 fair value measurements assets liabilities measured fair value recurring basis following tables provide summary assets measured fair value recurring basis reported consolidated balance sheets millions juniper networks inc notes consolidated financial statements continued 1 balance includes 16 million restricted investments measured fair market value related companys india gratuity trust 2 balance includes 751 million restricted investments measured fair market value related companys trust acquisition related escrows 3 balance includes 93 million companys nonqualified deferred compensation plan assets 10 million restricted investments measured fair market value related companys india gratuity trust juniper networks inc notes consolidated financial statements continued 1 balance includes 06 million restricted investments measured fair market value related acquisition completed 2005 additional information regarding companys restricted investments see note 4 cash equivalents investments heading “restricted cash juniper networks inc notes consolidated financial statements continued investments” restricted investments included restricted cash balance consolidated balance sheet 2 balance includes 27 million restricted investments measured fair market value related companys india gratuity trust 3 balance includes 1143 million restricted investments measured fair market value related companys trust acquisition related escrows companys policy recognize asset liability transfers among level 1 level 2 level 3 actual date events change circumstances caused transfer years ended december 31 2011 2010 company transfers levels fair value hierarchy assets liabilities measured fair value assets liabilities measured fair value nonrecurring basis december 31 2011 december 31 2010 carrying value privatelyheld equity investments measured fair value nonrecurring basis 04 million 08 million respectively privatelyheld equity investments normally carried cost measured fair value due events circumstances company identified significantly impacting fair value investments company measured fair value privately held equity investments using analysis financial condition nearterm prospects investee including recent financing activities capital structure result company recognized impairment loss 18 million 55 million years ended december 31 2011 2009 respectively classified investment level 3 assets due absence quoted market prices inherent lack liquidity charges year ended december 31 2010 company liabilities measured fair value nonrecurring basis december 31 2011 december 31 2010 assets liabilities measured fair value carrying amounts companys accounts receivable financing receivables accounts payable accrued liabilities approximate fair value due short maturities fair value company’s longterm debt disclosed note 10 financing determined using quoted market prices level 1 juniper networks inc notes consolidated financial statements continued note 6 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating cost services operating expenses derivatives intended protect us dollar equivalent companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified cost services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments expense income net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income loss expected reclassified earnings within next 12 months total fair value company’s derivative assets located current assets consolidated balance sheet december 31 2011 december 31 2010 04 million 04 million respectively total fair value company’s derivative liabilities located accrued liabilities consolidated balance sheet december 31 2011 december 31 2010 96 million 26 million respectively year ended december 31 2011 company recognized loss 79 million accumulated comprehensive income effective portion derivative instruments reclassified gain 07 million comprehensive income operating expense consolidated statements operations year ended december 31 2010 company recognized loss 30 million accumulated comprehensive income effective portion derivative instruments reclassified loss 21 million comprehensive income operating expense consolidated statements operations year ended december 31 2009 company recognized gain 06 million accumulated comprehensive income effective portion derivative instruments reclassified gain 42 million comprehensive income operating expense consolidated statements operations ineffective portion companys derivative instruments recognized consolidated statements operations immaterial years ended december 31 2011 2010 2009 nondesignated hedges company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies hedges qualify special hedge accounting treatment derivatives carried fair value changes recorded income expense net changes fair value derivatives largely offset within consolidated statement operations remeasurement underlying assets liabilities cash flows derivatives classified operating activities derivatives maturities one year less company recognized gain 15 million loss 03 million gain 49 million nondesignated derivative instruments within expense income net consolidated statements operations years ended december 31 2011 2010 2009 respectively juniper networks inc notes consolidated financial statements continued note 7 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material additional information existing acquisition dates unknown company may become known remainder measurement period exceed 12 months acquisition date may result changes amounts allocations recorded company completed two business combinations 2011 four business combinations 2010 either cash consideration cash consideration along vested sharebased awards assumed approximately 305 million 3945 million respectively acquisitions 2009 total purchase consideration acquisitions acquisition dates allocated follows millions company recognized 96 million 63 million acquisitionrelated costs years ended december 31 2011 2010 respectively acquisition related charges expensed period incurred reported companys consolidated statement operations within cost revenues operating expense goodwill recognized 2011 acquisitions attributable primarily expected synergies none goodwill deductible us federal income tax purposes acquisitions completed 2011 approximately 889 million acquired goodwill 2010 acquisition deductible income tax purposes fiscal 2011 acquisitions february 9 2011 company acquired certain ip assets opnext 260 million cash accounted business combination acquisition opnexts asic technology expected help junipers nextgeneration development converged packet optical solutions companys service provider customers connection acquisition company acquired net assets 257 million recognized goodwill 03 million assigned companys infrastructure segment february 18 2011 company acquired certain assets including intellectual property ip brilliant supplier nextgeneration packetbased network synchronization equipment monitoring solutions 45 million cash ip expected assist company extending market position delivering solutions offer greater flexibility service providers continue deploy 3g 4g networks connection acquisition company acquired net assets 44 million recognized goodwill 01 million assigned companys infrastructure segment fiscal 2010 acquisitions 2010 company completed acquisitions ankeena smobile systems inc “smobile” altor trapeze networks trapeze total purchase consideration acquisitions summarized follows millions juniper networks inc notes consolidated financial statements continued 1 fair value stock option rsu awards assumed based acquired companys determined value acquisition date ankeena acquisition april 19 2010 company acquired 100 equity securities ankeena privatelyheld provider new media infrastructure technology connection acquisition ankeena company acquired net assets 36 million including cash equivalents 23 million recognized goodwill 531 million assigned companys infrastructure segment prior acquisition company 20 million 77 ownership interest ankeena accounted privatelyheld equity investment acquisitiondate fair value equity interest ankeena 52 million based noncontrolling interest fair value included purchase price company recognized 32 million gain reported within gain loss equity investments consolidated statement operations smobile acquisition july 30 2010 company acquired 100 equity securities smobile privatelyheld software company focused solely smartphone tablet security solutions enterprise service provider consumer markets connection acquisition smobile company assumed net liabilities 52 million including cash equivalents 04 million recognized goodwill 481 million assigned companys service layer technology slt segment altor acquisition december 6 2010 company acquired 100 equity securities altor privatelyheld provider virtualization security connection acquisition altor company acquired net assets 45 million including cash equivalents 64 million recognized goodwill 782 million assigned companys slt segment prior acquisition company 20 million 50 ownership interest altor accounted privatelyheld equity investment acquisitiondate fair value equity interest altor 41 million based noncontrolling interest fair value included purchase price company recognized 21 million gain reported within gain loss equity investments consolidated statement operations trapeze acquisition december 16 2010 company acquired 100 equity securities trapeze subsidiary belden inc provider enterprise wireless local area network wlan solutions connection acquisition trapeze company acquired net assets 59 million including cash equivalents 08 million recognized goodwill 898 million assigned companys infrastructure segment intangible assets acquired following table presents details intangible assets acquired business combinations completed 2011 december 31 2011 millions except years following table presents details intangible assets acquired business combinations completed 2010 december 31 2011 millions except years juniper networks inc notes consolidated financial statements continued acquired inprocess research development “iprd” consists existing research development projects time acquisition projects qualify iprd assets represent yet reached technological feasibility alternative future use initial recognition acquired iprd assets accounted indefinitelived intangible assets development costs incurred acquisition acquired development projects expensed incurred upon completion development acquired iprd assets considered amortizable intangible assets iprd project abandoned company writes related purchased intangible asset period abandoned note 8 goodwill purchased intangible assets goodwill following table summarizes companys goodwill activities segment millions adjustments goodwill year ended december 31 2011 related adjustments net tangible assets assumed certain businesses acquired 2010 2011 impairments goodwill years ended december 31 2011 2010 2009 december 31 2011 accumulated impairment losses 12800 million associated slt segment purchased intangible assets changes company’s purchased intangible assets follows millions juniper networks inc notes consolidated financial statements continued year ended december 31 2011 company added 284 million purchased intangible assets result acquisitions completed 2011 year ended december 31 2010 company added 1165 million purchased intangible assets result acquisitions completed 2010 amortization purchased intangible assets included operating expenses cost product revenues totaled 271 million 86 million 154 million years ended december 31 2011 2010 2009 respectively estimated future amortization expense purchased intangible assets finite lives follows millions note 9 financial information inventories net companys inventories stated lower standard cost market approximates actual cost inventories net reported within prepaid expenses current assets consolidated balance sheet consist following millions juniper networks inc notes consolidated financial statements continued property equipment property equipment consist following millions depreciation expense 1422 million 1468 million 1330 million 2011 2010 2009 respectively 2011 company recorded 135 million asset impairment charge restructuring charges consolidated statement operations related abandoned inprocess internal use software project deferred revenue details companys deferred revenue follows millions deferred product revenue primarily represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training warranties company accrues warranty costs part cost sales based associated material costs labor costs customer support overhead time revenue recognized provision reported accrued warranty within current liabilities consolidated balance sheets changes company’s warranty reserve follows millions juniper networks inc notes consolidated financial statements continued restructuring liabilities third quarter 2011 company implemented restructuring plan 2011 restructuring plan effort better align business operations current market macroeconomic conditions 2011 restructuring plan primarily consisted certain workforce reductions lesser extent contract terminations 2009 company implemented restructuring plan 2009 restructuring plan effort better align business operations market macroeconomic conditions 2009 restructuring plan included restructuring certain business functions resulted reductions workforce facilities company recorded majority restructuring charges associated plan years ended 2010 2009 company recorded net restructuring charges 171 million year ended december 31 2011 primarily due implementation 2011 restructuring plan recorded 108 million 195 million restructuring charges years ended december 31 2010 2009 respectively associated 2009 restructuring plan december 31 2011 remaining restructuring liability 2011 restructuring plan related severance costs paid first half 2012 well facilities related charges 2009 restructuring plan expected completed february 2015 restructuring charges based companys restructuring plans committed management changes estimates executing approved plans reflected companys results operations following tables provide summary changes company’s restructuring liability reported current longterm liabilities consolidated balance sheets 2011 2010 millions expense income net expense income net consists following millions juniper networks inc notes consolidated financial statements continued interest income primarily includes interest earned company’s cash equivalents investments interest expense primarily includes interest expense longterm debt customer financing arrangements income expense typically consists investment foreign exchange gains losses nonoperational income expense items 2011 company recognized 377 million interest expense connection longterm debt issued march 2011 income expense net included certain legal expenses unrelated current recent operations approximately 70 million 2010 company recognized total gain 87 million primarily due acquisitions privatelyheld equity investments ankeena altor 2009 company recognized impairment loss 56 million equity investments changes fair value company believed otherthantemporary note 10 financing longterm debt march 2011 company issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes together 2016 notes 2021 notes interest notes payable cash semiannually company may redeem notes time whole time part subject makewhole premium event change control holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principle amount plus accrued unpaid interest indenture governs notes also contains various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds following table summarizes companys longterm debt entered 2011 millions except percentages effective rates notes include interest notes accretion discount amortization issuance costs december 31 2011 estimated fair value notes included longterm debt approximately 10698 million based quoted market prices level 1 customer financing arrangements company customer financing arrangements sell accounts receivable major thirdparty financing provider program intended affect timing revenue recognition company recognizes revenue upon sellthrough financing arrangements proceeds financing provider due company 30 days sale receivable transactions financing provider company surrendered control transferred assets accounts receivable isolated company put beyond reach creditors even juniper networks inc notes consolidated financial statements continued event bankruptcy company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant financing arrangements sale receivables company sold net receivables 7382 million 6375 million 4498 million years ended december 31 2011 2010 2009 respectively company received cash proceeds financing provider 6865 million 5957 million 4263 million years ended december 31 2011 2010 2009 respectively amounts owed financing provider recorded accounts receivable company’s consolidated balance sheets december 31 2011 december 31 2010 1629 million 1274 million respectively portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities longterm liabilities consolidated balance sheet december 31 2011 december 31 2010 estimated cash received financing provider recognized revenue distributors 333 million 491 million respectively note 11 equity stock repurchase activities february 2010 company’s board directors “board” approved stock repurchase program “2010 stock repurchase program” authorized company repurchase 10 billion common stock authorization addition stock repurchase program approved board march 2008 “2008 stock repurchase program” also enabled company repurchase 10 billion company’s common stock company repurchased retired approximately 175 million shares common stock average price 3093 per share aggregate purchase price 5412 million year ended december 31 2011 2010 stock repurchase program company repurchased approximately 197 million shares common stock average price 2867 per share total purchase price 5635 million year ended december 31 2010 two stock repurchase programs remaining authorized funds 2008 stock repurchase program 2138 million remaining authorized funds 2010 stock repurchase program december 31 2011 addition repurchases company’s stock repurchase programs also brokertransacted repurchases common stock companys employees connection net issuance shares satisfy tax withholding obligations vesting certain rsus psas brokertransacted repurchases approximately 02 million shares common stock average price 3598 per share aggregate purchase price 74 million connection net issuances year ended december 31 2011 brokertransacted repurchases approximately 01 million shares common stock average price 2575 per share aggregate purchase price 19 million connection net issuances year ended december 31 2010 shares common stock repurchased company’s 2008 2010 stock repurchase programs employees connection net issuances retired future share repurchases company’s 2010 stock repurchase program subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 17 subsequent events discussion companys stock repurchase activity 2012 comprehensive income attributable juniper networks comprehensive income attributable juniper networks consists following millions juniper networks inc notes consolidated financial statements continued note 12 employee benefit plans sharebased compensation plans company’s sharebased compensation plans include 2006 equity incentive plan “2006 plan” 2000 nonstatutory stock option plan “2000 plan” amended restated 1996 stock plan “1996 plan” various equity incentive plans assumed acquisitions 2008 employee stock purchase plan “2008 purchase plan” 1999 employee stock purchase plan 1999 purchase plan plans company granted case acquired plans assumed stock options rsus psas december 31 2011 total approximately 1052 million shares common stock reserved future issuance upon exercise stock options future grant sharebased compensation awards companys equity incentive plans 2008 purchase plan 2006 plan adopted approved company’s stockholders may 2006 initial authorized share reserve 645 million shares common stock plus addition shares subject options 2000 plan 1996 plan outstanding may 18 2006 subsequently expire unexercised maximum additional 750 million shares second quarters 2011 2010 company’s stockholders’ approved amendments 2006 plan increased number shares reserved issuance thereby increasing authorized share reserve 300 million shares may 2011 2010 december 31 2011 2006 plan 582 million shares subject currently outstanding equity awards 411 million shares available future issuance options granted 2006 plan maximum term seven years grant date generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan rsus psas vest solely based continuing employment provision services vest full earlier three years grant date event vesting based factors continued future provision services awards vest full earlier one year grant date connection past acquisitions company assumed stock option rsu awards stock plans acquired companies company exchanged awards juniper networks stock options rsus december 31 2011 stock options rsus covering approximately 14 million shares common stock outstanding awards assumed companys past acquisitions company adopted 2008 purchase plan may 2008 replaced 1999 purchase plan board reserves aggregate 120 million shares companys common stock issuance plan 2008 purchase plan generally similar 1999 purchase plan except 2008 purchase plan increases number shares reserved issuance must approved companys stockholders 2008 purchase plan permits eligible employees acquire shares company’s common stock 15 discount offering price determined 2008 purchase plan periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year december 2005 board amended juniper networks 1999 employee stock purchase plan approved board april 1999 purchase plan board authorized maximum number 120 million shares plus juniper networks inc notes consolidated financial statements continued annual increase added first day companys fiscal year beginning 2000 equal lesser 1 30 million shares 2 1 outstanding shares date 3 lesser amount determined board 1999 purchase plan permits eligible employees acquire shares companys common stock periodic payroll deductions 10 base compensation stock option activities since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant following table summarizes company’s stock option activity related information three years ended december 31 2011 millions except per share amounts years 1 stock options assumed connection acquisition ankeena altor aggregate intrinsic value represents difference company’s closing stock price last trading day period 2041 per share december 31 2011 exercise price multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 2498 million 2603 million 836 million 2011 2010 2009 respectively total fair value options vested 2011 2010 2009 807 million 832 million 889 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes information stock options outstanding option plans december 31 2011 december 31 2011 approximately 261 million shares common stock exercisable average exercise price 2151 per share december 31 2010 approximately 321 million shares common stock exercisable weightedaverage exercise price 2096 per share restricted stock units performance share awards activities rsus generally vest period three four years date grant psas generally vest three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes company’s rsu psa activity related information three years ended december 31 2011 millions except per share amounts years juniper networks inc notes consolidated financial statements continued 1 rsus assumed connection acquisitions ankeena altor 2 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved estimated 19 million shares depending achievement performance goals range shares could issued awards 0 45 million shares available grant following table presents stock grant activity total number shares available grant 2006 plan december 31 2011 millions 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 includes canceled expired options 1996 plan 2000 plan expired unexercised may 18 2006 become available grant 2006 plan according terms juniper networks inc notes consolidated financial statements continued employee stock purchase plan companys 2008 purchase plan implemented series offering periods six months duration shorter period determined board employees purchased approximately 24 million 20 million 32 million shares common stock 2008 purchase plan 1999 purchase plan average exercise price 2153 2120 1216 per share fiscal years 2011 2010 2009 respectively december 31 2011 approximately 60 million shares issued 60 million shares remained available future issuance 2008 purchase plan sharebased compensation expense weightedaverage assumptions used resulting estimates fair value employee stock options employee stock purchase plan three years ended december 31 2011 juniper networks inc notes consolidated financial statements continued company’s sharebased compensation expense associated stock options employee stock purchases rsus psas recorded following cost expense categories three years ended december 31 2011 millions following table summarizes sharebased compensation expense award type millions december 31 2011 approximately 948 million unrecognized compensation cost adjusted estimated forfeitures related unvested stock options recognized weightedaverage period approximately 23 years approximately 2474 million unrecognized compensation cost adjusted estimated forfeitures related unvested rsus psas recognized weightedaverage period approximately 21 years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirements defined may contribute statutory limits year company matched employee contributions since january 1 2001 currently matching 25 eligible employee contributions matching contributions vest immediately company’s matching contributions plan totaled 163 million 132 million 119 million years ended december 31 2011 2010 2009 respectively deferred compensation plan company’s nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds nqdc plan assets included within shortterm investments offsetting obligations included within accrued compensation consolidated balance sheet investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded expense income net offsetting compensation expense recorded operating expenses consolidated results operations deferred compensation liability nqdc plan approximately 93 million 81 million december 31 2011 december 31 2010 respectively additional information regarding companys nqdc see note 4 cash equivalents investments juniper networks inc notes consolidated financial statements continued note 13 segments company’s chief operating decision maker “codm” allocates resources assesses performance based financial information company’s business groups company’s operations organized two reportable segments infrastructure service layer technology slt infrastructure segment consists routing switching products services routing includes products services e mx ptx series router families network application platform junos space switching primarily consists products services ex series wireless local area network solutions well qfabric slt segment includes srx services vgw virtual gateways firewall virtual private network systems appliances secure socket layer virtual private network appliances j series router product family intrusion detection prevention appliances wide area network optimization platforms junos pulse primary financial measure used codm assessing performance segments segment operating income includes certain cost revenues research development “rd” expenses sales marketing expenses general administrative “ga” expenses codm allocate certain miscellaneous expenses segments even though expenses included company’s management operating income arrangements infrastructure slt products services revenue attributed segment based underlying purchase order contract sellthrough report direct costs operating expenses standard costs rd product marketing expenses generally applied segment indirect costs manufacturing overhead cost revenues allocated based standard costs indirect operating expenses sales marketing business development ga expenses generally allocated segment based factors including headcount usage revenue codm allocate sharebased compensation amortization purchased intangible assets restructuring impairment charges gains losses equity investments net income expense income taxes certain charges segments juniper networks inc notes consolidated financial statements continued following table summarizes financial information segment used codm three years ended december 31 2011 millions 1 amount includes amortization expense purchased intangible assets operating expenses cost revenues 2 amount includes acquisitionrelated costs operating expenses cost revenues depreciation expense allocated infrastructure segment 1100 million 1089 million 940 million years ended december 31 2011 2010 2009 respectively depreciation expense allocated slt segment 322 million 379 million 390 million years ended december 31 2011 2010 2009 respectively company attributes revenues geographic region based customer’s shipto location following table shows net revenues geographic region millions year ended december 31 2011 single customer accounted 10 net revenues verizon communications inc accounted 106 companys total net revenues 2010 att inc accounted 104 companys total net revenues 2009 majority company’s assets excluding cash equivalents investments december 31 2011 december 31 2010 attributable us operations years ended december 31 2011 december 31 2010 gross property equipment held us percentage total property equipment approximately 80 juniper networks inc notes consolidated financial statements continued although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 14 income taxes components income provision income taxes noncontrolling interest summarized follows millions provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows millions deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities follows millions juniper networks inc notes consolidated financial statements continued december 31 2011 2010 company valuation allowance us domestic deferred tax assets approximately 1452 million 1222 million respectively balance december 31 2011 consisted approximately 943 million 97 million companys california massachusetts deferred tax assets respectively utilized future years approximately 412 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 230 million 94 million years ended december 31 2011 2010 respectively approximately 137 million 97 million 2011 increase due changes income apportioned california massachusetts respectively approximately 94 million 2010 increase relates income apportioned california income apportioned massachusetts california impacts future taxable income within states years deferred tax assets expected realized settled december 31 2011 company federal california net operating loss carryforwards approximately 96 million 396 million respectively company also california tax credit carryforwards approximately 1598 million approximately 213 million benefit california tax credit carryforwards credited additional paidin capital realized companys income tax returns unused net operating loss carryforwards expire various dates beginning year 2012 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 14626 million cumulative undistributed earnings certain foreign subsidiaries december 31 2011 companys intention permanently reinvest earnings distributed company would accrue additional income tax expense approximately 4473 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations december 31 2011 2010 2009 total amount gross unrecognized tax benefits 1322 million 1164 million 1836 million respectively december 31 2011 approximately 1172 million 1322 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits years ended december 31 2011 2010 2009 follows millions juniper networks inc notes consolidated financial statements continued december 31 2011 2010 2009 company accrued interest penalties related unrecognized tax benefits 173 million 189 million 235 million respectively within longterm liabilities consolidated balance sheets accordance companys accounting policy accrued interest penalties related unrecognized tax benefits recognized component tax expense consolidated statements operations company recognized benefit net interest penalties 16 million 46 million expense 148 million consolidated statements operations years ended december 31 2011 2010 2009 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions reasonably possible balance gross unrecognized tax benefits decrease approximately 35 million within next twelve months due lapses applicable statutes limitation multiple jurisdictions company operated however time company unable make reasonably reliable estimate timing payments related remaining unrecognized tax liabilities due uncertainties timing tax audit outcomes fourth quarter 2011 company resolved audit state tax authority years 2002 2004 result settlement company recorded tax benefit approximately 70 million including interest penalties 2010 company recognized approximately 734 million tax benefits related share based compensation company previously recorded unrecognized tax benefits 2009 march 22 2010 court overturned may 27 2009 decision xilinx v commissioner affirmed original us tax court decision held favor taxpayer juniper networks named party case courts decision eliminates uncertainty regarding benefit tax position taken company certain years prior fiscal 2004 relative allocable transfer price sharebased compensation related companys intangible development costs courts decision affirms value sharebased compensation related sharebased compensation grants made prior 2004 required included cost sharing agreements related parties light courts decision company determined tax benefit recognized prior tax position likely sustained company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 although carryforward attributes generated prior 2004 may still adjusted upon examination internal revenue service irs attributes either used future period company currently examination irs 2004 2009 tax years company also subject two separate ongoing examinations india tax authorities 2004 tax year 2004 2009 tax years respectively additionally company reached final resolution irs adjustment proposed 1999 2000 tax years company aware examination taxing authorities major jurisdictions files income tax returns december 31 2011 may 2011 part 2005 2006 irs audit company received proposed adjustment related intercompany rd cost sharing arrangement license intangibles acquired 2005 2009 part 2004 irs audit juniper networks inc notes consolidated financial statements continued company received similar proposed adjustment related license intangibles acquired 2004 december 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands india tax authorities may issue initial assessment substantially higher amount result accordance administrative judicial process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative procedures relative matters referenced company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations information please see note 15 commitments contingencies heading “irs notices proposed adjustments” note 15 commitments contingencies commitments following table summarizes company’s future principal contractual obligations december 31 2011 millions operating leases company leases facilities operating leases expire various times longest expires november 30 2022 future minimum payments noncancelable operating leases totaled 3527 million december 31 2011 rent expense 2011 2010 2009 approximately 657 million 559 million 565 million respectively purchase commitments order reduce manufacturing lead times ensure adequate component supply contract manufacturers utilized company place noncancelable nonreturnable “ncnr” orders components based company’s build forecasts december 31 2011 ncnr component orders placed contract manufacturers value 1506 million contract manufacturers use components build products based company’s forecasts customer purchase orders received company generally company components title products transfers contract manufacturers company immediately company’s customers upon delivery designated shipment location components remain unused products remain unsold specified periods company may incur carrying charges obsolete materials charges components contract manufacturers purchased build products meet company’s forecast customer orders december 31 2011 company accrued 148 million based estimate charges tax liabilities juniper networks inc notes consolidated financial statements continued december 31 2011 company 1085 million included longterm liabilities consolidated balance sheet unrecognized tax positions time company unable make reasonably reliable estimate timing payments related 1085 million due uncertainties timing tax audit outcomes longterm debt interest payment longterm debt december 31 2011 company held longterm debt carrying value 9990 million notes 3000 million mature 2016 bears interest fixed rate 310 3000 million mature 2021 bears interest fixed rate 460 4000 million mature 2041 bears interest 595 interest notes payable semiannually see note 10 financing discussion companys longterm debt contractual obligations december 31 2011 contractual obligations primarily consisted 251 million indemnityrelated service related escrows required certain acquisitions completed 2005 2010 2011 307 million obligations related office campus buildout adjacent companys headquarters miscellaneous commitments guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights thirdparty company also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities december 31 2011 2010 company 199 million 216 million respectively bank guarantees standby letters credit related financial guarantees legal proceedings company involved disputes litigation legal actions including limited matters described company aggressively defending current litigation matters company currently believes existing claims proceedings likely material adverse effect financial position outcome matters currently determinable many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” juniper networks certain juniper networks officers action brought behalf purchasers companys common stock initial public offering june 1999 companys secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold companys initial public offering companys subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss february 19 2003 court granted part denied part motion dismiss juniper networks inc notes consolidated financial statements continued declined dismiss claims company parties reached global settlement litigation settlement insurers pay full amount settlement share allocated company bear financial liability company defendants receive complete dismissals case october 2009 court entered opinion order granting final approval settlement certain objectors appealed appeals dismissed withdrawn result case settled 2011 federal securities class action august 15 2011 purported securities class action lawsuit captioned city royal oak retirement system v juniper networks inc et al case 11cv04003lhk filed united states district court northern district california naming company certain officers directors defendants complaint alleges defendants made false misleading statements regarding companys business prospects january 9 2012 court appointed city omaha police fire retirement system city bristol pension fund lead plaintiff lead plaintiff filed amended complaint february 13 2012 amended complaint alleges defendants made false misleading statements junipers business future prospects failed adequately disclose impact certain changes accounting rules amended complaint purports assert claims violations sections 10b 20a securities exchange act 1934 sec rule 10b5 behalf purchased otherwise acquired junipers common stock july 20 2010 july 26 2011 inclusive 2011 california state derivative lawsuits august 22 september 9 2011 four purported shareholder derivative actions filed superior court state california county santa clara naming certain companys officers directors defendants company named nominal defendant actions consolidated juniper networks inc shareholder litigation case 111cv207701 lead case order dated september 12 2011 complaints generally based upon disclosures alleged omissions challenged securities class action complaints purport assert claims defendants breach fiduciary duties unjust enrichment abuse control gross mismanagement waste corporate assets complaints seek among relief damages unspecified amount restitution attorneys fees costs 2011 federal derivative lawsuit september 27 2011 december 28 2011 two purported shareholder derivative actions captioned ratinova v johnson et al case 11cv04792 lisa e coppola era v johnson et al case 11cv06667 respectively filed united states district court northern district california naming certain companys officers directors defendants company named nominal defendant action like state derivative actions federal derivative lawsuits generally based upon disclosures alleged omissions challenged securities class action complaints purport assert claims defendants breach fiduciary duties unjust enrichment complaints seek among relief damages unspecified amount restitution attorneys fees costs order dated january 30 2012 court consolidated actions juniper networks inc shareholder derivative litigation master file 11cv04792lhk february 3 2012 parties filed stipulation parties requested court stay action time court entered order denying motion dismiss related federal securities class action described february 6 2012 court granted parties stipulation irs notices proposed adjustments may 2011 result audit companys us federal income tax returns 2005 2006 fiscal years irs issued preliminary notice deficiency “pnod” regarding companys transfer pricing transactions intercompany rd cost sharing arrangement related license intangibles acquired 2005 asserted changes would affect companys income tax liabilities tax years subsequent 2004 pnod estimated incremental tax liabilities relative tax years would approximately 920 million excluding interest penalties company filed protest proposed deficiency irs review appeals division irs 2009 company received pnod irs claiming company owes additional taxes plus interest possible penalties 2004 tax year based transfer pricing transaction related license acquired intangibles juniper networks inc notes consolidated financial statements continued intercompany rd cost sharing arrangement asserted changes companys 2004 tax year would affect companys income tax liabilities tax years subsequent 2003 addition company reached final resolution irs adjustment irs proposed 1999 2000 tax years pnod estimated incremental tax liability would approximately 8070 million excluding interest penalties company filed protest proposed deficiency irs review appeals division irs company strongly believes irs position regard transfer pricing transactions companys 2004 2006 fiscal years inconsistent applicable tax laws judicial precedent existing treasury regulations companys previously reported income tax provisions years question appropriate however assurance matters resolved companys favor regardless whether matters resolved companys favor final resolution matters could expensive timeconsuming defend andor settle company believes provided adequately matters still possibility adverse outcome matters could material effect results operations financial condition september 2008 part ongoing audit us federal income tax return 2004 fiscal year irs issued notice proposed adjustment “nopa” regarding companys business credits company believes adequately provided reasonable foreseeable outcome related proposed adjustment company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits note 16 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter two years ended december 31 2011 millions except per share amounts 1 restructuring charges consisted restructuring charges asset impairment charges third quarter 2011 company implemented 2011 restructuring plan workforce reduction recorded restructuring charges 168 million fourth quarter 2011 company recorded charge 135 million associated abandoned inprocess internal used software project 2 acquisitionrelated charges comprised direct indirect costs financial advisory legal due diligence well integration costs related acquisitions completed 2010 2011 3 net income per share attributable juniper network stockholders computed independently therefore sum quarterly net income per share may equal total computed fiscal year cumulative interim period 1 restructuring costs typically comprised employee severance costs consolidating duplicate facilities contract termination costs first quarter 2010 company implemented plan resulted reduction workforce facilities certain business operations 2 acquisitionrelated charges comprised direct indirect costs financial advisory legal due diligence integration costs four acquisitions completed 2010 3 net income per share attributable juniper network stockholders computed independently therefore sum quarterly net income per share may equal total computed fiscal year cumulative interim period note 17 subsequent event stock repurchases subsequent december 31 2011 filing report company repurchased 24 million shares common stock 516 million average purchase price 2175 per share 2010 stock repurchase program filing annual report form 10k companys 2010 stock repurchase program remaining authorized funds 1622 million purchases companys 2010 stock repurchase program subject review circumstances place time made time permitted securities laws legal requirements program may discontinued time business acquisition february 13 2012 company acquired mykonos software provider intrusion deception systems protect websites web applications cash consideration approximately 800 million acquisition enables company juniper networks inc notes consolidated financial statements continued extend security portfolio intrusion deception system capable detecting attacker attack progress company process determining net assets acquired goodwill associated acquisition segment changes first quarter 2012 company aligned organization structure focus platform software strategy beginning 2012 company conform reportable segments new business structure item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2013 2012 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2013 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2013 2012 consolidated results operations cash flows three years period ended december 31 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework report dated february 25 2014 expressed unqualified opinion thereon ernst young llp san jose california february 25 2014 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 1992 framework coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2013 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2013 2012 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2013 juniper networks inc report dated february 25 2014 expressed unqualified opinion thereon ernst young llp san jose california february 25 2014 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2013 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework published 1992 may 2013 coso released new framework companies could adopt 2013 company adopt framework 2014 based assessment management concluded december 31 2013 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2013 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2013 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions taxes related availableforsale securities cash flow hedges material 2011 see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks combine scale performance agility efficiency customers build best networks businesses company serves highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated certain amounts prior years consolidated financial statements reclassified conform current year presentation 2013 company consolidated operational oversight management security products within software solutions division ssd segment result product realignment security products previously reported platform systems division psd segment including branch srx branch firewall j series product families reported ssd segment addition company realigned contrail products psd segment ssd segment company reclassified segment data prior years conform current year presentation changes impact previously reported consolidated net revenues operating income net income net income per share see note 13 segments discussion companys product realignments company previously owned 60 percent interest joint venture nokia siemens networks bv “nsn” given companys majority ownership interest joint venture accounts joint venture consolidated accounts company noncontrolling interest recorded noncontrolling investors interests net assets operations joint venture july 2011 nsn company entered agreement cease operation terminate joint venture subsequently nsn assumed activities joint venture company terminated joint venture 2013 termination material effect companys financial position results operations note 2 significant accounting policies cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash highly liquid investments purchased original maturities three months less classified cash equivalents investments availableforsale trading securities companys investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income realized gains losses determined based specific identification method reported consolidated statements operations company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments fair value temporary difference recognized impairment loss consolidated statements operations juniper networks inc notes consolidated financial statements continued companys nonqualified compensation plan invested mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations privatelyheld investments company privatelyheld investments included longterm assets consolidated balance sheets investments carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stages time investment company markets may never significant company measures fair value privatelyheld investments using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments expense net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income expected reclassified earnings within next twelve months company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies derivatives qualify special hedge accounting treatment derivatives carried fair value changes recorded expense net consolidated statements operations changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities one year less juniper networks inc notes consolidated financial statements continued inventory consists primarily component parts used manufacturing process stated lower cost market cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets construction progress related construction development property equipment yet placed service intended use depreciation equipment commences placed service depreciation buildings leasehold improvements commences ready intended use effective april 1 2013 company extended useful lives certain computers equipment based actual historical usage demonstrated longer useful lives well planned use assets change accounted change estimate applied prospectively year ended december 31 2013 change accounting estimate decreased depreciation expense approximately 283 million 004 per diluted share goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination acquisition individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill tested impairment annually fourth quarter frequently certain indicators present intangible assets acquired business combination determined indefinite useful life amortized assessed potential impairment annually events circumstances indicate carrying amounts might impaired company performs annual goodwill impairment analysis reporting unit level may one level operating segment level fourth quarter year frequently certain indicators present fair value companys reporting units determined using income market valuation approaches income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publicly traded companies similar lines business application income market valuation approaches company required make estimates future operating trends judgments discount rates variables actual future results related assumed variables could differ estimates longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives juniper networks inc notes consolidated financial statements continued revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories changes circumstances indicate collectability reasonably assured sales arrangements contain multiple elements including software nonsoftware components function together deliver tangible products essential functionality company allocates revenue element based selling price hierarchy selling price deliverable based either vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing thirdparty products similar functionality typically cannot obtained esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using residual method vsoe fair value undelivered items exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance services undelivered element case entire arrangement fee recognized ratably maintenance service period company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time portion companys sales made distributors agreements allowing pricing credits rights return reliable estimates credits returns cannot made product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits given amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue juniper networks inc notes consolidated financial statements continued service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems reached application development stage primarily attributable companys enterprise resource planning erp implementation capitalized costs include external direct costs utilized developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 201 million 200 million 172 million 2013 2012 2011 respectively foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive income company’s international subsidiaries functional currency us dollar company records foreign exchange gains losses assets liabilities consolidated statements operations remeasurement adjustments recorded expense net consolidated statements operations juniper networks inc notes consolidated financial statements continued loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value stock options employee stock purchase plan espp shares company determines fair value restricted stock units rsus restricted stock awards rsas performance share awards psas based closing market price company’s common stock date grant sharebased compensation expense based fair value underlying awards amortized straightline basis net estimated forfeitures respect psas generally vest three years portion award attributable performance year company recognizes psa expense straightline basis remaining vesting period starting period annual performance targets set performance year extent performance target expected met bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options expected life stock option award based historical experience provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognizing measuring uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal credit risk company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable years ended juniper networks inc notes consolidated financial statements continued december 31 2013 december 31 2011 single customer accounted 10 net revenues year ended december 31 2012 verizon communications inc verizon accounted 103 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected recent accounting pronouncements july 2013 financial accounting standards board fasb issued accounting standards update asu 201311 income taxes topic 740presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists consensus fasb emerging issues task force asu 201311 provide explicit guidance financial statement presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists asu 201311 effective fiscal years interim periods within years beginning december 31 2013 company intends adopt standard prospectively first quarter 2014 adoption result change tax provision company expect significant impact presentation longterm taxes payable deferred tax assets note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material additional information existing acquisition dates unknown company may become known remainder measurement period exceed 12 months acquisition date may result changes amounts allocations recorded company completed one business combination 2013 three business combinations 2012 two business combinations 2011 cash consideration including fair value vested sharebased awards assumed approximately 100 million 1873 million 305 million respectively following table presents purchase consideration allocations acquisitions based upon acquisitiondate fair values including cash equivalents acquired millions company recognized 09 million 20 million 96 million acquisitionrelated costs years ended december 31 2013 2012 2011 respectively acquisitionrelated costs expensed period incurred general administrative expenses consolidated statements operations goodwill recognized 2012 2011 acquisitions primarily attributable expected synergies deductible us federal income tax purposes juniper networks inc notes consolidated financial statements continued 2013 acquisition 2013 company completed business combination approximately 100 million cash consideration 01 million allocated net tangible assets acquired 99 million intangible assets intangible assets acquired consisted existing technology weightedaverage estimated useful life five years 2012 acquisitions contrail december 14 2012 company acquired remaining ownership interest contrail increasing ownership 12 100 cash stock transaction approximately 917 million contrail privatelyheld software networking company provides softwaredefined networking solutions technology augments junipers portfolio products services aggregate consideration 917 million allocated follows net tangible assets acquired 36 million including cash equivalents 86 million intangible assets 174 million recognized goodwill 707 million assigned companys psd segment refer note 7 goodwill purchased intangible assets discussion reclassification goodwill psd segment ssd segment related acquisition company previously accounted investment contrail cost 30 million prior acquisition date fair value companys previous equity interest contrail remeasured fair value 177 million based upon adjustments market participants would consider estimating fair value previously held interest contrail resulted 147 million gain reported within expense net consolidated statements operations mykonos software inc february 13 2012 company acquired 100 equity securities mykonos software inc mykonos 826 million cash acquisition mykonos extended juniper networks security portfolio intrusion deception system capable detecting attacker attack process connection acquisition company acquired net tangible liabilities 02 million intangible assets 243 million recognized goodwill 585 million assigned companys ssd segment bitgravity inc march 8 2012 company acquired source code license patent jointownership related service management layer bitgravity incs bitgravity content delivery network cdn technology 130 million cash connection acquisition company acquired net tangible assets 01 million intangible assets 124 million recognized goodwill 05 million assigned companys ssd segment intangible assets acquired following table presents details intangible assets acquired business combinations completed 2012 respective acquisition dates millions except years juniper networks inc notes consolidated financial statements continued acquired inprocess research development “iprd” consists existing research development projects time acquisition projects qualify iprd assets represent yet reached technological feasibility alternative future use initial recognition acquired iprd assets accounted indefinitelived intangible assets development costs incurred acquisition acquired development projects expensed incurred upon completion development acquired iprd assets considered amortizable intangible assets iprd project abandoned company writes related purchased intangible asset period abandoned 2011 acquisitions opnext february 9 2011 company acquired certain ip assets opnext 260 million cash accounted business combination acquisition opnexts asic technology furthered junipers nextgeneration development converged packet optical solutions companys service provider customers connection acquisition company acquired fair value intangible assets 257 million recognized goodwill 03 million brilliant february 18 2011 company acquired certain assets brilliant including intellectual property ip 45 million cash ip assisted company extending market position delivering solutions offer greater flexibility service providers deployed 3g 4g networks connection acquisition company acquired net tangible assets 17 million intangible assets 27 million recognized goodwill 01 million intangible assets acquired following table presents details intangible assets acquired business combinations completed 2011 respective acquisition dates millions except years juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale trading securities following tables summarize companys unrealized gains losses fair value investments designated availableforsale trading securities december 31 2013 december 31 2012 millions balance includes companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued balance includes companys nonqualified deferred compensation plan assets following table presents maturities companys fixed income securities december 31 2013 millions company 178 98 investments unrealized loss positions december 31 2013 december 31 2012 respectively gross unrealized losses related investments primarily due changes market interest rates stock prices company reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation availableforsale debt securities unrealized losses company evaluates whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2013 company anticipates recover entire amortized cost basis availableforsale debt securities determined otherthantemporary impairments associated credit losses required recognized year ended december 31 2013 2012 2011 availableforsale equity securities unrealized losses company evaluates whether indication otherthantemporary impairments determination based several factors including financial condition nearterm prospects issuer company’s intent ability hold publiclytraded equity securities period time sufficient allow anticipated recovery market value years ended december 31 2013 2012 2011 company recognize otherthantemporary impairments associated investments juniper networks inc notes consolidated financial statements continued material gross realized gains losses availableforsale trading securities years ended december 31 2013 2012 2011 following tables present companys availableforsale securities unrealized loss position december 31 2013 december 31 2012 millions 1 balance greater 12 months includes investments immaterial unrealized loss position december 31 2013 2 balance less 12 months include investments immaterial unrealized loss position december 31 2013 1 balance greater 12 months includes investments immaterial unrealized loss position december 31 2012 2 balance less 12 months include investments immaterial unrealized loss position december 31 2012 restricted cash investments company classifies cash investments designated availableforsale securities restricted cash investments consolidated balance sheets amounts held escrow accounts required connection certain acquisitions completed 2005 2013 ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust juniper networks inc notes consolidated financial statements continued privatelyheld investments december 31 2013 december 31 2012 carrying values company’s privatelyheld investments 572 million 320 million respectively included longterm assets consolidated balance sheets 2013 certain privatelyheld investments carrying values 122 million became public reclassified shortterm investments resulted net unrealized gains 1027 million recorded component accumulated comprehensive income consolidated balance sheets company reviews investments identify evaluate investments indication possible impairment company adjusts carrying value privatelyheld investments impairment fair value less carrying value respective assets otherthantemporary basis years ended december 31 2013 2012 2011 company determined certain privatelyheld investments otherthantemporarily impaired resulting impairment charges 28 million 200 million 18 million respectively recorded within expense net consolidated statements operations juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following tables provide summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes 836 million restricted investments measured fair market value related companys trust acquisitions related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes 1026 million restricted investments measured fair market value related companys trust acquisition related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets companys level 2 availableforsale fixed income securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level juniper networks inc notes consolidated financial statements continued 2 level 3 beginning quarter change circumstances resulted transfer year ended december 31 2013 company transferred approximately 2874 million government agency bonds within government sponsored enterprise obligations level 1 level 2 primarily due use additional valuation inputs appropriately classified level 2 inputs year ended december 31 2013 company transfers level 3 year ended december 31 2012 company transfers levels fair value hierarchy assets liabilities measured fair value assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill privatelyheld investments measured fair value nonrecurring basis impairment indicated privatelyheld investments normally carried cost measured fair value due events circumstances company identified significantly impacting fair value investments company estimates fair value privatelyheld investments using analysis financial condition nearterm prospects investee including recent financing activities capital structure purchased intangible assets measured fair value primarily using discounted cash flow projections following table presents assets measured fair value nonrecurring basis related impairment losses included consolidated statements operations millions assets classified level 3 assets due absence quoted market prices andor inherent lack liquidity december 31 2013 2012 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable financing receivables accounts payable accrued liabilities approximate fair value due short maturities december 31 2013 december 31 2012 estimated fair value company’s longterm debt approximately 10235 million 10907 million respectively based quoted market prices level 1 note 6 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions juniper networks inc notes consolidated financial statements continued cash flow hedges company uses foreign currency forward option contracts hedge companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less see note 5 fair value measurements fair values company’s derivative instruments consolidated balance sheets december 31 2013 company recognized loss 10 million accumulated comprehensive income effective portion derivative instruments reclassified gain 07 million year ended december 31 2013 comprehensive income operating expense consolidated statements operations december 31 2012 company recognized gain 72 million accumulated comprehensive income effective portion derivative instruments reclassified loss 75 million year ended december 31 2012 comprehensive income operating expense consolidated statements operations december 31 2011 company recognized loss 79 million accumulated comprehensive income effective portion derivative instruments reclassified gain 07 million year ended december 31 2011 comprehensive income operating expense consolidated statements operations ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2013 2012 2011 nondesignated derivatives years ended december 31 2013 2012 2011 company recognized net gain 09 million net gain 10 million gain 15 million respectively nondesignated derivative instruments within expense net consolidated statements operations offsetting derivatives company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party december 31 2013 december 31 2012 potential effect rights setoff associated derivative instruments material company neither required pledge entitled receive cash collateral related derivative transactions note 7 goodwill purchased intangible assets goodwill following table presents goodwill activity allocated companys reportable segments millions additions goodwill 2012 based purchase price allocations acquisitions completed 2012 adjustments goodwill 2012 related adjustments net tangible assets assumed certain businesses acquired 2010 2011 company also recorded adjustments net tangible assets assumed related acquisitions completed 2012 juniper networks inc notes consolidated financial statements continued 2013 goodwill 1790 million associated security products previously reported psd segment reclassified ssd segment connection companys product realignment security products addition company realigned contrail products psd segment ssd segment resulting reclassification goodwill 706 million goodwill reclassified based relative fair value allocation reporting units affected impairments goodwill years ended december 31 2013 2012 2011 purchased intangible assets company’s purchased intangible assets follows millions 2013 research development efforts completed iprd accounted indefinitelived asset reclassified amortizable finitelived asset following table presents amortization intangible assets included consolidated statements operations millions connection restructuring plan 2012 discussed note 9 restructuring charges company assessed value remaining useful life certain intangible assets determined intangible assets 54 million impaired assets writtendown fair value zero assets measured fair value primarily using discounted cash flow projections additionally company determined intangible assets 107 million longer utilized result company recorded 161 million charges related items year ended december 31 2012 included cost revenues consolidated statements operations impairment charges purchased intangible assets years ended december 31 2013 2011 juniper networks inc notes consolidated financial statements continued december 31 2013 estimated future amortization expense purchased intangible assets finite lives follows millions note 8 financial information inventories company purchases holds inventory provide adequate component supplies life underlying products majority companys inventory production components inventories reported within prepaid expenses current assets longterm assets consolidated balance sheets consisted following millions year ended december 31 2012 company recorded charges 443 million cost revenues representing inventory held excess forecasted demand 363 million connection restructuring plan 2012 discussed note 9 restructuring charges property equipment net property equipment net consisted following millions depreciation expense 1482 million 1547 million 1422 million 2013 2012 2011 respectively property equipment periodically reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable 2011 company recorded 135 million asset impairment charge restructuring charges consolidated statement operations related abandoned inprocess internal use software project juniper networks inc notes consolidated financial statements continued longterm assets longterm assets consisted following millions warranties company accrues warranty costs based associated material labor customer support overhead time revenue recognized accrual reported accrued warranty within current liabilities consolidated balance sheets changes company’s warranty reserve follows millions deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents billable amounts service contracts include technical support hardware software maintenance professional services training services rendered juniper networks inc notes consolidated financial statements continued expense net expense net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements typically consists investment foreign exchange gains losses nonoperational income expense items years ended december 31 2013 2012 2011 interest expense included 452 million net 19 million capitalized 400 million net 71 million capitalized 377 million net 12 million capitalized respectively related companys outstanding longterm debt issued march 2011 refer note 10 longterm debt financing 2013 primarily comprised net gains 71 million related privatelyheld investments publiclytraded equity investments 2012 included recognized gains 455 million including 147 million gain acquisition privatelyheld investment contrail impairment losses 200 million related privatelyheld investments 2011 included certain legal expenses unrelated current recent operations approximately 70 million note 9 restructuring charges following table presents restructuring charges included cost revenues restructuring charges consolidated statements operations companys restructuring plans millions restructuring charges based companys restructuring plans committed management changes estimates executing approved plans reflected companys results operations 2013 restructuring plan 2013 company initiated restructuring plan 2013 restructuring plan continue improve cost structure rationalize product portfolio rebalance investments 2013 restructuring plan consists workforce reductions contract terminations project cancellations company recorded 183 million severance costs 100 million contract termination project cancellation charges related 2013 restructuring plan year ended december 31 2013 restructuring plan total costs incurred december 31 2013 283 million 33 million recorded within cost revenues 250 million recorded within restructuring charges consolidated statements operations connection 2013 restructuring plan company expects record aggregate future charges 20 million related severance charges juniper networks inc notes consolidated financial statements continued 2012 restructuring plan 2012 company initiated restructuring plan 2012 restructuring plan bring cost structure line desired longterm financial strategic model 2012 restructuring plan consists workforce reductions facility consolidations closures supply chain procurement efficiencies year ended december 31 2013 company continued implement restructuring activities 2012 restructuring plan recorded 193 million charges severance costs facility consolidations closures contract terminations 2012 restructuring plan total costs incurred december 31 2013 1126 million 580 million recorded within cost revenues primarily related certain inventory intangible asset impairment charges 546 million recorded within restructuring charges consolidated statements operations restructuring activities related plan substantially complete 2011 restructuring plan 2011 company implemented restructuring plan 2011 restructuring plan effort better align business operations current market macroeconomic conditions 2011 restructuring plan consisted certain workforce reductions facility closures lesser extent contract terminations company recorded majority restructuring charges associated 2011 restructuring plan years ended 2012 2011 recorded severancerelated reversal 01 million 2013 december 31 2013 remaining restructuring liability plan relates facility charges expected completed march 2018 restructuring liabilities reported within accrued liabilities longterm liabilities consolidated balance sheets following table provides summary changes restructuring liability related companys plans december 31 2013 millions note 10 longterm debt financing longterm debt march 2011 company issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes collectively notes interest notes payable cash semiannually company may redeem notes time whole time part subject makewhole premium event change control holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principle amount plus accrued unpaid interest indenture governs notes also contains various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2013 company compliance debt covenants juniper networks inc notes consolidated financial statements continued following table summarizes companys longterm debt millions except percentages effective interest rates notes include interest accretion discount amortization issuance costs customer financing arrangements company provides distribution partners access extended financing arrangements certain enduser customers require longer payment terms typically provided company factoring accounts receivable third party financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing provider due company 30 days sale receivable transactions financing provider company surrenders control transferred assets factored accounts receivable isolated company put beyond reach creditors even event bankruptcy company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant financing arrangements sale receivables company sold net receivables 8984 million 6778 million 7382 million years ended december 31 2013 2012 2011 respectively company received cash proceeds financing provider 8439 million 6798 million 6865 million years ended december 31 2013 2012 2011 respectively december 31 2013 december 31 2012 amounts owed financing provider 1898 million 1476 million respectively recorded accounts receivable company’s consolidated balance sheets 2013 company provided guarantees thirdparty financing arrangements extended enduser customers terms four years company liable aggregate unpaid payments thirdparty financing company event customer default december 31 2013 company made payments arrangements pursuant arrangements company guarantees thirdparty financing arrangements 302 million december 31 2013 portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities longterm liabilities consolidated balance sheets december 31 2013 2012 estimated cash received financing provider recognized revenue distributors 623 million 307 million respectively note 11 equity stock repurchase activities july 2013 companys board directors “board” approved stock repurchase program authorized company repurchase 10 billion common stock time managements discretion authorization addition 10 billion stock repurchase program approved board announced june 2012 10 billion stock repurchase program approved board february 2010 december 31 2013 9977 million authorized funds remaining companys stock repurchase programs addition repurchases company’s stock repurchase programs company also repurchases common stock employees connection net issuance shares satisfy minimum tax withholding obligations vesting certain stock awards juniper networks inc notes consolidated financial statements continued following table summarizes companys repurchases retirements common stock repurchase programs repurchases associated minimum tax withholdings millions except per share amounts future share repurchases company’s stock repurchase programs subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys stock programs may discontinued time companys stock repurchase activity subsequent 2013 material accumulated comprehensive income net tax components accumulated comprehensive income net related taxes december 31 2013 december 31 2012 follows millions 1 reclassifications accumulated comprehensive income years ended december 31 2013 december 31 2012 realized gains availableforsale securities 10 million 12 million respectively included expense net consolidated statements operations 2 reclassifications accumulated comprehensive income year ended december 31 2013 realized gains cash flow hedges included within cost revenues 11 million sales marketing 43 million realized losses within research development 34 million general administrative 05 million hedged transactions relate consolidated statements operations reclassifications accumulated comprehensive income year ended december 31 2012 realized losses cash flow hedges included within cost revenues 09 million research development 23 million sales marketing 20 million general administrative 13 million hedged transactions relate consolidated statements operations juniper networks inc notes consolidated financial statements continued note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2006 equity incentive plan “2006 plan” 2000 nonstatutory stock option plan “2000 plan” amended restated 1996 stock plan “1996 plan” various equity incentive plans assumed acquisitions 2008 employee stock purchase plan espp plans company granted case acquired plans assumed stock options restricted stock units rsus restricted stock awards rsas performance share awards psas december 31 2013 total approximately 1038 million shares common stock reserved future issuance upon exercise stock options vesting rsus rsas psas future grant sharebased compensation awards companys equity incentive plans 2006 plan adopted approved company’s stockholders may 2006 date companys stockholders approved share reserve 1495 million shares common stock plus addition shares subject options 2000 plan 1996 plan outstanding may 18 2006 subsequently expire unexercised maximum additional 750 million shares december 31 2013 2006 plan 438 million shares subject currently outstanding equity awards 491 million shares available future issuance options granted 2006 plan maximum term seven years date grant generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan rsus psas vest solely based continuing employment provision services vest full earlier three years grant date event vesting based factors continued future provision services awards vest full earlier one year grant date year ended december 31 2012 company completed acquisitions mykonos contrail assumed respective plans mykonos software inc 2010 stock plan contrail systems inc 2012 stock plan connection plans company assumed stock options rsus rsas exchanged assumed awards juniper networks stock options rsus rsas respectively additional awards granted plans company assumed aggregate 70 million shares stock options rsus rsas connection acquisitions mykonos contrail 58 million shares exempt registration securities act 1933 amended “securities act” reliance upon section 42 securities act transactions issuer involving public offering andor private offering safe harbor provision rule 506 regulation promulgated securities act december 31 2013 stock options rsus rsas representing approximately 47 million shares common stock outstanding awards assumed companys acquisitions espp adopted may 2008 date companys stockholders approved share reserve 190 million shares companys common stock issuance espp permits eligible employees acquire shares company’s common stock 15 discount offering price determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year december 31 2013 approximately 128 million shares issued 62 million shares remain available future issuance espp stock option activities since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant juniper networks inc notes consolidated financial statements continued following table summarizes company’s stock option activity related information three years ended december 31 2013 millions except per share amounts years stock options assumed connection acquisition contrail aggregate intrinsic value represents difference company’s closing stock price last trading day period 2257 per share december 31 2013 exercise price multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 294 million 279 million 2498 million 2013 2012 2011 respectively total fair value options vested 2013 2012 2011 452 million 709 million 807 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes additional information regarding outstanding exercisable options december 31 2013 restricted stock unit restricted stock award performance share award activities rsus rsas generally vest period three four years date grant psas generally vest three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding juniper networks inc notes consolidated financial statements continued following table summarizes company’s rsu rsa psa activity related information three years ended december 31 2013 millions except per share amounts years 1 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved estimated 19 million shares depending achievement performance goals range shares could issued awards 0 45 million shares 2 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 09 million shares depending achievement performance goals range shares could issued awards 0 22 million shares 3 rsus assumed connection acquisition mykonos 4 rsus rsas assumed connection acquisition contrail 5 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 11 million shares depending achievement performance goals range shares could issued awards 0 22 million shares juniper networks inc notes consolidated financial statements continued 6 total fair value rsus rsas psas vested 2013 2012 2011 2215 million 1320 million 577 million respectively shares available grant following table presents stock activity total number shares available grant 2006 plan december 31 2013 millions 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 includes canceled expired options 1996 plan 2000 plan expired may 18 2006 become available grant 2006 plan according terms employee stock purchase plan companys espp implemented series offering periods six months duration shorter period determined board employees purchased approximately 33 million 35 million 24 million shares common stock espp average exercise price 1653 1626 2153 per share 2013 2012 2011 respectively valuation assumptions weightedaverage assumptions used resulting estimates fair value stock options espp follows juniper networks inc notes consolidated financial statements continued sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions following table presents unrecognized compensation cost adjusted estimated forfeitures recognized weightedaverage period related unvested stock options rsus rsas psas december 31 2013 millions except years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 207 million 202 million 163 million years ended december 31 2013 2012 2011 respectively deferred compensation plan company’s nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds nqdc plan assets included within shortterm investments offsetting obligations included within accrued compensation consolidated balance sheets investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded expense net offsetting compensation expense recorded operating expenses consolidated statements operations deferred compensation liability nqdc plan approximately 154 million 126 million december 31 2013 december 31 2012 respectively juniper networks inc notes consolidated financial statements continued note 13 segments company’s chief operating decision maker “codm” allocates resources assesses performance based financial information company’s divisions 2013 company consolidated operational oversight management security products within ssd segment result product realignment security products previously reported psd segment including branch srx branch firewall j series product families reported ssd segment addition company realigned contrail products psd segment ssd segment company reclassified segment data prior years conform current year presentation company’s psd segment primarily offers scalable routing switching products used service provider enterprise public sector networks control direct network traffic data centers core edge aggregation campus wide area networks wans customer premise equipment level companys psd segment consists routing switching products services routing products services include acx e mx ptx series product families switching products services primarily consist ex series wireless local area network solutions well qfabric™ system companys ssd segment offers solutions meet broad array customers’ priorities protecting users applications data network providing network services across distributed infrastructure ssd segment primarily consists security software management virtualization routing products services security includes firewalls junosbased srx screen osbased firewalls firefly virtual private network systems appliances secure socket layer virtual private network appliances intrusion detection prevention appliances wide area network optimization platforms junos pulse j series software services mobile wireline network edge include traffic flow monitoring dynamic application subscriber awareness next generation network addressing management virtualization products include junosphere junos sdk junosv app engine network management platform junos space fiscal 2013 company announced availability juniper networks contrail standardsbased highly scalable network virtualization intelligence solution softwaredefined networks enterprises service providers codm allocate companys business segments certain operating expenses managed separately corporate level direct costs operating expenses standard cost goods sold research development product marketing expenses generally applied segment indirect costs manufacturing overhead cost revenues allocated based factors including headcount usage revenue segment contribution margin provides supplemental data operational performance comprised direct costs operating expenses well indirect costs corporate unallocated expenses include sales marketing general administrative costs sharebased compensation amortization purchased intangible assets restructuring charges gains losses equity investments expense net income taxes certain charges segment contribution margin excludes corporate unallocated expenses juniper networks inc notes consolidated financial statements continued following table summarizes financial information segment used codm millions 1 amount includes unallocated costs global functions sales marketing general administrative 2 amount includes amortization expense purchased intangible assets reported cost revenues operating expenses 3 amount includes restructuring charges reported cost revenues operating expenses 4 amount includes acquisitionrelated costs reported cost revenues operating expenses depreciation expense allocated psd segment 1173 million 1169 million 1049 million years ended december 31 2013 2012 2011 respectively depreciation expense allocated ssd segment 309 million 378 million 373 million years ended december 31 2013 2012 2011 respectively juniper networks inc notes consolidated financial statements continued company attributes revenues geographic region based customer’s shipto location following table presents net revenues geographic region millions years ended december 31 2013 2011 customer accounted greater 10 companys net revenues year ended december 31 2012 verizon accounted 103 companys net revenues across segments following table presents geographic information property equipment net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2013 december 31 2012 attributable us operations although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 14 income taxes components income provision income taxes noncontrolling interest summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows millions 2013 company recorded 642 million net income tax benefit related items unique year amounts included 197 million multiyear claim related us production activities deduction 283 million tax settlement internal revenue service “irs” 162 million us federal rd tax credit resulting american taxpayer relief act 2012 signed january 2 2013 retroactively reinstated us federal rd tax credit january 1 2012 december 31 2013 juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities follows millions breakdown current longterm deferred tax assets deferred tax liabilities follows millions december 31 2013 2012 company valuation allowance us domestic deferred tax assets approximately 1557 million 1410 million respectively balance december 31 2013 consisted approximately 1092 million 97 million companys california massachusetts deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 368 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 147 million 2013 related increase california research development credit decreased 42 million 2012 related utilization losses capital nature december 31 2013 company federal california net operating loss carryforwards approximately 12 million 406 million respectively company also california tax credit carryforwards approximately 2081 million approximately 201 million benefit california tax credit carryforwards credited additional paidin capital realized companys income tax returns unused net operating loss carryforwards expire various dates beginning year 2014 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately juniper networks inc notes consolidated financial statements continued 15 billion cumulative undistributed earnings certain foreign subsidiaries december 31 2013 earnings considered indefinitely invested operations outside us company intends utilize amounts fund future expansion international operations earnings distributed united states form dividends otherwise shares relevant foreign subsidiaries sold otherwise transferred company would subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes determination amount unrecognized deferred income tax liability related earnings practicable december 31 2013 2012 2011 total amount gross unrecognized tax benefits 1376 million 1361 million 1322 million respectively december 31 2013 approximately 1288 million 1376 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2013 2012 2011 company accrued interest penalties related unrecognized tax benefits 184 million 167 million 173 million respectively within longterm liabilities consolidated balance sheets company recognized expense net interest penalties 06 million benefit 06 million 16 million consolidated statements operations years ended december 31 2013 2012 2011 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease approximately 16 million within next twelve months due lapses applicable statutes limitation completion tax review cycles various tax jurisdictions 2013 company executed closing agreement appeals division irs related intercompany rd cost sharing arrangement license intangibles acquired 2004 2005 2006 company reached final resolution irs proposed adjustments tax years 2006 resulted settlement approximately 196 million including interest fourth quarter 2011 company resolved audit state tax authority years 2002 2004 result settlement company recorded tax benefit approximately 70 million including interest penalties company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 company currently examination irs 2007 2009 tax years company also subject separate ongoing examinations india tax authorities 2004 tax year 2004 2008 tax years 2008 2010 tax years company aware examinations tax authorities major jurisdictions files income tax returns december 31 2013 juniper networks inc notes consolidated financial statements continued 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands accordance administrative judicial process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative remedies relative matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations note 15 net income per share company computed basic diluted net income per share attributable juniper networks common stockholders follows millions except per share amounts basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable excludes shares contingently issuable potentially dilutive common shares approximately 132 million 323 million 174 million shares years ended december 31 2013 2012 2011 respectively excluded computation diluted net income effect would antidilutive juniper networks inc notes consolidated financial statements continued note 16 commitments contingencies operating leases following table summarizes company’s future minimum payments noncancelable operating leases next five years thereafter december 31 2013 millions company leases facilities certain equipment noncancelable operating leases expire various dates november 30 2022 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses rent expense 2013 2012 2011 approximately 528 million 632 million 657 million respectively purchase commitments contract manufacturers suppliers order reduce manufacturing lead times ensure adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments purchase commitments totaled 4914 million december 31 2013 company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2013 company accrued 229 million based estimate charges longterm debt interest payment longterm debt december 31 2013 company held longterm debt consisting senior notes carrying value 9993 million notes 3000 million mature 2016 bears interest fixed rate 310 3000 million mature 2021 bears interest fixed rate 460 4000 million mature 2041 bears interest fixed rate 595 interest notes payable semiannually see note 10 longterm debt financing discussion companys longterm debt contractual obligations december 31 2013 contractual obligations primarily consisted 895 million indemnityrelated service related escrows required connection certain asset purchases acquisitions completed 2005 2013 campus buildout obligations 131 million 103 million agreements firm noncancelable specify terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing payment juniper networks inc notes consolidated financial statements continued guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights thirdparty company also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements custom duty guarantees standby letters credit certain lease facilities december 31 2013 december 31 2012 company 401 million 126 million respectively financing arrangements bank guarantees standby letters credit related financial guarantees 302 million financing guarantees recorded accrued liabilities longterm liabilities consolidated balance sheets december 31 2013 see note 10 longterm debt financing discussion companys thirdparty customer financing arrangements contain guarantee provisions legal proceedings company involved disputes litigation legal actions including limited matters described company aggressively defending current litigation matters assurances outcome matters currently determinable company currently believes existing claims proceedings likely material adverse effect financial position many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses unless otherwise noted period presented recorded accrual loss contingencies associated legal proceedings determined unfavorable outcome probable reasonably possible determined amount range possible loss reasonably estimable 2013 federal securities class action august 12 2013 purported securities class action lawsuit captioned warren avery v juniper networks inc et al case 13cv3733who filed united states district court northern district california naming company certain officers directors defendants complaint alleged defendants made false misleading statements regarding companys revenues business practices internal controls complaint purported assert claims violations sections 10 b 20a securities exchange act 1934 sec rule 10b5 behalf purchased juniper networks securities april 24 2012 august 8 2013 inclusive plaintiff sought unspecified amount monetary damages behalf purported class november 12 2013 court issued order appointing warren avery lead plaintiff january 9 2014 lead plaintiff filed notice voluntary dismissal action without prejudice january 23 2014 court entered order dismissal without prejudice 2013 shareholder derivative lawsuit august 28 2013 purported shareholder derivative action captioned washtenaw county employees’ retirement system v kriens et al case 113cv252083 filed superior court state california county santa clara naming certain companys officers directors defendants october 17 2013 action removed united states district court northern district california case 13cv04829who company named nominal defendant action complaint alleges defendants failed implement adequate internal controls compliance programs prevent violations foreign corrupt practices act complaint purports assert claims defendants breach fiduciary duties abuse control waste corporate assets complaint seeks among relief damages unspecified amount restitution attorneys fees costs january 22 2014 company filed motion dismiss action hearing motion scheduled april 23 2014 investigations us securities exchange commission us department justice conducting investigations possible violations company us foreign corrupt practices act company cooperating agencies regarding matters company unable predict duration scope outcome investigations juniper networks inc notes consolidated financial statements continued note 17 selected quarterly financial data unaudited tables set forth selected unaudited financial data quarter two years ended december 31 2013 millions except per share amounts 1 second quarter 2013 company extended useful lives certain computers equipment based actual historical usage demonstrated longer useful lives well planned use assets change accounted change estimate applied prospectively change accounting estimate decreased depreciation expense within research development expense approximately 110 million 001 per diluted share second quarter 2013 94 million 001 third quarter 2013 79 million 001 fourth quarter 2013 2 third quarter 2013 company implemented 2013 restructuring plan workforce reductions contract terminations project cancellations recorded restructuring charges 74 million 37 million operating expenses cost revenues respectively fourth quarter 2013 company continued implement restructuring activities 2013 restructuring plan primarily recorded charges operating expenses 176 million 3 net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 4 certain amounts prior quarters condensed consolidated statements operations reclassified conform current year presentation juniper networks inc notes consolidated financial statements continued 1 third quarter 2012 company recorded net period adjustments reducing income taxes noncontrolling interest 82 million net adjustments resulted increased research development expense 186 million related prototype development costs partially offset increased net revenues 62 million related reversal certain revenue obligations reduced cost revenues 42 million related inventory purchases company assessed materiality adjustments using relevant quantitative qualitative factors determined adjustments individually aggregate material previously reported period 2 third quarter 2012 company implemented 2012 restructuring plan workforce reductions facility consolidations closures supply chain procurement efficiencies recorded restructuring charges 295 million connection restructuring activities company also recorded certain inventory intangible asset impairment charges totaling 524 million cost revenues fourth quarter 2012 company continued implement restructuring activities 2012 restructuring plan 3 net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 4 certain amounts prior quarters condensed consolidated statements operations reclassified conform current year presentation note 18 subsequent events integrated operating plan february 2014 company announced integrated operating plan iop focused innovation matters service providers enterprises demand highiq networks bestinclass cloud environments driving growth execution iop company coalesce engineering talent gotomarket teams rd around strategy resulting streamlined operations business portfolio operational efficiencies company expects initiate substantial cost reduction plan connection iop accomplished various restructuring activities company able make reasonable estimate future restructuring costs associated iop part iop company announced commitment return minimum 30 billion shareholders next three years combination share repurchases dividends part plan board directors authorized 20 billion share repurchases executed end first quarter 2015 including 12 billion accelerated share repurchase program entered first quarter 2014 company also initiate quarterly cash dividend 010 per share common stock beginning third quarter 2014 activities funded combination existing cash balances debt offerings business combination subsequent december 31 2013 company acquired wandl inc “wandl” provider software solutions advanced planning management design optimization nextgeneration multilayer networks cash stock consideration approximately 300 million acquisition provides company technology experience traffic engineering multilayer optimization path computation help service provider customers optimize performance cost networks initial purchase accounting transaction yet complete filing report item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2015 2014 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2015 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2015 2014 consolidated results operations cash flows three years period ended december 31 2015 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 19 2016 expressed unqualified opinion thereon ernst young llp san jose california february 19 2016 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2015 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2015 2014 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2015 juniper networks inc report dated february 19 2016 expressed unqualified opinion thereon ernst young llp san jose california february 19 2016 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2015 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework published 2013 based assessment management concluded december 31 2015 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2015 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2015 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility efficiency value automation company serves highperformance networking requirements global service providers cloud environments enterprises governments research public sector organizations view network critical success addition companys products company offers technical support professional services well education training programs customers together highperformance product service offerings help companys customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated certain amounts prioryears consolidated financial statements reclassified conform currentyear presentation including adoption accounting standards update asu 201517 balance sheet classification deferred taxes requires deferred tax assets liabilities classified noncurrent consolidated balance sheets guidance effective annual periods interim periods within annual periods beginning december 15 2016 early adoption permitted company early adopted standard effective december 31 2015 retrospectively adoption resulted 2610 million 1470 million decrease current deferred tax assets decrease 2070 million 1074 million longterm liabilities december 31 2015 2014 respectively consolidated balance sheets adoption asu 201517 impact company’s consolidated statements operations note 2 significant accounting policies use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash highly liquid investments purchased original maturities three months less classified cash equivalents investments availableforsale trading securities companys investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income realized gains losses determined based specific identification method reported consolidated statements operations juniper networks inc notes consolidated financial statements continued company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments fair value temporary difference recognized impairment loss consolidated statements operations companys nonqualified compensation plan invested mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations privatelyheld investments company privatelyheld investments included longterm assets consolidated balance sheets investments include debt redeemable preferred stock securities carried fair value nonredeemable preferred stock securities carried cost investments carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stages time investment company markets may never significant company measures fair value privatelyheld investments using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments expense income net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income expected reclassified earnings within next twelve months company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense income net consolidated statements operations period juniper networks inc notes consolidated financial statements continued changes fair value remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities one year less inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost market cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets construction progress related construction development property equipment yet placed service intended use depreciation computers equipment software furniture fixtures commences placed service depreciation buildings land leasehold improvements commences ready intended use goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination acquisition individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill tested impairment annually fourth quarter frequently certain circumstances indicate carrying value goodwill impaired qualitative assessment first made determine whether necessary quantitatively test goodwill impairment initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed comparing estimated fair values reporting units respective carrying values including goodwill impairment loss recognized extent carrying amount goodwill exceeds assets implied fair value intangible assets acquired business combination determined indefinite useful life amortized assessed potential impairment annually events circumstances indicate carrying amounts might impaired longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement juniper networks inc notes consolidated financial statements continued • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories changes circumstances indicate collectability reasonably assured sales arrangements contain multiple elements company allocates revenue element based selling price hierarchy selling price deliverable based either vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similar situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing thirdparty products similar functionality typically cannot obtained therefore tpe used esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using residual method vsoe fair value undelivered items exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance services undelivered element case entire arrangement fee recognized ratably maintenance service period company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time portion companys sales made distributors agreements allowing pricing credits rights return reliable estimates credits returns cannot made product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits given amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance juniper networks inc notes consolidated financial statements continued considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems application development stage capitalized costs include external direct costs utilized developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 202 million 192 million 201 million 2015 2014 2013 respectively foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive income companys international subsidiaries functional currency us dollar company records foreign exchange gains losses assets liabilities denominated nonus dollar currencies remeasurement adjustments recorded expense income net consolidated statements operations loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required juniper networks inc notes consolidated financial statements continued sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options stock awards stock units employee stock purchases related employee stock purchase plan espp sharebased compensation expense based fair value underlying awards amortized straightline basis net estimated forfeitures company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value stock options espp shares bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options espp expected life stock option based historical experience employee exercises postvesting termination behavior well potential effect options exercised expected life espp approximates offering period company determines fair value restricted stock units rsus restricted stock awards rsas performance share awards psas based closing market price company’s common stock date grant adjusted present value expected dividend marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte carlo model affected companys stock price well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal credit risk company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing juniper networks inc notes consolidated financial statements continued credit evaluations customers generally require collateral accounts receivable years ended december 31 2015 2014 2013 single customer accounted 10 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers outside design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recent accounting pronouncements january 2016 financial accounting standards board fasb issued asu 201601 financial instrumentsoverall recognition measurement financial assets financial liabilities asu 201601 requires equity investments measured fair value changes fair value recognized net income simplifies impairment assessment equity investments without readily determinable fair values requiring qualitative assessment identify impairment entities may choose practical expedient estimate fair value certain equity securities readily determinable fair value practical expedient elected investments would recorded cost less impairment subsequently adjusted observable price changes guidance also updates certain presentation disclosure requirements asu 201601 effective financial statements issued fiscal years beginning december 15 2017 interim periods within fiscal years company currently evaluating impact asu 201601will consolidated financial statements disclosures september 2015 fasb issued asu 201516 topic 805 business combinations simplifying accounting measurementperiod adjustments asu 201516 replaces requirement acquirer business combination account measurement period adjustments retrospectively requirement acquirer recognize adjustments provisional amounts identified measurement period reporting period adjustment amounts determined asu 201516 requires entity record periods financial statements effect earnings changes depreciation amortization income effects result change provisional amounts calculated accounting completed acquisition date amendment requires entity present separately face income statement disclose notes portion amount recorded currentperiod earnings line item would recorded previous reporting periods adjustment provisional amounts recognized acquisition date asu 201516 effective fiscal years beginning december 15 2015 including interim periods within fiscal years amendment applied prospectively adjustments provisional amounts occur effective date guidance early adoption permitted financial statements issued adoption standard apply upon execution business combination july 2015 fasb issued asu 201511 subtopic 330 simplifying measurement inventory asu 201511 provides guidance companies account inventory using either firstin firstout fifo average cost methods guidance states companies measure inventory lower cost net realizable value net realizable value defined estimated selling prices ordinary course business less reasonably predictable costs completion disposal transportation asu 201511 effective fiscal years beginning december 15 2016 early adoption permitted adoption standard significant impact companys consolidated financial statements april 2015 fasb issued asu 201505 subtopic 35040 customers accounting fees paid cloud computing arrangement asu 201505 provides guidance customers whether cloud computing arrangement includes software license cloud computing arrangement includes software license customer account software license element arrangement consistent acquisition software licenses cloud computing arrangement include software license customer account arrangement service contract asu also eliminates existing requirement customers analogize guidance leases asc 840 determine asset acquired software licensing arrangement instead customers account software licenses obtained internaluse manner licenses intangible assets asu 201505 effective fiscal years beginning december 15 2015 early adoption permitted company plans adopt asu prospectively new transactions entered materially modified date adoption april 2015 fasb issued asu 201503 subtopic 83530 simplifying presentation debt issuance costs asu 201503 requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts asu 201503 effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted juniper networks inc notes consolidated financial statements continued adoption standard would reduce debt issuance cost asset companys consolidated balance sheet approximately 110 million correspondingly reduce debt liabilities approximately 110 million company plans adopt standard first quarter 2016 adoption standard impact consolidated statement operations august 2015 fasb issued asu 201515 interest imputation interest subtopic 83530 presentation subsequent measurement debt issuance costs associated lineofcredit arrangements asu 201503 asu 201515 provides additional guidance asu 201503 address presentation subsequent measurement debt issuance costs related lineofcredit arrangements amendment states entity may defer present debt issuance costs associated lineofcredit arrangements asset subsequently amortize deferred debt issuance costs ratably term lineofcredit arrangement regardless whether outstanding borrowings lineofcredit arrangement adoption asu 201515 impact companys consolidated financial statements november 2014 fasb issued asu 201416 topic 815 derivatives hedging asu 201416 provides clarification current guidance interpreted evaluating economic characteristics risks host contract hybrid financial instrument issued form share specifically amendments clarify entity consider relevant terms features evaluating host contract single term feature would necessarily determine economic characteristics risks host contract asu 201416 effective fiscal years interim periods within fiscal years beginning december 15 2015 amendment applied modified retrospective basis existing hybrid financial instruments issued form share beginning year amendments effective early adoption permitted adoption standard material impact companys consolidated financial statements june 2014 fasb issued asu 201412 topic 718 compensation stock compensation “asu 201412” provides guidance performance target affects vesting sharebased payment could achieved requisite service period performance condition result target reflected estimation award’s grant date fair value compensation cost award would recognized required service period probable performance condition achieved asu 201412 effective entities annual periods beginning december 15 2015 interim periods within annual periods asu 201412 applied prospective basis awards granted modified effective date adoption standard impact companys consolidated financial statements may 2014 fasb issued asu 201409 topic 606revenue contracts customers “asu 201409” provides guidance revenue recognition asu affects contracts company enters customers transfer goods services transfer nonfinancial assets asu supersede revenue recognition requirements topic 605 industry specific guidance asu also supersedes cost guidance included subtopic 60535 revenue recognitionconstructiontype productiontype contracts standards core principle revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services company need use additional judgment estimates existing guidance may include identifying performance obligations contract estimating amount variable consideration include transaction price allocating transaction price separate performance obligation august 2015 fasb issued asu 201514 deferred effective date new revenue standard december 15 2016 december 15 2017 early adoption permitted annual reporting periods beginning december 15 2016 accordingly asu effective company beginning fiscal year 2018 company currently evaluating impact adoption standard consolidated financial statements note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material additional information existing acquisition dates unknown company may become known remainder measurement period exceed 12 months acquisition date may result changes amounts allocations recorded company complete business combinations 2015 completed one business combination 2014 one business combination 2013 cash consideration including fair value vested sharebased awards assumed acquisitions 2014 2013 approximately 287 million 100 million respectively juniper networks inc notes consolidated financial statements continued following table presents purchase consideration allocations acquisitions based upon acquisitiondate fair values including cash equivalents acquired millions goodwill recognized 2014 acquisition primarily attributable expected synergies deductible us federal income tax purposes 2014 acquisition january 7 2014 company acquired 100 equity securities wandl inc wandl 287 million cash stock consideration wandl provider software solutions advanced planning management design optimization nextgeneration multilayer networks provides company technology experience traffic engineering multilayer optimization path computation help service provider customers optimize performance cost networks terms purchase agreement company assumed unvested sharebased awards employees fair value 349 million granted contemplation future services expensed sharebased compensation remaining service period intangible assets acquired following table presents details companys intangible assets acquired business combination completed twelve months ended december 31 2014 millions except years 2013 acquisition 2013 company completed business combination approximately 100 million cash consideration 01 million allocated net tangible assets acquired 99 million intangible assets intangible assets acquired consisted existing technology weightedaverage estimated useful life five years juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale trading securities following tables summarize companys unrealized gains losses fair value investments designated availableforsale trading securities december 31 2015 december 31 2014 millions 1 balance includes companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes companys nonqualified deferred compensation plan assets following table presents contractual maturities companys total fixed income securities december 31 2015 millions company 682 437 investments unrealized loss positions december 31 2015 december 31 2014 respectively gross unrealized losses related investments primarily due changes market interest rates stock prices company periodically reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation availableforsale debt securities unrealized losses company evaluates whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2015 company anticipates recover entire amortized cost basis availableforsale debt securities determined otherthantemporary impairments associated credit losses required recognized years ended december 31 2015 2014 2013 availableforsale equity securities unrealized losses company evaluates whether indication otherthantemporary impairments determination based several factors including financial condition nearterm prospects issuer company’s intent ability hold publiclytraded equity securities period time sufficient allow anticipated recovery market value years ended december 31 2015 december 31 2013 company recognize otherthantemporary impairments associated availableforsale equity securities juniper networks inc notes consolidated financial statements continued year ended december 31 2014 company determined certain availableforsale equity securities otherthan temporarily impaired resulting impairment charge 11 million recorded within expense income net consolidated statement operations years ended december 31 2015 december 31 2013 material gross realized gains losses availableforsale securities trading securities year ended december 31 2014 gross realized gains availableforsale securities 1668 million gross realized losses material gross realized gains losses trading securities year ended december 31 2014 following tables present companys availableforsale securities unrealized loss position december 31 2015 december 31 2014 millions 1 balances less 12 months include investments immaterial unrealized loss position december 31 2015 1 balances less 12 months include investments immaterial unrealized loss position december 31 2014 juniper networks inc notes consolidated financial statements continued restricted cash investments company classifies certain cash investments restricted cash investments consolidated balance sheets amounts held escrow accounts required connection certain acquisitions completed 2005 2014 ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust restricted investments designated availableforsale securities privatelyheld investments december 31 2015 december 31 2014 carrying values companys privatelyheld investments 1024 million 899 million respectively included longterm assets consolidated balance sheets december 31 2015 december 31 2014 carrying value privatelyheld investments includes debt redeemable preferred stock securities 602 million 475 million respectively year ended december 31 2015 company recorded 114 million comprehensive loss income unrealized gains unrealized losses associated privatelyheld debt redeemable preferred stock securities year ended december 31 2014 150 million unrealized gains unrealized losses associated privatelyheld securities unrealized gains losses redeemable preferred stock comprehensive loss income company reviews investments identify evaluate investments indication possible impairment company adjusts carrying value privatelyheld investments impairment fair value less carrying value respective assets otherthantemporary basis years ended december 31 2015 company determined privatelyheld investments otherthantemporarily impaired years ended december 31 2014 december 31 2013 company determined certain privatelyheld investments otherthantemporarily impaired resulting impairment charges 11 million 28 million respectively recorded within expense income net consolidated statements operations juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following tables provide summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes 297 million restricted investments measured fair market value related companys trust acquisitions related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes 413 million restricted investments measured fair market value related companys trust acquisition related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale fixed income securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level 2 level 3 beginning quarter change circumstances resulted transfer years ended december 31 2015 december 31 2014 company transfers levels fair value hierarchy assets liabilities measured fair value companys privatelyheld debt redeemable preferred stock securities classified level 3 assets due absence quoted market prices inherent lack liquidity company estimates fair value privatelyheld debt investments recurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure year ended december 31 2015 53 million purchases related privatelyheld debt securities assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill privatelyheld equity investments measured fair value nonrecurring basis impairment indicated privatelyheld equity investments normally carried cost measured fair value nonrecurring basis due events circumstances company identifies significantly impacting fair value investments company estimates fair value privatelyheld equity investments using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure purchased intangible assets measured fair value primarily using discounted cash flow projections december 31 2015 december 31 2014 company significant privatelyheld equity investments measured fair value nonrecurring basis december 31 2013 company 20 million privatelyheld equity investments measured fair value nonrecurring basis classified level 3 assets due absence quoted market prices inherent lack liquidity impairment charges 28 million representing difference net book value fair value recorded expense income net consolidated statements operations december 31 2014 company recorded goodwill impairment charge 8500 million security reporting unit measured fair value nonrecurring basis remeasurement goodwill classified level 3 value assessment due significance unobservable inputs developed using companyspecific information refer note 7 goodwill purchased intangible assets information goodwill impairment charge unobservable inputs used december 31 2015 2014 2013 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable financing receivables accounts payable accrued liabilities approximate fair value due short maturities december 31 2015 december 31 2014 estimated fair value companys shortterm longterm debt consolidated balance sheets approximately 19467 million 13952 million respectively based observable market inputs level 2 december 31 2015 carrying value promissory note including interest paid kind 1329 million connection sale junos pulse recorded longterm assets consolidated balance sheet approximates fair value promissory note classified level 3 asset due absence quoted market prices inherent lack liquidity refer note 8 financial information promissory note juniper networks inc notes consolidated financial statements continued note 6 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward option contracts hedge companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less see note 5 fair value measurements fair values company’s derivative instruments consolidated balance sheets december 31 2015 company recognized loss 63 million accumulated comprehensive loss income effective portion derivative instruments reclassified loss 96 million year ended december 31 2015 comprehensive income operating expense consolidated statements operations december 31 2014 company recognized loss 34 million accumulated comprehensive loss income effective portion derivative instruments reclassified gain 34 million year ended december 31 2014 comprehensive loss income operating expense consolidated statements operations december 31 2013 company recognized loss 10 million accumulated comprehensive income effective portion derivative instruments reclassified gain 07 million year ended december 31 2013 comprehensive income operating expense consolidated statements operations ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2015 2014 2013 nondesignated derivatives years ended december 31 2015 2014 2013 company recognized net loss 06 million net loss 24 million net gain 09 million respectively nondesignated derivative instruments within expense income net consolidated statements operations offsetting derivatives company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party december 31 2015 2014 respectively potential effect rights setoff associated derivative instruments material company neither required pledge entitled receive cash collateral related derivative transactions juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill following table presents goodwill activity millions fourth quarter company performed annual goodwill impairment test companys three reporting units routing switching security years ended december 31 2015 2014 2013 respectively year ended december 31 2015 company elected perform qualitative assessment companys reporting units qualitative assessment included review certain macroeconomic factors entityspecific qualitative factors determine morelikelythan fair values companys reporting units carrying value result qualitative assessment company concluded morelikelythannot goodwill impaired 2014 company determined security reporting units carrying value goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations goodwill impairment 2013 fourth quarter 2014 company compared reporting units’ fair value current value determine whether impairment exists fair value determined using combination income approach market approach income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rates used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach company estimated fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units income approach market approach equally weighted derive fair value reporting unit fair value company’s routing switching reporting units significantly exceeded carrying value however fair value security reporting unit exceed carrying value therefore company determined security reporting unit’s goodwill impaired 2014 company realigned gotomarket research development rd resources projects highest potential growth continued leverage engineering efforts across routing switching security products fourth quarter 2014 company began implement new security strategy focused network resiliency performance based srx platform result company rationalized security product portfolio including developing new product roadmap exiting certain point products including divestiture junos pulse factors decreased companys short term near term revenue profitability forecasts security reporting unit determining impairment amount fair value security reporting unit allocated assets liabilities including unrecognized intangible assets based respective fair values assumptions used measuring value assets liabilities included discount rates customer renewal rates technology obsolescence rates used valuing intangible assets pricing comparable transactions market valuing tangible assets juniper networks inc notes consolidated financial statements continued purchased intangible assets company’s purchased intangible assets follows millions following table presents amortization intangible assets included consolidated statements operations millions year ended december 31 2015 company recorded 56 million cost revenues consolidated statements operations related acceleration endoflife certain intangible assets connection restructuring plan 2014 note 9 restructuring charges company determined certain intangible assets 200 million longer utilized year ended december 31 2014 company recorded charges 193 million cost revenues 07 million restructuring charges consolidated statements operations impairment charges purchased intangible assets year ended december 31 2013 juniper networks inc notes consolidated financial statements continued december 31 2015 estimated future amortization expense purchased intangible assets finite lives follows millions note 8 financial information inventories company purchases holds inventory provide adequate component supplies life underlying products majority companys inventory production components used manufacturing process finished goods inventory transit inventories reported within prepaid expenses current assets longterm assets consolidated balance sheets total inventories consisted following millions connection 2014 restructuring plan discussed note 9 restructuring charges company accelerated endofservice life certain products resulting inventory charges 155 million recorded within cost revenues consolidated statement operations december 31 2014 similar charges recorded years ended december 31 2015 2013 property equipment net property equipment net consisted following millions 1 july 10 2015 company entered data center lease agreement accounted buildtosuit lease company deemed owner property construction period company capitalized construction cost property plant equipment recorded corresponding financing liability 456 million consolidated balance sheet december 31 2015 juniper networks inc notes consolidated financial statements continued depreciation expense 1415 million 1419 million 1482 million 2015 2014 2013 respectively property equipment periodically reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable longterm assets longterm assets consisted following millions 1 year ended december 31 2015 company early adopted asu 201517 balance sheet classification deferred taxes requiring deferred tax assets liabilities related valuation allowance classified noncurrent consolidated balance sheets certain amounts prioryear consolidated financial statements retrospectively adjusted conform currentyear presentation october 1 2014 company completed sale junos pulse product portfolio company received total consideration 2307 million 1057 million cash net 193 million working capital adjustment 1250 million form noncontingent interestbearing promissory note due company april 1 2016 “pulse note” october 2 2015 company issuer pulse note mutually agreed amend original terms pulse note terms modified pulse note parties agreed extend maturity date april 1 2016 december 31 2018 provided interest due pulse note december 31 2015 shall paid kind increasing outstanding principal amount note increase interest payable pulse note include semiannual excess cash flow sweeps commencing 2016 required certain debt subordinated promissory note issued company addition amended terms pulse note issuer required make minimum payment 750 million prior april 1 2017 less amount previously prepaid company use commercially reasonable efforts refinance entire note remaining balance due december 31 2018 connection amendment certain holding companies issuer also provided company guarantee additional collateral secure repayment amended promissory note receivable along related interest receivable classified longterm assets based expected collection beyond twelve months consolidated balance sheet date company considers notes receivable impaired based current information events probable company able collect scheduled payments principal interest due company measures impairment pulse note based present value expected cash flows discounted notes effective interest rate compared recorded investment note including principal accrued interest based impairment assessment impairment charge required pulse note december 31 2015 interest income pulse note accrued credited interest income earned unless probable company collect amounts due present value expected cash flows less recorded investment years ended december 31 2015 december 31 2014 related amount interest income recognized 63 million 16 million respectively juniper networks inc notes consolidated financial statements continued warranties company accrues warranty costs based associated material labor customer support overhead time revenue recognized accrual reported within accrued liabilities consolidated balance sheets changes company’s warranty reserve follows millions deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria circumstances costs deferred product revenue recorded net related costs product revenue deferred service revenue represents billable amounts service contracts include technical support hardware software maintenance professional services training services rendered expense income net expense income net consisted following millions juniper networks inc notes consolidated financial statements continued interest income primarily includes interest earned company’s cash equivalents investments promissory note issued company connection sale junos pulse interest expense primarily includes interest net capitalized interest expense shortterm debt longterm debt customer financing arrangements typically consists investment foreign exchange gains losses nonoperational income expense items interest expense years ended december 31 2015 2014 2013 interest expense included 798 million net 22 million capitalized 575 million net 27 million capitalized 452 million net 19 million capitalized respectively related companys outstanding shortterm longterm debt issued march 2011 march 2014 march 2015 discussed note 10 debt financing gain legal settlement year ended december 31 2014 company entered settlement agreement palo alto networks inc palo alto networks resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees gain investments years ended december 31 2015 december 31 2013 company recorded gain 68 million 71 million respectively primarily related sale privatelyheld investments year ended december 31 2014 company recorded gain 1630 million primarily related sale investments converted privatelyheld investments publiclytraded equity upon initial public offering subsequently sold gain sale junos pulse october 1 2014 company completed sale junos pulse product portfolio company received total consideration 2307 million 1057 million cash net 193 million working capital adjustment 1250 million form noncontingent interest bearing promissory note issued company result sale company recorded gain 196 million expense income net consolidated statement operations companys sale junos pulse driven product rationalization connection companys initiative focus projects highest potential growth note 9 restructuring charges first quarter 2014 company initiated restructuring plan “2014 restructuring plan” designed refocus companys strategy optimize structure improve operational efficiencies 2014 restructuring plan consisted workforce reductions facility consolidations closures asset writedowns contract terminations charges company also initiated restructuring plans fiscal years 2011 2013 focused improving companys cost structure product portfolio rationalizations workforce reductions contract terminations project cancellations facility closures consolidations december 31 2014 companys restructuring plans substantially completed company expect record significant future charges restructuring plans juniper networks inc notes consolidated financial statements continued restructuring charges benefits following table presents restructuring charges benefits included cost revenues restructuring benefits charges consolidated statements operations companys restructuring plans millions 2014 restructuring plan year ended december 31 2015 company recorded benefit 35 million previously recorded charge related certain products contract manufacturers acceleration endofservice life products cost revenues consolidated statements operations additionally company recorded 04 million severance costs benefit 10 million facilities recorded restructuring benefits charges consolidated statements operations connection 2014 restructuring plan year ended december 31 2014 company recorded 520 million severance costs 142 million facility consolidation closures costs 854 million impairment charges related licensed software 123 million asset writedowns 23 million charges related contract terminations recorded restructuring charges consolidated statements operations connection facility consolidation closures charge 142 million company consent landlord administrative agent holder certain liens secured upon buildings leased premises assigned certain real property leases totaling approximately 04 million square feet third party concurrently assignments company executed sublease assignee one properties approximately 01 million square feet period two years onetime right extend term six months arrangements company paid 123 million landlord released future lease obligations following date assignments company also incurred 53 million transaction fees recorded restructuring charges consolidated statements operations offsetting charges adjustment relating deferred rent liability relating premises 98 million company also recorded inventory writedowns 155 million intangibles writedowns 193 million charge related products contract manufacturers 67 million acceleration endofservice life certain products cost revenues consolidated statements operations year ended december 31 2014 2013 restructuring plan 2013 company initiated restructuring plan 2013 restructuring plan continue improve cost structure rationalize product portfolio rebalance investments 2013 restructuring plan consists workforce reductions contract terminations project cancellations company recorded 06 million severance costs related 2013 restructuring plan year ended december 31 2014 2013 restructuring plan total costs incurred december 31 2014 289 million 33 million recorded within cost revenues 256 million recorded within restructuring charges consolidated statements operations restructuring activities related plan substantially complete company expect record significant future charges plan juniper networks inc notes consolidated financial statements continued restructuring liability restructuring liabilities reported within accrued liabilities longterm liabilities consolidated balance sheets following table provides summary changes restructuring liability related companys plans year ended december 31 2015 millions december 31 2015 companys restructuring liability 28 million related facility closures expected paid march 2018 note 10 debt financing debt following table summarizes companys shortterm longterm debt millions except percentages march 2015 company issued 3000 million aggregate principal amount 330 senior notes due 2020 notes 3000 million aggregate principal amount 435 senior notes due 2025 notes march 2014 company issued 3500 million aggregate principal amount 450 senior notes due 2024 notes march 2011 company issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes 2016 notes 2020 notes 2021 notes 2024 notes 2025 notes 2041 notes collectively notes company’s senior unsecured unsubordinated obligations ranking equally right payment company’s existing future senior unsecured unsubordinated indebtedness senior right payment company’s future indebtedness expressly subordinated notes juniper networks inc notes consolidated financial statements continued company may redeem 2020 notes 2025 notes either whole part time one month prior maturity date 2020 notes three months prior maturity date 2025 notes redemption price equal greater 100 aggregate principal amount 2020 notes 2025 notes redeemed ii sum present values remaining scheduled payments discounted treasury rate plus 30 basis points 2020 notes treasury rate plus 375 basis points 2025 notes plus case clauses ii accrued unpaid interest time may 15 2020 case 2020 notes time march 15 2025 case 2025 notes company may redeem notes series whole part redemption price equal 100 principal amount 2020 notes 2025 notes redeemed plus accrued unpaid interest company may redeem notes either whole part time redemption price equal greater 100 aggregate principal amount notes redeemed ii sum present values remaining scheduled payments discounted redemption date plus either case accrued unpaid interest event change control repurchase event holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principal amount plus accrued unpaid interest notes payable cash semiannually effective interest rates notes include interest notes accretion discount amortization issuance costs indentures govern notes also contain various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2015 company compliance covenants indentures governing notes revolving credit facility june 27 2014 company entered credit agreement credit agreement certain institutional lenders citibank na administrative agent provides 5000 million unsecured revolving credit facility option company increase amount credit facility additional 2000 million subject certain conditions proceeds loans made credit agreement may used company working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid borrowing may denominated companys option us dollars pounds sterling euro borrowings credit agreement bear interest either floating rate per annum equal base rate plus margin 000 050 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 090 150 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 050 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period december 31 2015 company compliance covenants credit agreement amounts outstanding customer financing arrangements company provides certain distribution partners access extended financing arrangements certain enduser customers require longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing provider due company within 30 90 days sale receivable transactions financing provider company surrenders control transferred assets beginning 2014 2015 company transitioned certain distribution partners third party financing program companys commercial payment terms result companys customer financing activities significantly declined fiscal year 2014 fiscal year 2015 pursuant financing arrangements sale receivables company sold net receivables 725 million 4403 million 8984 million years ended december 31 2015 2014 2013 respectively company received cash proceeds financing provider 993 million 6021 million 8439 million years ended december 31 2015 2014 2013 respectively december 31 2015 december 31 2014 amounts juniper networks inc notes consolidated financial statements continued owed financing provider 12 million 280 million respectively recorded accounts receivable company’s consolidated balance sheets company provided guarantees thirdparty financing companies certain thirdparty financing arrangements extended certain enduser customers terms three years company liable aggregate unpaid payments thirdparty financing company event customer default december 31 2015 company required make payments arrangements pursuant arrangements company guarantees thirdparty financing arrangements 99 million december 31 2015 portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities longterm liabilities consolidated balance sheets december 31 2015 2014 cash received financing provider recognized revenue 14 million 453 million respectively note 11 equity cash dividends shares common stock 2015 company declared four quarterly cash dividends 010 per share common stock january 27 2015 april 23 2015 july 23 2015 october 22 2015 paid march 24 2015 june 23 2015 september 22 2015 december 22 2015 respectively stockholders record close business march 3 2015 june 2 2015 september 1 2015 december 1 2015 respectively aggregate amount 1563 million future dividends establishment record payment dates subject approval board directors board juniper networks authorized committee thereof see note 18 subsequent events discussion companys dividend declaration subsequent december 31 2015 stock repurchase activities february 2014 companys board approved stock repurchase program authorized company repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program 2014 stock repurchase program october 2014 july 2015 board authorized 13 billion 5000 million increase respectively 2014 stock repurchase program total 39 billion december 31 2015 5325 million authorized funds remaining 2014 stock repurchase program addition repurchases company’s stock repurchase program company also repurchases common stock certain employees connection net issuance shares satisfy minimum tax withholding obligations upon vesting certain stock awards issued employees following table summarizes companys repurchases retirements common stock repurchase programs accelerated share repurchase repurchases associated minimum tax withholdings millions except per share amounts 1 part 2014 stock repurchase program company entered two separate accelerated share repurchase agreements collectively asr two financial institutions repurchase 12 billion companys common stock company made upfront payment 12 billion pursuant asr repurchase companys common stock aggregate number shares ultimately purchased determined based volume weighted average repurchase price less agreed upon discount shares received respect asr retired shares return authorized unissued shares common stock juniper networks inc notes consolidated financial statements continued future share repurchases company’s stock repurchase programs subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys stock repurchase programs may discontinued time see note 18 subsequent events discussion companys stock repurchase activity subsequent december 31 2015 accumulated comprehensive loss net tax components accumulated comprehensive loss net related taxes years ended december 31 2015 december 31 2014 follows millions 1 reclassifications accumulated comprehensive income net tax years ended december 31 2015 december 31 2014 realized gains availableforsale securities 05 million 1043 million respectively included expense income net consolidated statements operations 2 reclassifications accumulated comprehensive loss income net tax year ended december 31 2015 realized losses cash flow hedges included within cost revenues 29 million research development 02 million sales marketing 60 million general administrative 05 million consolidated statements operations reclassifications accumulated comprehensive income year ended december 31 2014 realized gains cash flow hedges included within research development 14 million sales marketing 03 million general administrative 07 million realized losses within cost revenues 01 million hedged transactions relate consolidated statements operations note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2015 equity incentive plan “2015 plan” 2006 equity incentive plan “2006 plan” amended restated 1996 stock plan “1996 plan” various equity incentive plans assumed acquisitions espp plans company granted case acquired plans assumed stock options restricted stock units “rsus” restricted stock awards “rsas” performance share awards “psas” 2015 plan adopted approved companys stockholders may 2015 initial authorized share reserve 380 million shares common stock plus addition shares subject outstanding awards 2006 plan 1996 plan outstanding may 19 2015 subsequently expire otherwise terminate maximum additional 290 million shares december 31 2015 aggregate 205 million shares subject outstanding equity awards 2015 plan 2006 plan 1996 plan december 31 2015 367 million shares available future issuance 2015 plan shares available future issuance 2006 plan 1996 plan december 31 2015 total approximately 665 million shares common stock reserved future issuance upon exercise stock options vesting rsus rsas psas future grant sharebased compensation awards companys equity incentive plans juniper networks inc notes consolidated financial statements continued espp adopted approved companys stockholders may 2008 date companys stockholders approved share reserve 260 million shares companys common stock issuance espp includes additional 70 million shares approved companys stockholders may 2015 espp permits eligible employees acquire shares company’s common stock 15 discount offering price determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year december 31 2015 approximately 184 million shares issued 76 million shares remain available future issuance espp 2014 company completed acquisition wandl inc assumed wandl inc 2013 restricted stock unit plan connection plan company assumed rsus rsas psas exchanged assumed awards juniper networks rsus rsas psas respectively company assumed aggregate 15 million shares rsus rsas psas connection acquisition wandl inc additional awards granted plan december 31 2015 stock options rsus rsas psas representing approximately 17 million shares common stock outstanding awards assumed companys acquisitions stock option activities since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant following table summarizes company’s stock option activity related information three years ended december 31 2015 millions except per share amounts years aggregate intrinsic value represents difference company’s closing stock price last trading day period 2760 per share december 31 2015 exercise price applicable options multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 275 million 334 million 294 million 2015 2014 2013 respectively total fair value options vested 2015 2014 2013 70 million 208 million 452 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes additional information regarding outstanding exercisable options december 31 2015 restricted stock unit restricted stock award performance share award activities rsus rsas generally vest period three four years date grant psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding juniper networks inc notes consolidated financial statements continued following table summarizes company’s rsu rsa psa activity related information three years ended december 31 2015 millions except per share amounts years 1 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee authorized subcommittee achieved target 11 million shares depending achievement performance goals range shares could issued awards 0 22 million shares 2 total fair value rsus rsas psas vested 2015 2014 2013 2027 million 2385 million 2215 million respectively 3 includes servicebased marketbased rsus granted 2006 plan 2015 plan according terms 4 rsus rsas psas assumed connection acquisition wandl inc 5 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee authorized subcommittee achieved target 07 million shares depending achievement performance goals range shares could issued awards 0 14 million shares 6 february 20 2014 company announced intention initiate quarterly cash dividend 010 per share common stock third quarter 2014 result companys announcement grant date fair value rsus psas granted juniper networks inc notes consolidated financial statements continued announcement date reduced present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested 7 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee authorized subcommittee achieved target 07 million shares depending achievement performance goals range shares could issued awards 0 10 million shares available grant following table presents stock activity total number shares available grant 2015 plan 2006 plan applicable 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2015 plan 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 canceled expired options 2006 plan 1996 plan canceled rsus psas 2006 plan longer available future grant plans however number shares available grant 2015 plan increased amount canceled expired options rsus psas applicable maximum 290 million additional shares common stock pursuant terms 2015 plan 3 authorized shares subject outstanding awards 2006 plan canceled may 19 2015 following approval company’s stockholders 2015 plan effective may 19 2015 additional awards issuable 2006 plan employee stock purchase plan companys espp implemented series offering periods six months duration shorter period determined board employees purchased approximately 27 million 29 million 33 million shares common stock espp average exercise price 1925 1930 1653 per share 2015 2014 2013 respectively juniper networks inc notes consolidated financial statements continued valuation assumptions weightedaverage assumptions used resulting estimates fair value stock options espp marketbased rsus follows 1 blackscholesmerton optionpricing model utilized estimate fair value espp 2 fair value marketbased rsus utilizes monte carlo simulation option pricing model company amortizes fair value awards derived service period adjusted estimated forfeitures separately vesting tranche award provided derived service rendered total fair value marketbased rsus date grant recognized compensation expense even market condition achieved however number shares ultimately vest vary significantly performance specified market criteria sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions juniper networks inc notes consolidated financial statements continued following table presents unrecognized compensation cost adjusted estimated forfeitures recognized weightedaverage period related unvested stock options rsus rsas psas december 31 2015 millions except years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 196 million 202 million 207 million years ended december 31 2015 2014 2013 respectively deferred compensation plan company’s nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds nqdc plan assets included within shortterm investments offsetting obligations included within accrued compensation consolidated balance sheets investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded expense income net offsetting compensation expense recorded operating expenses consolidated statements operations deferred compensation liability nqdc plan approximately 177 million 163 million december 31 2015 december 31 2014 respectively note 13 segments company conducts business globally managed operated organized major functional departments operate consolidated basis major functional leader reports directly companys chief executive officer chief operating decision maker “codm” company’s codm views business allocates resources assesses performance company primarily based consolidated financial information entire business accompanied disaggregated information net revenues product service geographic region presented result company operates one reportable operating segment financial segment information found accompanying consolidated financial statements following table presents net revenues product service millions juniper networks inc notes consolidated financial statements continued company attributes revenues geographic region based customer’s shipto location following table presents net revenues geographic region millions years ended december 31 2015 2014 2013 customer accounted greater 10 companys net revenues following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2015 december 31 2014 attributable us operations note 14 income taxes components pretax loss income noncontrolling interest summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate pretax loss income follows millions 2015 united states tax court “court” issued opinion favorable altera corporation “altera” respect altera’s litigation internal revenue service “irs” litigation relates treatment sharebased compensation expense intercompany costsharing arrangement altera’s foreign subsidiary opinion court accepted altera’s position excluding sharebased compensation intercompany costsharing arrangement result company reversed inclusion sharebased compensation costsharing arrangement cumulative adjustment quarter ended september 30 2015 change cost sharing increases companys cumulative foreign earnings approximately 703 million gross income tax benefit associated change offset increase income tax expense accrued upon company’s foreign earnings company continue monitor ongoing developments potential impacts financial statements passage protecting americans tax hike act 2015 december 18 2015 retroactively permanently reinstated us federal rd tax credit effective january 1 2015 2014 company provided tax pretax loss primarily due nondeductible goodwill charge 2013 company recorded 642 million net income tax benefit related items unique year amounts included 197 million multiyear claim related us production activities deduction 283 million tax settlement irs 162 million juniper networks inc notes consolidated financial statements continued us federal rd tax credit resulting american taxpayer relief act 2012 signed january 2 2013 retroactively reinstated us federal rd tax credit january 1 2012 december 31 2013 deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys longterm deferred tax assets deferred tax liabilities follows millions 1 year ended december 31 2015 company early adopted asu 201517 balance sheet classification deferred taxes requiring deferred tax assets liabilities related valuation allowance classified noncurrent consolidated balance sheets certain amounts prioryear consolidated financial statements retrospectively adjusted conform currentyear presentation december 31 2015 2014 company valuation allowance us domestic deferred tax assets approximately 1462 million 1445 million respectively balance december 31 2015 consisted approximately 1281 million 97 million companys california massachusetts deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 84 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 2015 17 million related increase california rd tax credit decreased 112 million 2014 related utilization losses capital nature offset increase california rd tax credit december 31 2015 company california net operating loss carryforwards approximately 495 million 480 million expected expire unused company also california tax credit carryforwards approximately 2371 million approximately 195 million benefit california tax credit carryforwards credited additional paidin capital realized companys income tax returns unused net operating loss carryforwards expire various dates beginning year 2016 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 22 billion cumulative undistributed earnings certain foreign subsidiaries december 31 2015 earnings considered indefinitely invested operations outside us company intends utilize amounts fund future juniper networks inc notes consolidated financial statements continued expansion international operations earnings distributed united states form dividends otherwise shares relevant foreign subsidiaries sold otherwise transferred company would subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes determination amount unrecognized deferred income tax liability related earnings practicable december 31 2015 2014 2013 total amount gross unrecognized tax benefits 2161 million 1992 million 1376 million respectively december 31 2015 approximately 1818 million 2161 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2015 2014 2013 company accrued interest penalties related unrecognized tax benefits 241 million 223 million 184 million respectively longterm liabilities consolidated balance sheets company recognized expense net interest penalties 25 million 28 million 06 million consolidated statements operations years ended december 31 2015 2014 2013 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease approximately 186 million within next twelve months due lapses applicable statutes limitation completion tax review cycles various tax jurisdictions 2013 company executed closing agreement appeals division irs related intercompany rd cost sharing arrangement license intangibles acquired 2004 2005 2006 company reached final resolution irs proposed adjustments tax years 2006 resulted settlement approximately 196 million including interest company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 company currently examination irs 2007 2009 tax years california franchise tax board 2004 2006 tax years 2015 irs issued “notices proposed adjustments” related examination company regularly assesses likelihood adverse outcome resulting examinations december 31 2015 company believes resolution audits material adverse impact financial statements company also subject separate ongoing examinations india tax authorities 2003 tax year 2004 2008 tax years 2009 2010 tax years company aware examinations tax authorities major jurisdictions files income tax returns december 31 2015 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation companys 2004 2008 tax returns disputing juniper networks inc notes consolidated financial statements continued companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands accordance administrative judicial process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative remedies relative matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations note 15 net income per share company computed basic diluted net loss income per share attributable juniper networks common stockholders follows millions except per share amounts basic net income per share computed using net income loss available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income loss available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable excludes shares contingently issuable potentially dilutive common shares excluded computation diluted net loss per share effect would antidilutive juniper networks inc notes consolidated financial statements continued note 16 commitments contingencies commitments operating leases following table summarizes company’s future minimum payments noncancelable operating leases next five years thereafter december 31 2015 millions company leases facilities certain equipment noncancelable operating leases expire various dates october 31 2024 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses rent expense 2015 2014 2013 approximately 432 million 460 million 528 million respectively data center lease agreement july 10 2015 company entered data center lease agreement march 2026 company option extend term lease twenty years increments either five years ten years approximately 63000 square feet space state washington total payment lease expected approximately 1181 million tenyear term lease agreement provides company tenant allowance 60 million used tenant leasehold improvements unused tenant allowance may applied credit rent payment space used among things consolidate certain companys laboratory operations currently located sunnyvale california company subject certain contractual obligations construction period company deemed owner property construction period accordingly december 31 2015 company capitalized construction cost recording buildtosuit lease asset construction progress 456 million component property equipment net corresponding buildtosuit financing liability component longterm liabilities consolidated balance sheets purchase commitments contract manufacturers suppliers order reduce manufacturing lead times ensure adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments purchase commitments totaled 5912 million december 31 2015 company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2015 company accrued 180 million based estimate charges debt interest payment debt december 31 2015 company held shortterm longterm debt consisting senior notes carrying value 2999 million 16488 million respectively notes 3000 million mature 2016 bears interest fixed rate 310 3000 million mature 2020 bears interest rate 330 3000 million mature 2021 bears interest fixed rate 460 3500 million mature 2024 bears interest fixed rate 450 3000 million juniper networks inc notes consolidated financial statements continued mature 2025 bears interest fixed rate 435 4000 million mature 2041 bears interest fixed rate 595 interest notes payable semiannually see note 10 debt financing discussion companys shortterm longterm debt contractual obligations december 31 2015 contractual obligations primarily consisted 1 362 million indemnity employeerelated obligations servicerelated escrows including required connection certain asset purchases acquisitions completed company 2005 2014 2 35 million campus buildout obligations 3 334 million agreements include firm noncancelable terms transfer funds future fixed minimum amounts quantities purchased fixed minimum prices tax liabilities december 31 2015 company 1873 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products solely combination third party products infringe intellectual property rights thirdparty december 31 2015 company recorded 150 million liability indemnification obligations accrued liabilities consolidated balance sheets company also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements custom duty guarantees standby letters credit certain lease facilities december 31 2015 2014 company 158 million 262 million respectively financing arrangements bank guarantees standby letters credit related financial guarantees 99 million financing guarantees recorded accrued liabilities longterm liabilities consolidated balance sheets december 31 2015 see note 10 debt financing discussion companys thirdparty customer financing arrangements contain guarantee provisions legal proceedings investigations us securities exchange commission sec us department justice doj conducting investigations possible violations company us foreign corrupt practices act fcpa company cooperating agencies regarding matters company’s audit committee assistance independent advisors investigating conducting thorough review possible violations fcpa made recommendations remedial measures including employee disciplinary actions foreign jurisdictions company implemented continues implement company unable predict duration scope outcome sec doj investigations believes adverse outcome reasonably possible however company able estimate reasonable range possible loss sec andor doj could take action company could agree settle event company could required pay substantial fines sanctions andor implement additional remedial measures addition may determined company violated fcpa litigation addition investigations discussed company involved disputes litigation legal actions company aggressively defending current litigation matters assurances outcome matters currently determinable company currently believes none existing claims proceedings likely material adverse effect financial position many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability juniper networks inc notes consolidated financial statements continued matters may materially different companys estimates could result need adjust liability record additional expenses company records accrual loss contingencies legal proceedings believes unfavorable outcome probable b amount range possible loss reasonably estimable company recorded accrual loss contingencies associated legal proceedings investigations discussed note 17 selected quarterly financial data unaudited tables set forth selected unaudited financial data quarter two years ended december 31 2015 millions except per share amounts 1 first quarter 2015 company issued 3000 million aggregate principal amount 330 senior notes due 2020 3000 million aggregate principal amount 435 senior notes due 2025 result company recorded interest expense 191 million related longterm debt issued 2015 expense net year ended december 31 2015 2 includes approximately 132 million net benefit cumulative adjustment related change treatment sharebased compensation result us tax court decision altera corporation et al altera v commissioner see note 14 income taxes notes consolidated financial statements item 8 part ii report information 3 fourth quarter 2015 company recorded gain privately held investments 73 million expense net 4 net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 5 january 27 2015 april 23 2015 july 23 2015 october 22 2015 company declared quarterly cash dividend 010 per share common stock stockholders record close business march 3 2015 june 2 2015 september 1 2015 december 1 2015 respectively juniper networks inc notes consolidated financial statements continued 1 first quarter 2014 company initiated 2014 restructuring plan consisted 847 million asset writedowns 280 million severance costs 08 million contract terminations recorded restructuring charges addition company recorded inventory writedowns related acceleration endofservice life certain products totaling 84 million cost revenues second quarter company recorded 99 million severance costs 376 million facility consolidation closures 89 million asset writedowns 15 million contract terminations recorded restructuring charges company also recorded inventory writedowns 115 million charge related products contract manufacturers 23 million acceleration endoflife service certain products cost revenues third quarter company recorded 71 million severance costs benefit 250 million facility consolidation closures result lease assignment 29 million asset writedowns recorded restructuring credit charges fourth quarter company recorded 69 million severance costs 16 million facility consolidation closures 206 million asset impairment writedowns 2 fourth quarter 2014 company recorded 8500 million goodwill impairment charge related security reporting unit 3 first quarter 2014 company recorded gain 1630 million related sale investments converted privatelyheld investments publiclytraded equity upon initial public offering second quarter company entered settlement agreement palo alto networks resulted realized gain legal settlement 1953 million net legal fees palo alto networks securities sold third quarter company recorded additional 08 million gain fourth quarter company recorded gain 196 million sale junos pulse 4 net income loss per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 5 july 22 2014 october 23 2014 company declared quarterly cash dividend 010 per share common stock stockholders record close business september 2 2014 december 2 2014 respectively note 18 subsequent events business combination january 2016 company entered definitive agreement acquire bti systems inc provider cloud metro optical networking systems software content cloud service providers approximately 650 million cash inclusive debt plus cash hand closing ii assumption restricted stock units outstanding closing company believes acquisition allow company accelerate delivery open automated packet optical transport solutions integrated network management based bti systems pronx service manager junipers connectivity services director well northstar controller company believes together products provide unified management interface multilayer provisioning endtoend services across ip optical networks consummation acquisition subject customary closing conditions dividend declaration january 27 2016 company announced declared quarterly cash dividend 010 per share common stock payable march 22 2016 stockholders record close business march 1 2016 stock repurchase activities subsequent december 31 2015 filing annual report form 10k company repurchased 31 million shares common stock aggregate purchase price 750 million average price 2389 per share 2014 stock repurchase program settled prior filing report 2014 stock repurchase program company 4575 million authorized funds remaining filing date purchases companys stock repurchase program subject review circumstances place time made time permitted securities law legal requirements program may discontinued time item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2016 2015 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2016 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2016 2015 consolidated results operations cash flows three years period ended december 31 2016 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 24 2017 expressed unqualified opinion thereon ernst young llp san jose california february 24 2017 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2016 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2016 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2016 2015 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2016 juniper networks inc report dated february 24 2017 expressed unqualified opinion thereon ernst young llp san jose california february 24 2017 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2016 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework published 2013 based assessment management concluded december 31 2016 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2016 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2016 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility efficiency value automation company sells highperformance routing switching security networking products service offerings global service providers cloud providers national governments research public sector organizations enterprises view network critical success addition companys products company offers worldwide services including technical support professional services education training programs customers together highperformance product service offerings help companys customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated certain amounts prioryears consolidated financial statements reclassified conform currentyear presentation including adoption accounting standards update asu 201503 subtopic 83530 simplifying presentation debt issuance costs asu 201503 requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts company decreased longterm assets longterm debt december 31 2015 consolidated balance sheets 113 million note 2 significant accounting policies use estimates preparation financial statements related disclosures accordance us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposits time deposits corporate debt securities readily convertible cash highly liquid investments purchased original maturities three months less classified cash equivalents investments availableforsale trading securities companys investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive loss consolidated balance sheets realized gains losses determined based specific identification method reported consolidated statements operations juniper networks inc notes consolidated financial statements continued company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments value temporary difference recognized impairment loss consolidated statements operations companys nonqualified compensation plan invested mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations investments privatelyheld companies company privatelyheld investments included longterm assets consolidated balance sheets investments include debt redeemable preferred stock securities carried fair value nonredeemable preferred stock securities carried cost investments carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently carry higher risk market technologies products manufactured companies usually early stages time investment company markets may never significant company measures fair value privatelyheld investments using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities eighteen months less derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive loss upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments expense income net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive loss expected reclassified earnings within next eighteen months juniper networks inc notes consolidated financial statements continued company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense income net consolidated statements operations period changes fair value remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities eighteen months less inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost market cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets construction progress related construction development property equipment yet placed service intended use goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill tested impairment annually fourth quarter frequently certain circumstances indicate carrying value goodwill impaired qualitative assessment first made determine whether necessary quantitatively test goodwill impairment initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed comparing estimated fair values reporting units respective carrying values including goodwill impairment loss recognized extent carrying amount goodwill exceeds assets implied fair value intangible assets acquired business combination related inprocess research development iprd projects considered indefinitelived completion abandonment associated research development efforts indefinitelived intangibles amortized results operations instead evaluated impairment development complete associated assets would deemed finitelived would amortized cost revenues respective estimated useful lives point time research development project abandoned acquired iprd assets written charged expense period abandonment longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives juniper networks inc notes consolidated financial statements continued revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery product obligations • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories changes circumstances indicate collectability reasonably assured sales arrangements contain multiple elements company allocates revenue element based selling price hierarchy selling price deliverable based either vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similar situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing thirdparty products similar functionality typically cannot obtained therefore tpe used esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using residual method vsoe fair value undelivered items exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii vsoe established maintenance service undelivered element entire arrangement fee recognized ratably maintenance service period company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time portion companys sales made distributors agreements allowing pricing credits rights return reliable estimates credits returns cannot made product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits given amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue service revenues include revenue maintenance training professional services software postcontract support pcs maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less software pcs juniper networks inc notes consolidated financial statements continued includes technical support provide software license updates software license updates provide customers rights unspecified software product upgrades maintenance releases patches released term support period revenue related software pcs recognized term pcs arrangement allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems application development stage capitalized costs include external direct costs utilized developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 158 million 202 million 192 million 2016 2015 2014 respectively foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive loss company records foreign exchange transaction gains losses assets liabilities denominated nonfunctional currencies remeasurement adjustments recorded expense income net consolidated statements operations juniper networks inc notes consolidated financial statements continued loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options stock awards restricted stock units performance share awards employee stock purchases related employee stock purchase plan espp sharebased compensation expense based fair value underlying awards amortized straightline basis net estimated forfeitures company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value stock options espp shares bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options espp expected life stock option based historical experience employee exercises postvesting termination behavior well potential effect options exercised expected life espp approximates offering period company determines fair value restricted stock units rsus restricted stock awards rsas performance share awards psas based closing market price company’s common stock date grant adjusted present value expected dividend marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte carlo model affected companys stock price well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits mitigate concentration credit risk investment portfolio diversification investments various industries limit amount credit exposure single issuer juniper networks inc notes consolidated financial statements continued company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable years ended december 31 2016 2015 2014 single customer accounted 10 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers outside design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recent accounting pronouncements november 2016 financial accounting standards board fasb issued asu 201618 topic 230 statement cash flow restricted cash pronouncement requires statement cash flows explain change period total cash equivalents amounts generally described restricted cash restricted cash equivalents therefore amounts generally described restricted cash restricted cash equivalents included cash equivalents reconciling beginningofperiod endofperiod total amounts shown statement cash flows amendments asu effective reporting periods beginning december 15 2017 early adoption permitted standard must applied retrospectively periods presented company currently evaluating impact adoption consolidated financial statements october 2016 fasb issued asu 201617 topic 810 interests held related parties common control pronouncement amends consolidation guidance reporting entity single decision maker vie treat indirect interests entity held related parties common control reporting entity determining whether primary beneficiary vie amendments asu effective reporting periods beginning december 15 2016 early adoption permitted standard must applied retrospectively periods presented company adopted standard january 1 2017 adoption standard significant impact companys consolidated financial statements october 2016 fasb issued asu 201616 topic 740 income taxes intraentity transfers assets inventory require companies recognize opposed defer tax effects intercompany transfer asset inventory transfer occurs prior issuance asu companies required defer income tax effects intercompany transfers assets asset sold outside party otherwise recognized asu 201616 still require companies defer income tax effects intercompany inventory transactions asu 201616 effective annual interim reporting periods beginning december 15 2017 applied modified retrospective basis early adoption permitted company currently evaluating impact adoption consolidated financial statements august 2016 fasb issued asu 201615 topic 230 statement cash flow classification certain cash receipts cash payments pronouncement provides clarification guidance certain cash flow presentation issues debt prepayment debt extinguishment costs contingent consideration payments made business combination applied using retrospective transition method period presented provisions impracticable apply retrospectively provisions may applied prospectively earliest date practicable pronouncement effective interim annual reporting periods beginning december 15 2017 early adoption permitted company currently evaluating impact standard consolidated statements cash flows juniper networks inc notes consolidated financial statements continued june 2016 fasb issued asu 201613 topic 326 financial instruments credit losses pronouncement issued provide decisionuseful information expected credit losses financial instruments changes loss impairment methodology pronouncement effective reporting periods beginning december 15 2019 interim periods within fiscal years using modified retrospective adoption method prospective transition approach required debt securities otherthantemporary impairment recognized early adoption permitted company currently evaluating impact standard consolidated financial statements disclosures march 2016 fasb issued asu 201609 topic 718 compensationstock compensation improvements employee sharebased payment accounting asu 201609 simplifies several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities forfeiture statutory tax withholding requirements classification statement cash flows asu201609 effective interim annual reporting periods beginning december 15 2016 company adopted standard january 1 2017 elected account forfeitures occur using modified retrospective transition method rather current method estimating forfeitures resulting cumulativeeffect adjustment approximately 90 million increased january 1 2017 opening accumulated deficit balance company also required record excess tax benefits tax deficiencies income tax benefit expense statement operations prospectively sharebased awards vest settled upon adoption company recognized previously unrecognized excess tax benefits using modified retrospective transition method resulted impact january 1 2017 opening accumulated deficit balance previously unrecognized excess tax effects recorded deferred tax asset fully offset valuation allowance without valuation allowance company’s deferred tax asset would increased 208 million company also elected apply change presentation statements cash flows retrospectively longer classify excess tax benefits sharebased compensation reduction operating cash flows march 2016 fasb issued asu 201606 topic 815 derivatives hedging contingent put call options debt instruments asu 201606 requires embedded derivatives separated host contract accounted separately derivatives certain criteria met one criteria economic characteristics risks embedded derivatives clearly closely related economic characteristics risks host contract “clearly closely related” criterion addition march 2016 fasb issued asu 201605 topic 815 derivatives hedging effect derivative contract novations existing hedge accounting relationships asu 201605 clarifies change counterparty derivative instrument designated hedging instrument topic 815 require dedesignation hedging relationship provided hedge accounting criteria continue met asu 201606 asu 201605 effective financial statements issued fiscal years beginning december 15 2016 interim periods within fiscal years early adoption permitted company adopted standard january 1 2017 adoption standard significant impact companys consolidated financial statements february 2016 fasb issued asu 201602 topic 842 leases asu 201602 requires recognition lease assets lease liabilities balance sheet lessees lease contracts lease term twelve months asu 201602 applied modified retrospective basis effective financial statements issued fiscal years beginning december 15 2018 interim periods within fiscal years early adoption permitted company currently evaluating impact adoption standard however expected material impact companys consolidated financial statements disclosures january 2016 fasb issued asu 201601 financial instrumentsoverall recognition measurement financial assets financial liabilities asu 201601 requires equity investments measured fair value changes fair value recognized net income simplifies impairment assessment equity investments without readily determinable fair values requiring qualitative assessment identify impairment entities may choose practical expedient estimate fair value certain equity securities readily determinable fair value practical expedient elected investments would recorded cost less impairment subsequently adjusted observable price changes guidance also updates certain presentation disclosure requirements asu 201601 effective financial statements issued fiscal years beginning december 15 2017 interim periods within fiscal years company currently evaluating impact asu 201601will consolidated financial statements disclosures july 2015 fasb issued asu 201511 subtopic 330 simplifying measurement inventory asu 201511 provides guidance companies account inventory using either firstin firstout fifo average cost methods guidance states companies measure inventory lower cost net realizable value net realizable value defined estimated selling prices ordinary course business less reasonably predictable costs completion juniper networks inc notes consolidated financial statements continued disposal transportation asu 201511 effective fiscal years beginning december 15 2016 early adoption permitted company adopted standard january 1 2017 adoption standard significant impact companys consolidated financial statements may 2014 fasb issued asu 201409 topic 606 revenue contracts customers “asu 201409” provides guidance revenue recognition fasb also issued several amendments standard since initial issuance asu supersede revenue recognition requirements topic 605 industry specific guidance standards core principle revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services company need use additional judgment estimates existing guidance asu also requires extensive disclosures regarding nature amount timing uncertainty revenue cash flows arising contracts customers august 2015 fasb issued asu 201514 deferred effective date new revenue standard december 15 2016 december 15 2017 early adoption permitted annual reporting periods beginning december 15 2016 accordingly asu amendments effective company beginning fiscal year 2018 company intends adopt standard january 1 2018 retrospectively applying amendments prior reporting period presented companys ability adopt retrospectively dependent completion scoping analysis necessary information able report prior period within date adoption january 1 2018 company completed review accounting systems processes required apply full retrospective method additionally company completed majority assessment phase documentation new policies currently process preparing priorperiod financial statements gathering data new disclosure requirements evaluating controls framework company expect significant change control environment due adoption new standard however continue assess date adoption upon adoption company expects material impact opening balance sheet january 1 2016 related cumulative effect adopting standard primarily result items discussed company continue assess potential impacts standard currently believes significantly impacted areas following • distributor sales topic 606 company recognize revenue sales distributors upon delivery product distributor rather upon delivery product end customer rebates incentives offered distributors earned sales end customers completed estimated point revenue recognition may require significant judgment additional assumptions december 31 2015 deferred revenue topic 605 related shipments distributors sold endusers 818 million since company required recognize revenue control products transfer distributor topic 606 company expects majority deferred revenue december 31 2015 eliminated cumulative effect adjustment implementing topic 606 january 1 2016 full impact adjustment still analyzed company • software revenue company currently defers revenue perpetual licenses vsoe fair value established undelivered items topic 606 revenue perpetual licenses recognized time delivery vsoe requirement longer applies company estimate standalone selling price services currently term license revenue deferred recognized license term due lack vsoe services topic 606 term license revenue recognized time delivery rather ratably term period unless ongoing services provide frequent critical updates software without software functionality would rapidly diminished december 31 2015 deferred revenue topic 605 due lack vsoe ratably recognized term licenses 795 million company expects significant proportion deferred revenue eliminated cumulative effect adjustment implementing topic 606 january 1 2016 full impact adjustment still analyzed company • contract acquisition costs topic 606 requires deferral amortization “incremental” costs incurred obtain contract associated contract duration greater one year primary contract acquisition cost company sales commissions current us gaap company expenses sales commissions change required topic 606 result creation asset opening balance sheet january 1 2016 subsequent financial period expected asset increase decrease proportionally deferred revenues material impact income statement juniper networks inc notes consolidated financial statements continued • variable consideration companys contracts include penalties acceptance provisions preclude revenue recognition requirement amounts fixed determinable topic 605 topic 606 requires company estimate account variable consideration associated penalty provisions requires evaluation acceptance provisions determine control transferred customer december 31 2015 deferred revenue topic 605 due penalties acceptance provisions 403 million company expects majority deferred revenue eliminated cumulative effect adjustment implementing topic 606 january 1 2016 full impact adjustment still analyzed company • revenue allocation similar topic 605 topic 606 requires allocation revenue deliverables within transaction topic 605 restricts allocation revenue contingent future deliverables current deliverables however topic 606 removes restriction impact allocation transaction price still assessed however expect material impact income statement company continue assess impact 606 works adoption 2017 remain areas still fully concluded upon remain ongoing interpretive reviews may alter companys conclusions financial impact topic 606 note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material primary areas preliminary purchase price allocation subject change relate certain legal income tax matters residual goodwill company completed four acquisitions three years ended december 31 2016 company acquired bti systems inc “bti” aurrion inc aurrion appformix inc appformix 2016 wandl inc wandl 2014 following table summarizes estimated fair values assets acquired liabilities assumed acquisition dates millions goodwill recognized acquisitions primarily attributable expected synergies deductible us federal income tax purposes juniper networks inc notes consolidated financial statements continued following table summarizes fair value separately identifiable intangible assets time acquisition period intangible asset amortized millions except years 2016 acquisitions appformix december 6 2016 company acquired appformix 479 million cash acquisition appformix company focused cloud infrastructure optimization software expected complement analytics capabilities contrail help customers enhance cloud operations terms acquisition agreement company assumed sharebased awards continuing employees acquisition appformix granted contemplation future services fair value sharebased awards 239 million expensed sharebased compensation remaining service period aurrion august 9 2016 company acquired remaining ownership interest aurrion increasing ownership 18 100 743 million cash acquisition aurrion privatelyheld provider fabless silicon photonic technology expected strengthen companys longterm competitive advantage costeffective highdensity highspeed networks prior acquisition company preexisting investment aurrions equity also held convertible debt remeasured fair value 172 million 104 million respectively based upon perspective market participant estimating fair value terms acquisition agreement company assumed sharebased awards continuing employees acquisition aurrion granted contemplation future services fair value sharebased awards 550 million expensed sharebased compensation remaining service period additionally company acquired iprd consisting existing research development projects yet reached technological feasibility time acquisition acquired iprd involves technology costeffective highspeed networks iprd valued using multiperiod excess earnings method income approach discounting forecasted cash flows directly related products expected result associated project juniper networks inc notes consolidated financial statements continued bti april 1 2016 company acquired remaining ownership interest bti increasing ownership 12 100 258 million cash bti privatelyheld provider cloud metro networking systems software content cloud service providers company acquired bti expectation would help accelerate companys ability deliver open automated packet optical transport solutions prior acquisition company preexisting investment btis equity remeasured investment fair value 171 million based upon perspective market participant estimating fair value company also held 09 million convertible debt measured fair value settled upon acquisition company also repaid upon acquisition 186 million certain outstanding bti liabilities assumed additionally terms acquisition agreement company assumed sharebased awards continuing employees acquisition bti granted contemplation future services fair value sharebased awards 86 million expensed sharebased compensation remaining service period 2014 acquisition wandl january 7 2014 company acquired 100 equity securities wandl 287 million cash stock consideration wandl provider software solutions advanced planning management design optimization nextgeneration multilayer networks provides company technology experience traffic engineering multilayer optimization path computation help service provider customers optimize performance cost networks terms purchase agreement company assumed unvested sharebased awards employees fair value 349 million granted contemplation future services expensed sharebased compensation remaining service period acquisition costs company recognized 118 million 05 million acquisitionrelated costs years ended december 31 2016 2014 respectively acquisitionrelated costs expensed period incurred within general administrative expense companys consolidated statements operations costs year ended december 31 2015 juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale trading securities following tables summarize companys unrealized gains losses fair value investments designated availableforsale trading securities december 31 2016 december 31 2015 millions 1 balance includes companys nonqualified deferred compensation plan assets 2 includes 40 million shortterm restricted investments classified prepaid expenses current assets consolidated balance sheets juniper networks inc notes consolidated financial statements continued 1 balance includes companys nonqualified deferred compensation plan assets following table presents contractual maturities companys total fixed income securities december 31 2016 millions juniper networks inc notes consolidated financial statements continued following tables present companys availableforsale securities unrealized loss position december 31 2016 december 31 2015 millions balances less 12 months include investments immaterial unrealized loss position december 31 2015 company 494 682 investments unrealized loss positions december 31 2016 december 31 2015 respectively gross unrealized losses related investments primarily due changes market interest rates stock prices company periodically reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation availableforsale debt securities unrealized losses company evaluates whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2016 company anticipates recover entire amortized cost basis availableforsale debt securities determined otherthantemporary impairments associated credit losses required recognized years ended december 31 2016 2015 2014 juniper networks inc notes consolidated financial statements continued availableforsale equity securities unrealized losses company evaluates whether indication otherthantemporary impairments determination based several factors including financial condition nearterm prospects issuer company’s intent ability hold publiclytraded equity securities period time sufficient allow anticipated recovery market value years ended december 31 2016 december 31 2015 company recognize otherthantemporary impairments associated availableforsale equity securities year ended december 31 2014 company determined certain availableforsale equity securities otherthan temporarily impaired resulting impairment charge 11 million recorded within expense income net consolidated statement operations years ended december 31 2016 december 31 2015 material gross realized gains losses availableforsale securities trading securities year ended december 31 2014 gross realized gains availableforsale securities 1668 million gross realized losses material restricted cash investments company restricted cash investments amounts held escrow accounts required connection certain acquisitions completed primarily 2014 2016 ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust iv amounts held companys shortterm disability plan california v amounts nonqualified deferred compensation nqdc plan officers seniorlevel employees restricted investments designated availableforsale securities except relating nqdc plan designated trading securities december 31 2016 total restricted cash investments 1192 million 193 million included prepaid expenses current assets 999 million included restricted cash investments consolidated balance sheets investments privatelyheld companies december 31 2016 december 31 2015 carrying values companys privatelyheld investments 627 million 1024 million respectively included longterm assets consolidated balance sheets december 31 2016 december 31 2015 carrying value privatelyheld investments includes debt redeemable preferred stock securities 437 million 602 million respectively year ended december 31 2016 company record unrealized gains unrealized losses associated privatelyheld debt redeemable preferred stock securities year ended december 31 2015 company recorded 114 million unrealized gains comprehensive loss unrealized losses associated privatelyheld securities redeemable preferred stock securities year ended december 31 2014 150 million unrealized gains unrealized losses associated privatelyheld securities unrealized gains losses redeemable preferred stock comprehensive loss company reviews investments identify evaluate investments indication possible impairment company adjusts carrying value privatelyheld investments impairment fair value less carrying value respective assets otherthantemporary basis years ended december 31 2016 december 31 2014 company determined certain privatelyheld investments thantemporarily impaired resulting impairment charges 112 million 11 million respectively recorded within expense income net consolidated statement operations year ended december 31 2015 company determined privatelyheld investments otherthantemporarily impaired juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following tables provide summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes 429 million restricted investments measured fair value related companys trust acquisitionrelated escrows 2 balance relates restricted investments measured fair value related companys india gratuity trust 3 balance relates restricted investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes 297 million restricted investments measured fair value related companys trust acquisitionrelated escrows 2 balance relates restricted investments measured fair value related companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale fixed income securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level 2 level 3 beginning quarter change circumstances resulted transfer years ended december 31 2016 december 31 2015 company transfers levels fair value hierarchy assets liabilities measured fair value companys privatelyheld debt redeemable preferred stock securities classified level 3 assets due lack observable inputs determine fair value company estimates fair value privatelyheld debt investments recurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure year ended december 31 2016 129 million purchases related privatelyheld debt securities assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill investments privatelyheld companies nonredeemable preferred stock securities common stock measured fair value nonrecurring basis deemed otherthantemporarily impaired investments privatelyheld companies normally carried cost measured fair value nonrecurring basis due events circumstances company identifies significantly impacting fair value investments company estimates fair value investments privatelyheld companies using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure purchased intangible assets measured fair value primarily using discounted cash flow projections assets classified level 3 due lack observable inputs determine fair value december 31 2016 certain investments privatelyheld companies carrying value 16 million impaired writtendown fair value zero impairment charges 16 million recorded expense income net consolidated statements operations december 31 2015 company privatelyheld equity investments measured fair value nonrecurring basis december 31 2016 2015 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable financing receivables accounts payable accrued liabilities approximate fair value due short maturities december 31 2016 december 31 2015 estimated fair value companys longterm debt consolidated balance sheets approximately 22157 million 19467 million respectively based observable market inputs level 2 carrying value promissory note issued company connection previouslycompleted sale junos pulse 1329 million approximates fair value 750 million recorded prepaid expenses current assets remaining balance recorded within longterm assets consolidated balance sheets december 31 2016 december 31 2015 carrying value promissory note 1329 million recorded longterm assets consolidated balance sheets promissory note classified level 3 asset due lack observable inputs determine fair value see note 8 financial information promissory note juniper networks inc notes consolidated financial statements continued note 6 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward option contracts hedge companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities eighteen months less see note 5 fair value measurements fair values company’s derivative instruments consolidated balance sheets december 31 2016 company recognized loss 13 million accumulated comprehensive loss effective portion derivative instruments reclassified gain 18 million year ended december 31 2016 comprehensive loss operating expense consolidated statements operations december 31 2015 company recognized loss 63 million accumulated comprehensive loss effective portion derivative instruments reclassified loss 96 million year ended december 31 2015 comprehensive loss operating expense consolidated statements operations december 31 2014 company recognized loss 34 million accumulated comprehensive loss effective portion derivative instruments reclassified gain 34 million year ended december 31 2014 comprehensive loss operating expense consolidated statements operations ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2016 2015 2014 nondesignated derivatives years ended december 31 2016 2015 2014 company recognized net loss 05 million net loss 06 million net loss 24 million respectively nondesignated derivative instruments within expense income net consolidated statements operations offsetting derivatives company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party december 31 2016 2015 respectively potential effect rights offset associated derivative instruments material company neither required pledge entitled receive cash collateral related derivative transactions juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill following table presents goodwill activity millions fourth quarter company performed annual goodwill impairment test companys three reporting units routing switching security years ended december 31 2016 2015 2014 respectively year ended december 31 2016 company performed quantitative assessment companys three reporting units quantitative assessment performed determining fair value reporting unit using combination income approach market approach based outcome quantitative assessments company determined fair value reporting unit exceeded respective carrying value resulting goodwill impairment goodwill impairment year ended december 31 2015 2014 company realigned gotomarket research development rd resources projects highest potential growth continued leverage engineering efforts across routing switching security products fourth quarter 2014 company began implement new security strategy focused network resiliency performance based srx platform result company rationalized security product portfolio including developing new product roadmap exiting certain point products including divestiture junos pulse factors decreased companys short term near term revenue profitability forecasts security reporting unit company determined security reporting units carrying value goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations fair value determined using combination income approach market approach determining impairment amount fair value security reporting unit allocated assets liabilities including unrecognized intangible assets based respective fair values assumptions used measuring value assets liabilities included discount rates customer renewal rates technology obsolescence rates used valuing intangible assets pricing comparable transactions market valuing tangible assets juniper networks inc notes consolidated financial statements continued purchased intangible assets company’s purchased intangible assets follows millions following table presents amortization intangible assets included consolidated statements operations millions impairment charges purchased intangible assets year ended december 31 2016 year ended december 31 2015 company recorded 56 million cost revenues consolidated statements operations related acceleration endoflife certain intangible assets connection restructuring plan 2014 note 9 restructuring charges benefits company determined certain intangible assets 200 million longer utilized recorded charges 193 million cost revenues 07 million restructuring charges benefits consolidated statements operations year ended december 31 2014 juniper networks inc notes consolidated financial statements continued december 31 2016 estimated future amortization expense purchased intangible assets finite lives follows millions note 8 financial information inventory company purchases holds inventory provide adequate component supplies life underlying products majority companys inventory production components used manufacturing process finished goods inventory transit total inventory consisted following millions property equipment net property equipment net consisted following millions includes capitalized construction costs lease arrangement entered july 2015 refer note 16 commitments contingencies details depreciation expense 1845 million 1415 million 1419 million 2016 2015 2014 respectively juniper networks inc notes consolidated financial statements continued longterm assets longterm assets consisted following millions january 1 2016 company adopted asu 201503 result debt issuance costs included prepaid costs deposits reclassified longterm debt december 31 2015 conform currentyear presentation october 1 2014 company completed sale junos pulse product portfolio company received total consideration 2307 million 1057 million cash net 193 million working capital adjustment 1250 million form noncontingent interestbearing promissory note due company april 1 2016 “pulse note” october 2 2015 company issuer pulse note mutually agreed amend original terms pulse note among things extend maturity date april 1 2016 december 31 2018 provide interest due pulse note december 31 2015 shall paidinkind increasing outstanding principal amount note increase interest rate pulse note addition amended terms pulse note issuer required make minimum payment 750 million prior april 1 2017 less principal amount previously prepaid company 750 million portion note receivable classified within prepaid expenses current assets consolidated balance sheets remaining balance along interest paidinkind classified longterm asset based expected collection beyond twelve months consolidated balance sheet date company considers notes receivable impaired based current information events probable company able collect scheduled payments principal interest due company measures impairment pulse note based present value expected cash flows discounted notes effective interest rate compared recorded investment note including principal accrued interest based impairment assessment impairment charge required pulse note december 31 2016 interest income pulse note accrued credited interest income earned unless probable company collect amounts due present value expected cash flows less recorded investment years ended december 31 2016 december 31 2015 related amount interest income recognized 106 million 63 million respectively warranties company accrues warranty costs based associated material labor customer support overhead time revenue recognized accrual reported within accrued liabilities consolidated balance sheets changes company’s warranty reserve follows millions juniper networks inc notes consolidated financial statements continued deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria circumstances costs deferred product revenue recorded net related costs product revenue deferred service revenue represents billed amounts service contracts include technical support hardware software maintenance professional services training services rendered expense income net expense income net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments promissory note issued company connection sale junos pulse interest expense primarily includes interest net capitalized interest expense shortterm debt longterm debt customer financing arrangements loss gain investments net primarily includes gains losses sale investments privatelyheld companies including impairment charges recorded investments typically consists investment foreign exchange gains losses nonoperational income expense items interest expense years ended december 31 2016 2015 2014 interest expense included 930 million net 04 million capitalized 798 million net 22 million capitalized 575 million net 27 million capitalized respectively related companys outstanding longterm debt issued march 2011 march 2014 march 2015 march 2016 discussed note 10 debt financing juniper networks inc notes consolidated financial statements continued gain legal settlement net year ended december 31 2014 company entered settlement agreement palo alto networks inc palo alto networks resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees loss gain investments net years ended december 31 2016 december 31 2015 company recorded loss 18 million gain 68 million respectively primarily related sale privatelyheld investments year ended december 31 2014 company recorded gain 1630 million related sale investments converted privatelyheld investments publiclytraded equity upon initial public offering subsequently sold gain sale junos pulse october 1 2014 company completed sale junos pulse product portfolio company received total consideration 2307 million 1057 million cash net 193 million working capital adjustment 1250 million form noncontingent interest bearing promissory note issued company result sale company recorded gain 196 million expense income net consolidated statement operations companys sale junos pulse driven product rationalization connection companys initiative focus projects highest potential growth note 9 restructuring charges benefits following table presents restructuring charges benefits included cost revenues restructuring charges benefits consolidated statements operations millions juniper networks inc notes consolidated financial statements continued year ended december 31 2016 company recorded 28 million restructuring charges related severance costs certain former bti employees well 05 million restructuring costs related facilities restructuring charges benefits consolidated statements operations december 31 2016 companys restructuring liability material 2014 restructuring plan first quarter 2014 company initiated restructuring plan “2014 restructuring plan” designed refocus companys strategy optimize structure improve operational efficiencies 2014 restructuring plan consisted workforce reductions facility consolidations closures asset writedowns contract terminations charges 2014 restructuring plan substantially completed december 31 2014 company expect record significant future charges year ended december 31 2015 company recorded benefit 35 million previously recorded charge related certain products contract manufacturers acceleration endofservice life products cost revenues consolidated statements operations additionally company recorded 04 million severance costs benefit 10 million facilities recorded restructuring charges benefits consolidated statements operations connection 2014 restructuring plan year ended december 31 2014 company recorded 520 million severance costs 142 million facility consolidation closures costs 854 million impairment charges related licensed software 123 million asset writedowns 23 million charges related contract terminations recorded restructuring charges benefits consolidated statements operations connection facility consolidation closures charge 142 million company consent landlord administrative agent holder certain liens secured upon buildings leased premises assigned certain real property leases totaling approximately 04 million square feet third party concurrently assignments company executed sublease assignee one properties approximately 01 million square feet period two years onetime right extend term six months arrangements company paid 123 million landlord released future lease obligations following date assignments company also incurred 53 million transaction fees recorded restructuring charges benefits consolidated statements operations offsetting charges adjustment relating deferred rent liability relating premises 98 million company also recorded inventory writedowns 155 million intangibles writedowns 193 million charge related products contract manufacturers 67 million acceleration endofservice life certain products cost revenues consolidated statements operations year ended december 31 2014 juniper networks inc notes consolidated financial statements continued note 10 debt financing debt following table summarizes companys longterm debt millions except percentages february 2016 company issued 350 million aggregate principal amount 3125 senior notes due 2019 notes 150 million aggregate principal amount 450 senior notes due 2024 notes march 2015 company issued 3000 million aggregate principal amount 330 senior notes due 2020 notes 3000 million aggregate principal amount 435 senior notes due 2025 notes march 2014 company issued 3500 million aggregate principal amount 2024 notes form single series fully fungible 2024 notes issued february 2016 march 2011 company issued 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes december 31 2016 companys aggregate debt maturities based outstanding principle follows millions 2019 notes 2020 notes 2021 notes 2024 notes 2025 notes 2041 notes collectively notes company’s senior unsecured unsubordinated obligations ranking equally right payment company’s existing future senior unsecured unsubordinated indebtedness senior right payment company’s future indebtedness expressly subordinated notes company may redeem 2020 notes 2025 notes either whole part time one month prior maturity date 2020 notes three months prior maturity date 2025 notes redemption price equal greater 100 aggregate principal amount 2020 notes 2025 notes redeemed ii sum present values remaining scheduled payments discounted treasury rate plus 30 basis points 2020 notes treasury rate plus 375 basis points 2025 notes plus case clauses ii accrued unpaid interest time may 15 2020 case 2020 notes time march 15 2025 case 2025 notes company may redeem notes series whole part redemption price equal 100 principal amount 2020 notes 2025 notes redeemed plus accrued unpaid interest company may redeem notes either whole part time redemption price equal greater 100 juniper networks inc notes consolidated financial statements continued aggregate principal amount notes redeemed ii sum present values remaining scheduled payments discounted redemption date plus either case accrued unpaid interest event change control repurchase event holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principal amount plus accrued unpaid interest notes payable cash semiannually effective interest rates notes include interest notes accretion discount amortization issuance costs indentures govern notes also contain various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2016 company compliance covenants indentures governing notes revolving credit facility june 27 2014 company entered credit agreement credit agreement certain institutional lenders citibank na administrative agent provides 5000 million unsecured revolving credit facility option company increase amount credit facility additional 2000 million subject certain conditions proceeds loans made credit agreement may used company working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid borrowing may denominated companys option us dollars pounds sterling euro borrowings credit agreement bear interest either floating rate per annum equal base rate plus margin 000 050 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 090 150 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 050 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period december 31 2016 company compliance covenants credit agreement amounts outstanding financing arrangements company provides certain channel partners access extended financing arrangements require longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing provider due company within 30 90 days sale receivable transactions financing provider company surrenders control transferred assets pursuant financing arrangements sale receivables company sold receivables 956 million 725 million 4403 million years ended december 31 2016 2015 2014 respectively company received cash proceeds financing providers 832 million 993 million 6021 million years ended december 31 2016 2015 2014 respectively december 31 2016 december 31 2015 amounts owed financing provider 136 million 12 million respectively recorded accounts receivable company’s consolidated balance sheets juniper networks inc notes consolidated financial statements continued note 11 equity cash dividends shares common stock 2016 company declared four quarterly cash dividends 010 per share common stock january 27 2016 april 28 2016 july 26 2016 october 25 2016 paid march 22 2016 june 22 2016 september 22 2016 december 22 2016 respectively stockholders record close business march 1 2016 june 1 2016 september 1 2016 december 1 2016 respectively aggregate amount 1525 million future dividends establishment record payment dates subject approval board directors board juniper networks authorized committee thereof see note 18 subsequent events discussion companys dividend declaration subsequent december 31 2016 stock repurchase activities february 2014 board approved stock repurchase program authorized company repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program stock repurchase program october 2014 july 2015 board authorized 13 billion 5000 million increase respectively stock repurchase program total 39 billion december 31 2016 2197 million authorized funds remaining stock repurchase program february 2017 board approved incremental 5000 million stock repurchase authorization stock repurchase program addition repurchases company’s stock repurchase program company also repurchases common stock certain employees connection net issuance shares satisfy minimum tax withholding obligations upon vesting certain stock awards issued employees juniper networks inc notes consolidated financial statements continued following table summarizes companys repurchases retirements common stock repurchase programs accelerated share repurchase repurchases associated minimum tax withholdings millions except per share amounts part stock repurchase program company entered two separate accelerated share repurchase agreements collectively asr two financial institutions repurchase 12 billion companys common stock company made upfront payment 12 billion pursuant asr repurchase companys common stock aggregate number shares ultimately purchased determined based volume weighted average repurchase price less agreed upon discount shares received respect asr retired shares return authorized unissued shares common stock future share repurchases company’s stock repurchase programs subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys stock repurchase programs may discontinued time see note 18 subsequent events discussion companys stock repurchase activity subsequent december 31 2016 accumulated comprehensive loss net tax components accumulated comprehensive loss net related taxes years ended december 31 2016 december 31 2015 follows millions 1 reclassifications accumulated comprehensive loss years ended december 31 2016 december 31 2015 realized gains availableforsale securities insignificant included expense income net consolidated statements operations 2 reclassifications accumulated comprehensive loss realized gains losses cash flow hedges included within cost revenues research development sales marketing general administrative consolidated statements operations amounts insignificant years ended december 31 2016 december 31 2015 juniper networks inc notes consolidated financial statements continued note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2015 equity incentive plan “2015 plan” 2006 equity incentive plan “2006 plan” 2008 employee stock purchase plan “espp” plans company granted stock options restricted stock units “rsus” performance share awards “psas” addition connection certain past acquisitions company assumed stock options rsus restricted stock awards rsas psas stock plans acquired companies exchanged assumed awards companys stock options rsus rsas psas respectively 2015 plan adopted approved companys stockholders may 2015 initial authorized share reserve 380 million shares common stock plus addition shares subject outstanding awards 2006 plan amended restated 1996 stock plan outstanding may 19 2015 subsequently expire otherwise terminate maximum additional 290 million shares december 31 2016 aggregate 193 million shares subject outstanding equity awards 2015 plan 2006 plan december 31 2016 225 million shares available future issuance 2015 plan shares available future issuance 2006 plan 1996 plan december 31 2016 total approximately 407 million shares common stock reserved future issuance upon exercise stock options vesting rsus rsas psas future grant sharebased compensation awards companys equity incentive plans espp adopted approved companys stockholders may 2008 date companys stockholders approved share reserve 260 million shares companys common stock issuance espp includes additional 70 million shares approved companys stockholders may 2015 espp permits eligible employees acquire shares company’s common stock 15 discount offering price determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year december 31 2016 approximately 211 million shares issued 49 million shares remain available future issuance espp december 6 2016 company completed acquisition appformix connection acquisition company assumed stock options rsus rsas psas granted appformix inc amended restated 2013 stock plan appformix plan converted awards juniper networks stock options rsus rsas psas respectively based exchange ratio set forth acquisition agreement company assumed aggregate 09 million shares stock options rsus rsas psas connection acquisition appformix additional awards granted appformix plan august 9 2016 company completed acquisition aurrion connection acquisition company assumed stock options rsus rsas psas granted aurrion inc amended restated 2008 equity incentive plan aurrion plan converted awards juniper networks stock options rsus rsas psas respectively based exchange ratio set forth acquisition agreement company assumed aggregate 25 million shares stock options rsus rsas psas connection acquisition aurrion additional awards granted aurrion plan april 1 2016 company completed acquisition bti connection acquisition company assumed rsus psas granted bti amended restated 2012 stock option plan longterm incentive plan bti plan converted awards junipers rsus psas respectively based exchange ratio set forth acquisition agreement company assumed aggregate 04 million shares rsus psas connection acquisition bti additional awards granted bti plan 2014 company completed acquisition wandl assumed wandl inc 2013 restricted stock unit plan connection plan company assumed rsus rsas psas exchanged assumed awards juniper networks rsus rsas psas respectively company assumed aggregate 15 million shares rsus rsas psas connection acquisition wandl additional awards granted plan juniper networks inc notes consolidated financial statements continued december 31 2016 stock options rsus rsas psas representing approximately 41 million shares common stock outstanding awards assumed companys acquisitions stock option activities since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant following table summarizes company’s stock option activity related information three years ended december 31 2016 millions except per share amounts years aggregate intrinsic value represents difference company’s closing stock price last trading day period 2826 per share december 30 2016 exercise price applicable options multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 71 million 275 million 334 million 2016 2015 2014 respectively total fair value options vested 2016 2015 2014 39 million 70 million 208 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes additional information regarding outstanding exercisable options december 31 2016 restricted stock unit restricted stock award performance share award activities rsus rsas generally vest period three four years date grant psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding juniper networks inc notes consolidated financial statements continued following table summarizes company’s rsu rsa psa activity related information three years ended december 31 2016 millions except per share amounts years 1 includes servicebased marketbased rsus granted 2006 plan 2015 plan according terms 2 rsus rsas psas assumed connection acquisition wandl 3 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee authorized subcommittee achieved target 07 million shares depending achievement performance goals range shares could issued awards 0 14 million shares 4 february 20 2014 company announced intention initiate quarterly cash dividend 010 per share common stock third quarter 2014 result companys announcement grant date fair value rsus psas granted announcement date reduced present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested juniper networks inc notes consolidated financial statements continued 5 total fair value rsus rsas psas vested 2016 2015 2014 1857 million 2027 million 2385 million respectively 6 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee authorized subcommittee achieved target 07 million shares depending achievement performance goals range shares could issued awards 0 10 million shares 7 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 09 million shares depending achievement performance goals range shares could issued awards 0 12 million shares 8 rsus rsas psas assumed connection acquisition bti aurrion appformix shares available grant following table presents stock activity total number shares available grant 2015 plan 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2015 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 cancelled expired options 2006 plan 1996 plan cancelled rsus psas 2006 plan longer available future grant plans however number shares available grant 2015 plan increased amount cancelled expired options rsus psas applicable maximum 290 million additional shares common stock pursuant terms 2015 plan employee stock purchase plan companys espp implemented series offering periods six months duration shorter period determined board employees purchased approximately 27 million 27 million 29 million shares common stock espp average exercise price 1966 1925 1930 per share 2016 2015 2014 respectively juniper networks inc notes consolidated financial statements continued valuation assumptions weightedaverage assumptions used resulting estimates fair value stock options espp marketbased rsus follows sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions juniper networks inc notes consolidated financial statements continued following table presents unrecognized compensation cost adjusted estimated forfeitures recognized weightedaverage period related unvested stock options rsus rsas psas december 31 2016 millions except years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 207 million 196 million 202 million years ended december 31 2016 2015 2014 respectively deferred compensation plan company’s nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds nqdc plan assets included within restricted cash investments offsetting obligations included within longterm liabilities consolidated balance sheets december 31 2016 nqdc plan assets included within shortterm investments offsetting obligations included within accrued compensation consolidated balance sheets december 31 2015 investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded expense income net offsetting compensation expense recorded operating expenses consolidated statements operations deferred compensation liability nqdc plan approximately 210 million 177 million december 31 2016 december 31 2015 respectively note 13 segments company conducts business globally managed operated organized major functional departments operate consolidated basis major functional leader reports directly companys chief executive officer chief operating decision maker “codm” company’s codm views business allocates resources assesses performance company primarily based consolidated financial information entire business accompanied disaggregated information net revenues product service geographic region presented result company operates one reportable segment following table presents net revenues product service millions juniper networks inc notes consolidated financial statements continued company attributes revenues geographic region based customer’s shipping address following table presents net revenues geographic region millions years ended december 31 2016 2015 2014 customer accounted greater 10 companys net revenues following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2016 december 31 2015 attributable us operations note 14 income taxes components pretax income loss noncontrolling interest summarized follows millions provision income taxes summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes differs amount computed applying federal statutory rate pretax income loss follows millions represents cumulative impact fiscal year 2014 change treatment sharebased compensation result us tax court decision altera corp v commissioner 145 tc 3 2015 united states tax court “court” issued opinion favorable altera corporation “altera” respect altera’s litigation internal revenue service “irs” litigation relates treatment sharebased compensation expense intercompany costsharing arrangement altera’s foreign subsidiary opinion court accepted altera’s position excluding sharebased compensation intercompany costsharing arrangement result company reversed inclusion sharebased compensation costsharing arrangement cumulative adjustment quarter ended september 30 2015 change cost sharing increases companys cumulative foreign earnings approximately 703 million gross income tax benefit associated change offset increase income tax expense accrued upon company’s foreign earnings 2016 irs filed appeal altera decision rendered court appeal currently pending company continue monitor ongoing developments potential impacts financial statements juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys longterm deferred tax assets deferred tax liabilities follows millions december 31 2016 2015 company valuation allowance us domestic deferred tax assets approximately 1544 million 1462 million respectively balance december 31 2016 consisted approximately 1348 million 119 million companys california massachusetts deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 77 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 2016 2015 82 million 17 million respectively primarily related change california massachusetts rd tax credits december 31 2016 company federal california net operating loss carryforwards approximately 559 million 1114 million respectively california net operating loss carryforwards 1114 million expected expire unused company also federal california tax credit carryforwards approximately 27 million 2465 million respectively approximately 208 million benefit california tax credit carryforwards credited additional paidin capital realized companys income tax returns unused net operating loss carryforwards expire various dates beginning year 2017 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 24 billion cumulative undistributed earnings certain foreign subsidiaries december 31 2016 earnings considered indefinitely invested operations outside us company intends utilize amounts fund future expansion international operations earnings distributed united states form dividends otherwise shares relevant foreign subsidiaries sold otherwise transferred company would subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes determination amount unrecognized deferred income tax liability related earnings practicable december 31 2016 2015 2014 total amount gross unrecognized tax benefits 2231 million 2161 million 1992 million respectively december 31 2016 approximately 1947 million 2231 million gross unrecognized tax benefits recognized would affect effective tax rate juniper networks inc notes consolidated financial statements continued reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2016 2015 2014 company accrued interest penalties related unrecognized tax benefits 313 million 241 million 223 million respectively longterm liabilities consolidated balance sheets company recognized expense net interest penalties 60 million 25 million 28 million consolidated statements operations years ended december 31 2016 2015 2014 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease approximately 37 million within next twelve months due lapses applicable statutes limitation completion tax review cycles various tax jurisdictions company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2007 company currently examination irs 2007 2009 tax years march 2016 irs concluded field audit issued final assessment company appealing assessment company regularly assesses likelihood adverse outcome resulting examinations december 31 2016 company believes resolution audits unlikely material effect consolidated financial condition results operations june 2016 california franchise tax board “ftb” concluded audit 2004 2006 tax years result closure california ftb audit gross unrecognized tax benefits reduced approximately 143 million affect company’s effective tax rate company longer subject audit california income taxes 2006 tax year company also subject separate ongoing examinations uk tax authorities 2013 2014 tax years french tax authorities 2014 2015 tax years german tax authorities 2010 2013 tax years australia tax authorities 2016 tax year india tax authorities 2003 tax year 2004 2008 tax years 2009 2012 tax years december 31 2016 company aware examinations tax authorities major jurisdictions files income tax returns 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation companys 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands accordance administrative judicial process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously juniper networks inc notes consolidated financial statements continued company pursuing available administrative remedies relative matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations note 15 net income per share company computed basic diluted net income loss per share follows millions except per share amounts basic net income per share computed using net income loss available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income loss available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable antidilutive shares excluded computation diluted net income per share juniper networks inc notes consolidated financial statements continued note 16 commitments contingencies commitments operating lease arrangements following table summarizes company’s future minimum payments noncancelable operating lease arrangements next five years thereafter december 31 2016 millions operating leases company leases facilities certain equipment noncancelable operating leases expire various dates march 2026 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses rent expense 2016 2015 2014 approximately 379 million 432 million 460 million respectively lease arrangement july 10 2015 company entered lease arrangement march 2026 company option extend term lease additional twenty years increments either five years ten years approximately 63000 square feet space state washington december 31 2016 total payment lease agreement tenyear term approximately 1155 million 616 million included otherlong term liabilities consolidated balance sheets lease agreement provides company tenant allowance 60 million used tenant leasehold improvements unused tenant allowance may applied credit rent payment year ended december 31 2016 company received reimbursement tenant allowances 44 million space used among things consolidate certain companys laboratory operations currently located sunnyvale california due certain contractual obligations construction period company deemed owner property period december 31 2015 company capitalized construction costs recording buildtosuit lease asset construction progress 456 million component property equipment net corresponding buildtosuit financing liability component longterm liabilities consolidated balance sheets date construction completion company recorded additional construction costs corresponding buildtosuit financing liability 153 million upon completion construction april 2016 company assessed whether arrangement qualified saleleaseback accounting guidance company concluded certain form continuing economic involvement facility precluded saleleaseback accounting treatment result total 609 million costs capitalized placed service depreciated lease term purchase commitments contract manufacturers suppliers order reduce manufacturing lead times interest access adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments purchase commitments totaled 6862 million december 31 2016 juniper networks inc notes consolidated financial statements continued company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2016 company accrued 140 million based estimate charges clocksignal supplier component remediation liability december 31 2016 company recorded approximately 108 million accrued liabilities consolidated balance sheets expected remediation costs certain products containing defect clocksignal component manufactured thirdparty supplier company advised component supplier components may begin fail product operation 18 months company process working customers component supplier implement remediation debt interest payment debt december 31 2016 company held longterm debt consisting notes carrying value 21337 million see note 10 debt financing discussion companys longterm debt expected future principal maturities contractual obligations december 31 2016 contractual obligations primarily consisted 462 million agreements include firm noncancelable terms transfer funds future fixed minimum amounts quantities purchased fixed minimum prices tax liabilities december 31 2016 company 2092 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products solely combination third party products infringe intellectual property rights thirdparty december 31 2016 company recorded 289 million indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets company also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs guarantees related thirdparty customerfinancing arrangements 60 million 158 million december 31 2016 december 31 2015 respectively legal proceedings investigations us securities exchange commission sec us department justice doj conducting investigations possible violations company us foreign corrupt practices act fcpa company cooperating agencies regarding matters company’s audit committee assistance independent advisors investigating conducting thorough review possible violations fcpa made recommendations remedial measures including employee disciplinary actions foreign jurisdictions company implemented continues implement company unable predict duration scope outcome sec doj investigations believes adverse outcome reasonably possible however company able estimate reasonable range possible loss sec andor doj could take action company could agree settle event company could required pay substantial fines sanctions andor implement additional remedial measures addition may determined company violated fcpa juniper networks inc notes consolidated financial statements continued litigations investigations addition investigations discussed company involved investigations disputes litigations legal proceedings company intends aggressively defend matters assurances outcome matters currently determinable company currently believes none existing claims proceedings likely material adverse effect financial position notwithstanding foregoing many uncertainties associated litigation matters thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses company records accrual loss contingencies legal proceedings believes unfavorable outcome probable b amount range possible loss reasonably estimable company recorded accrual loss contingencies associated legal proceedings investigations discussed note 17 selected quarterly financial data unaudited tables set forth selected unaudited financial data quarter two years ended december 31 2016 millions except per share amounts 1 gross margin fourth quarter 2016 includes 108 million charge expected remediation costs certain products containing defect clocksignal component manufactured thirdparty supplier 2 net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period note 18 subsequent events dividend declaration january 26 2017 company announced declared quarterly cash dividend 010 per share common stock payable march 22 2017 stockholders record close business march 1 2017 stock repurchase activities february 2017 board approved incremental 5000 million stock repurchase authorization stock repurchase program subsequent december 31 2016 filing annual report form 10k company repurchased 45 million shares common stock aggregate purchase price 1250 million average price 2803 per share stock repurchase program repurchases 37 million shares settled prior filing report remaining shares settled filing date following february 2017 increase stock repurchase program company aggregate 5947 million authorized funds remaining filing date purchases companys stock repurchase program subject review circumstances place time made time permitted securities law legal requirements program may discontinued time item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm stockholders board directors juniper networks inc opinion financial statements audited accompanying consolidated balance sheets juniper networks inc company december 31 2017 2016 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2017 related notes financial statement schedule listed index item 15a2 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 23 2018 expressed unqualified opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served companys auditor since 1996 san jose california february 23 2018 report independent registered public accounting firm stockholders board directors juniper networks inc opinion internal control financial reporting audited juniper networks incs internal control financial reporting december 31 2017 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion juniper networks inc company maintained material respects effective internal control financial reporting december 31 2017 based coso criteria also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2017 2016 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2017 related notes financial statement schedule listed index item 15a2 report dated february 23 2018 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california february 23 2018 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2017 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework published 2013 based assessment management concluded december 31 2017 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2017 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2017 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility efficiency value automation company sells highperformance routing switching security networking products service offerings customers within verticals cloud telecomcable strategic enterprise view network critical success addition companys products company offers services including technical support professional services education training programs customers basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated excess tax benefits sharebased compensation prior periods reclassified conform currentperiod presentation consolidated statements cash flows upon adoption accounting standard described note 2 significant accounting policies addition certain amounts consolidated statements cash flows reclassified conform currentperiod presentation note 2 significant accounting policies use estimates preparation financial statements related disclosures accordance us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposits time deposits corporate debt securities readily convertible cash highly liquid investments purchased original maturities three months less classified cash equivalents investments availableforsale trading securities companys investments debt securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive loss consolidated balance sheets realized gains losses determined based specific identification method reported consolidated statements operations company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments value temporary difference recognized impairment loss consolidated statements operations juniper networks inc notes consolidated financial statements continued companys nonqualified compensation plan nqdc invested mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations investments privatelyheld companies company privatelyheld investments included longterm assets consolidated balance sheets investments include debt redeemable preferred stock securities carried fair value nonredeemable preferred stock common stock securities carried cost company’s investments debt redeemable preferred stock securities classified availableforsale unrealized gains losses investments reported separate component accumulated comprehensive loss consolidated balance sheets investments carried cost fair value adjusted impairment determined temporary company controlling interest ability exercise significant influence companies investments inherently carry higher risk markets technologies products manufactured companies generally early stages time investment company markets may never significant company measures fair value privatelyheld investments debt redeemable preferred stock securities using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive loss upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments expense net consolidated statements operations cash flows hedges classified operating activities company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense net consolidated statements operations period changes fair value remeasurement underlying assets liabilities cash flows derivatives classified operating activities juniper networks inc notes consolidated financial statements continued company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party company neither required pledge entitled receive cash collateral related derivative transactions inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets construction progress related construction development property equipment yet placed service intended use goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill tested impairment annually fourth quarter frequently certain circumstances indicate carrying value goodwill impaired qualitative assessment first made determine whether necessary quantitatively test goodwill impairment initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed determining fair value reporting unit using combination income approach market approach based outcome quantitative assessments company compares estimated fair value reporting unit respective carrying values including goodwill impairment loss recognized extent carrying amount goodwill exceeds assets implied fair value intangible assets acquired business combination related inprocess research development iprd projects considered indefinitelived completion abandonment associated research development efforts indefinitelived intangibles amortized results operations instead evaluated impairment development complete associated assets would deemed finitelived would amortized cost revenues respective estimated useful lives point time research development project abandoned acquired iprd assets written charged expense period abandonment longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value juniper networks inc notes consolidated financial statements continued company amortizes intangible assets estimable useful lives straightline basis useful lives revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery product obligations • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories changes circumstances indicate collectability reasonably assured sales arrangements contain multiple elements company allocates revenue element based selling price hierarchy selling price deliverable based either vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similar situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing thirdparty products similar functionality typically cannot obtained therefore tpe used esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using residual method vsoe fair value undelivered items exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii vsoe established maintenance service undelivered element entire arrangement fee recognized ratably maintenance service period company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time portion companys sales made distributors agreements allowing pricing credits rights return reliable estimates credits returns cannot made product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits given amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue service revenues include revenue maintenance training professional services software postcontract support pcs maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably juniper networks inc notes consolidated financial statements continued contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less software pcs includes technical support software license updates software license updates provide customers rights unspecified software product upgrades maintenance releases patches released term support period revenue related software pcs recognized term pcs arrangement allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems application development stage capitalized costs include external direct costs incurred developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 199 million 158 million 202 million 2017 2016 2015 respectively foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using rates approximate effect period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive loss company records foreign exchange transaction gains losses assets liabilities denominated nonfunctional currencies remeasurement adjustments recorded expense net consolidated statements operations juniper networks inc notes consolidated financial statements continued loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options restricted stock awards rsas restricted stock units rsus performance share awards psas employee stock purchases related employee stock purchase plan espp service condition awards sharebased compensation expense based fair value underlying awards amortized straightline basis psas marketbased rsus sharebased compensation expense amortized straightline basis separate vesting portion awards upon adoption accounting standard described recently adopted accounting standard section company accounts forfeitures occur company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value stock options espp shares bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options espp expected life stock option based historical experience employee exercises postvesting termination behavior well potential effect options exercised expected life espp approximates offering period company determines grant date fair value rsus rsas psas based closing market price company’s common stock date grant adjusted present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte carlo model affected companys stock price well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes juniper networks inc notes consolidated financial statements continued concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits mitigate concentration credit risk investment portfolio diversification investments various industries asset classes limits amount credit exposure single issuer credit rating company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable years ended december 31 2017 2016 2015 single customer accounted 10 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers outside design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recently adopted accounting standard sharebased compensation january 1 2017 company adopted financial accounting standards board fasb accounting standards update asu 201609 topic 718 compensationstock compensation improvements employee sharebased payment accounting simplifies several aspects accounting sharebased payment transactions including income tax consequences classification awards either equity liabilities forfeiture statutory tax withholding requirements classification statement cash flows impact adoption companys consolidated financial statements follows • forfeitures company elected account forfeitures occur using modified retrospective transition method rather estimating forfeitures resulting cumulativeeffect net tax adjustment 90 million increased january 1 2017 opening accumulated deficit balance consolidated balance sheets • income tax accounting company also required record excess tax benefits tax deficiencies related stock based compensation income tax benefit expense statement operations prospectively sharebased awards vest settled upon adoption company recognized previously unrecognized excess tax benefits using modified retrospective transition method resulted impact january 1 2017 opening accumulated deficit balance previously unrecognized excess tax effects fully offset valuation allowance • cash flow presentation excess tax benefits company required classify excess tax benefits along income tax cash flows operating activity either prospectively retrospectively company elected apply change presentation statements cash flows retrospectively longer classify excess tax benefits sharebased compensation financing activity 2016 2015 company reclassified 67 million 123 million respectively excess tax benefits sharebased compensation operating activities financing activities juniper networks inc notes consolidated financial statements continued recent accounting standards yet adopted derivatives hedging august 2017 fasb issued asu 201712 topic 815 derivatives hedging targeted improvements accounting hedging activities expands entitys ability hedge financial nonfinancial risk components amends companies assess effectiveness well changes presentation disclosure requirements new standard applied modified retrospective basis effective interim annual periods beginning december 15 2018 early adoption permitted company currently evaluating impact adoption consolidated financial statements sharebased compensation may 2017 fasb issued asu 201709 topic 718 compensationstock compensation scope modification accounting provides guidance types changes terms conditions sharebased payment awards entity would required apply modification accounting new standard effective prospective basis interim annual periods beginning december 15 2017 early adoption permitted amortization purchased callable debt securities march 2017 fasb issued asu 201708 receivablesnonrefundable fees costs subtopic 31020 premium amortization purchased callable debt securities shortens amortization period premium certain purchased callable debt securities earliest call date asu impact debt securities held discount standard effective annual reporting periods beginning december 15 2018 including interim reporting periods within annual reporting periods applied modified retrospective basis early adoption permitted company currently evaluating impact adoption consolidated financial statements derecognition nonfinancial assets february 2017 fasb issued asu 201705 incomegains losses derecognition nonfinancial assets subtopic 61020 clarifying scope asset derecognition guidance accounting partial sales nonfinancial assets amends guidance entities account derecognition nonfinancial asset substance nonfinancial asset business standard effective annual reporting periods beginning december 15 2017 including interim reporting periods within annual reporting periods applied either retrospective modified retrospective basis early adoption permitted adoption standard material impact consolidated financial statements simplifying test goodwill impairment january 2017 fasb issued asu 201704 topic 350 intangiblesgoodwill simplifying test goodwill impairment removes step 2 goodwill impairment test requires hypothetical purchase price allocation amended guidance goodwill impairment charge recognized amount carrying value reporting unit exceeds fair value exceed carrying amount goodwill asu applied prospective basis effective interim annual periods beginning december 15 2019 early adoption permitted impairment tests performed january 1 2017 definition business january 2017 fasb issued asu 201701 topic 805 business combinations clarifying definition business clarifies definition business assists entities evaluating set transferred assets activities business asu effective interim annual periods beginning december 15 2017 applied prospective basis restricted cash statement cash flow november 2016 fasb issued asu 201618 topic 230 statement cash flow restricted cash provides guidance classification restricted cash included cash equivalents reconciling beginning period end period total amounts statement cash flows amendments asu effective interim annual periods beginning december 15 2017 standard must applied retrospectively periods presented adoption standard material impact cash flow activity presented companys consolidated statements cash flows income taxes intraentity transfers assets october 2016 fasb issued asu 201616 topic 740 income taxes intraentity transfers assets inventory requires recognition income tax consequences intraentity transfer asset inventory transfer occurs asu effective annual interim reporting periods beginning december 15 2017 applied modified retrospective basis adoption standard material impact consolidated financial statements juniper networks inc notes consolidated financial statements continued classification statement cash flow august 2016 fasb issued asu 201615 topic 230 statement cash flow classification certain cash receipts cash payments clarifies companies present classify certain cash receipts cash payments statement cash flows pronouncement effective interim annual reporting periods beginning december 15 2017 applied retrospective basis adoption standard material impact companys consolidated statements cash flows credit losses financial instruments june 2016 fasb issued asu 201613 topic 326 financial instrumentscredit losses measurement credit losses financial instruments provides decisionuseful information expected credit losses financial instruments changes loss impairment methodology pronouncement effective reporting periods beginning december 15 2019 interim periods within fiscal years using modified retrospective adoption method early adoption permitted company currently evaluating impact standard consolidated financial statements disclosures leases february 2016 fasb issued asu 201602 topic 842 leases requires recognition lease assets lease liabilities balance sheet lessees leases classified operating leases lease term twelve months asu applied modified retrospective basis effective financial statements issued fiscal years beginning december 15 2018 interim periods within fiscal years early adoption permitted company currently evaluating impact adoption standard completed assessment phase determine approach implementing standard adoption standard expected material impact companys consolidated balance sheets disclosures company still evaluating impact standard consolidated statements operations financial instruments january 2016 fasb issued asu 201601 financial instrumentsoverall recognition measurement financial assets financial liabilities changes entities measure equity investments present changes fair value financial liabilities measured fair value option guidance also updates certain presentation disclosure requirements asu effective financial statements issued fiscal years beginning december 15 2017 interim periods within fiscal years asu applied prospective basis amendments related equity securities without readily determinable fair values amendments standard applied modified retrospective basis equity securities without readily determinable fair values expect elect measurement alternative defined cost less impairments adjusted observable price changes company anticipate adoption amendments applied modified retrospective basis material impact consolidated financial statements revenue may 2014 fasb issued asu 201409 topic 606 revenue contracts customers “asu 201409” provides guidance revenue recognition supersede revenue recognition requirements topic 605 industry specific guidance core principle asu 201409 revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services asu 201409 effective annual reporting periods beginning december 15 2017 company expects adopt asu 201409 january 1 2018 modified retrospective approach applying amendments prospective reporting periods company expect significant change control environment due adoption new standard however assessment continue completion first reporting period upon adoption company expects material impact opening balance sheet january 1 2018 related cumulative effect adopting standard primarily result items discussed company continue assess complete review potential impacts standard including tax related impact significantly impacted areas following • distributor sales topic 606 company recognize revenue sales distributors upon delivery product distributor rather upon delivery product end customer rebates incentives offered distributors earned sales end customers completed estimated point revenue recognition december 31 2017 deferred revenue topic 605 related shipments distributors sold endusers 680 million since company recognize revenue control products transfer distributor topic 606 majority amount eliminated cumulative effect adjustment implementing topic 606 january 1 2018 juniper networks inc notes consolidated financial statements continued • software revenue topic 605 company deferred revenue software licenses vsoe fair value established undelivered items primarily services topic 606 revenue software licenses recognized time delivery unless ongoing services provide frequent critical updates software without software functionality would rapidly diminished december 31 2017 deferred software license revenue topic 605 1445 million company expects approximately half deferred revenue eliminated cumulative effect adjustment implementing topic 606 january 1 2018 • contract acquisition costs topic 606 requires deferral amortization “incremental” costs incurred obtain contract associated contract duration greater one year primary contract acquisition cost company sales commissions current us gaap company expensed sales commissions change required topic 606 result creation asset cumulative effect adjustment implementing topic 606 january 1 2018 • variable consideration companys contracts include penalties extended payment terms acceptance provisions price variability precluded revenue recognition topic 605 requirement amounts fixed determinable topic 606 requires company estimate account variable consideration reduction transaction price december 31 2017 deferred revenue topic 605 due amounts fixed determinable 710 million company expects majority deferred revenue eliminated cumulative effect adjustment implementing topic 606 january 1 2018 • revenue allocation similar topic 605 topic 606 requires allocation revenue deliverables performance obligations within arrangement topic 605 restricted allocation revenue contingent future deliverables current deliverables however topic 606 removes restriction addition nature performance obligations identified within contract topic 606 compared topic 605 impact allocation transaction price product services company expects reduction deferred service revenue balance cumulative effect adjustment implementing topic 606 january 1 2018 company expect changes described material impact company’s quarterly andor annual statement operations however exact impact topic 606 dependent facts circumstances could vary quarter note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material primary areas preliminary purchase price allocation subject change relate certain legal income tax matters residual goodwill company acquired cyphort inc cyphort 2017 bti systems inc “bti” aurrion inc aurrion appformix inc appformix 2016 following table summarizes estimated fair values assets acquired liabilities assumed acquisition dates millions 1 see note 7 goodwill purchased intangible assets adjustments made measurement period subsequent acquisition dates 2 goodwill recognized acquisitions primarily attributable expected synergies deductible us federal income tax purposes juniper networks inc notes consolidated financial statements continued following table summarizes fair value separately identifiable intangible assets time acquisition period intangible asset amortized millions except years 2017 acquisition cyphort september 18 2017 company acquired 100 cyphort 335 million cash acquisition cyphort software company providing security analytics advanced threat defense expected strengthen junipers security product portfolio terms acquisition agreement cyphort company assumed certain sharebased awards continuing employees granted contemplation future services fair value sharebased awards 38 million expensed sharebased compensation remaining service period 2016 acquisitions appformix december 6 2016 company acquired 100 appformix 479 million cash acquisition appformix company focused cloud infrastructure optimization software expected complement analytics capabilities contrail help customers enhance cloud operations terms acquisition agreement company assumed sharebased awards continuing employees acquisition appformix granted contemplation future services fair value sharebased awards 239 million expensed sharebased compensation remaining service period aurrion august 9 2016 company acquired remaining ownership interest aurrion increasing ownership 18 100 743 million cash acquisition aurrion privatelyheld provider fabless silicon photonic technology expected strengthen companys longterm competitive advantage costeffective highdensity highspeed networks prior acquisition company preexisting investment aurrions equity also held convertible debt remeasured fair value 172 million 104 million respectively based upon perspective market participant estimating fair value juniper networks inc notes consolidated financial statements continued terms acquisition agreement company assumed sharebased awards continuing employees acquisition aurrion granted contemplation future services fair value sharebased awards 550 million expensed sharebased compensation remaining service period additionally company acquired iprd consisting existing research development projects yet reached technological feasibility time acquisition acquired iprd involves technology costeffective highspeed networks iprd valued using multiperiod excess earnings method income approach discounting forecasted cash flows directly related products expected result associated project bti april 1 2016 company acquired remaining ownership interest bti increasing ownership 12 100 258 million cash bti privatelyheld provider cloud metro networking systems software content cloud service providers company acquired bti expectation would help accelerate companys ability deliver open automated packet optical transport solutions prior acquisition company preexisting investment btis equity remeasured investment fair value 171 million based upon perspective market participant estimating fair value company also held 09 million convertible debt measured fair value settled upon acquisition company also repaid upon acquisition 186 million certain outstanding bti liabilities assumed additionally terms acquisition agreement company assumed sharebased awards continuing employees acquisition bti granted contemplation future services fair value sharebased awards 86 million expensed sharebased compensation remaining service period acquisition costs company recognized 21 million 118 million acquisitionrelated costs years ended december 31 2017 december 31 2016 respectively acquisitionrelated costs expensed period incurred within general administrative expense companys consolidated statements operations costs year ended december 31 2015 juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale securities following table summarizes companys unrealized gains losses fair value investments designated availableforsale december 31 2017 december 31 2016 millions balance includes 314 million 40 million shortterm restricted investments classified prepaid expenses current assets following table presents contractual maturities companys total fixed income securities december 31 2017 millions juniper networks inc notes consolidated financial statements continued following tables present companys availableforsale securities unrealized loss position december 31 2017 december 31 2016 millions availableforsale debt securities unrealized losses company evaluates whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2017 company 956 investments unrealized loss position gross unrealized losses related investments primarily due changes market interest rates company anticipates recover entire amortized cost basis availableforsale debt securities determined otherthantemporary impairments associated credit losses required recognized years ended december 31 2017 2016 2015 years ended december 31 2017 2016 2015 material gross realized gains losses availableforsale securities investments trading securities december 31 2017 december 31 2016 total investments companys nqdc plan 276 million 210 million respectively invested mutual funds classified trading securities years ended december 31 2017 2016 2015 trading gains losses related trading securities material juniper networks inc notes consolidated financial statements continued restricted cash investments company restricted cash investments amounts held escrow accounts required connection certain acquisitions completed primarily 2014 2017 ii directors officers indemnification trust iii amounts held companys shortterm disability plan california iv amounts nqdc plan officers seniorlevel employees restricted investments designated availableforsale securities except relating nqdc plan designated trading securities december 31 2017 total restricted cash investments 1220 million 859 million included prepaid expenses current assets 361 million included restricted cash investments consolidated balance sheets investments privatelyheld companies december 31 2017 december 31 2016 carrying values companys privatelyheld investments 830 million 613 million respectively included longterm assets consolidated balance sheets 297 million 190 million accounted cost method december 31 2017 december 31 2016 respectively see note 5 fair value measurements companys investments privatelyheld companies carried fair value cost method investments measured fair value nonrecurring basis juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following table provide summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes 418 million 429 million restricted investments measured fair value related companys trust acquisitionrelated escrows years ended december 31 2017 2016 respectively 2 balance relates restricted investments measured fair value related companys nqdc plan juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale fixed income securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level 2 level 3 beginning quarter change circumstances resulted transfer years ended december 31 2017 2016 company transfers levels fair value hierarchy assets liabilities measured fair value companys privatelyheld debt redeemable preferred stock securities classified level 3 assets due lack observable inputs determine fair value year ended december 31 2017 110 million unrealized gains related privatelyheld debt redeemable preferred stock securities significant activities related level 3 assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill investments privatelyheld nonredeemable preferred stock common stock securities measured fair value nonrecurring basis deemed otherthantemporarily impaired investments privatelyheld nonredeemable preferred stock common stock securities normally carried cost measured fair value nonrecurring basis due events circumstances company identifies materially impacting carrying value investments company estimates fair value investments using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure december 31 2016 investments privatelyheld nonredeemable preferred stock common stock securities totaled 190 million 68 million investments remeasured fair value due otherthantemporary decline value writtendown fair value zero assets classified level 3 assets due lack observable inputs determine fair value december 31 2017 investments privatelyheld nonredeemable preferred stock common stock securities totaled 297 million assets measured fair value nonrecurring basis impairment charges years ended december 31 2017 2015 december 31 2017 2016 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable accounts payable accrued liabilities approximate fair value due short maturities december 31 2017 december 31 2016 estimated fair value companys longterm debt consolidated balance sheets 22529 million 22157 million respectively based observable market inputs level 2 carrying value promissory note issued company connection previously completed sale junos pulse note 612 million 1329 million approximates fair value december 31 2017 december 31 2016 respectively pulse note classified level 3 asset due lack observable inputs determine fair value see note 8 financial information pulse note juniper networks inc notes consolidated financial statements continued note 6 derivative instruments notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward contracts hedge companys planned cost revenues operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities eighteen months less december 31 2017 estimated 76 million existing gains losses within accumulated comprehensive loss expected reclassified earnings within next 12 months company recognized unrealized gain 202 million unrealized losses 13 million 63 million accumulated comprehensive loss effective portion derivative instruments years ended december 31 2017 2016 2015 respectively company reclassified gains 76 million 18 million loss 96 million accumulated comprehensive loss cost revenues operating expenses consolidated statement operations years ended december 31 2017 2016 2015 respectively ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2017 2016 2015 respectively see note 5 fair value measurements fair values company’s derivative instruments consolidated balance sheets nondesignated derivatives company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one month outstanding nondesignated derivative instruments carried fair value changes fair value derivatives recorded expense net within consolidated statements operations material years ended december 31 2017 2016 2015 see note 2 significant accounting policies company’s policy regarding offsetting derivative assets derivative liabilities juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill following table presents goodwill activity millions primarily consists certain purchase accounting adjustments related acquisition bti fourth quarter 2017 company performed annual goodwill impairment test companys three reporting units routing switching security years ended december 31 2017 2016 2015 goodwill impairment respective periods purchased intangible assets company’s purchased intangible assets net follows millions amortization expense 175 million 163 million 285 million years ended december 31 2017 2016 2015 respectively impairment charges related purchased intangible assets years ended december 31 2017 2016 year ended december 31 2015 company recorded 56 million cost revenues consolidated statements operations related acceleration endoflife certain intangible assets juniper networks inc notes consolidated financial statements continued december 31 2017 estimated future amortization expense purchased intangible assets finite lives follows millions note 8 financial information inventory majority companys inventory production components used manufacturing process finished goods inventory transit addition company purchases holds inventory provide adequate component supplies life underlying products total inventory consisted following millions property equipment net property equipment net consisted following millions depreciation expense 2028 million 1845 million 1415 million 2017 2016 2015 respectively juniper networks inc notes consolidated financial statements continued note receivable october 2014 company completed sale junos pulse product portfolio company received total consideration 2307 million 1057 million cash net 193 million working capital adjustment 1250 million form noncontingent interestbearing promissory note due company april 1 2016 october 2015 company issuer pulse note mutually agreed amend original terms pulse note among things • extend maturity date april 1 2016 december 31 2018 • provide interest due pulse note december 31 2015 shall paid kind increasing outstanding principal amount note increase interest rate pulse note • require minimum payment 750 million prior april 1 2017 less principal amount previously prepaid company may 2017 company received payment 750 million outstanding interest due company issuer pulse note mutually agreed amend terms pulse note among things • extend maturity date remaining outstanding amount approximately 580 million december 31 2018 september 30 2022 • provide interest due april 1 2017 paid kind increasing outstanding principal amount note paid cash • require promissory note subordinated debt raised issuer • entitle company additional financial considerations issuer note affiliates meet certain conditions company considers notes receivable impaired based current information events probable company able collect scheduled payments principal interest due impairment charge required pulse note december 31 2017 outstanding balance pulse note along accumulated interest paid kind 612 million december 31 2017 classified longterm asset based expected collection beyond twelve months consolidated balance sheet date interest income pulse note accrued credited interest income earned unless probable company collect amounts due present value expected cash flows less recorded investment years ended december 31 2017 2016 2015 related amount interest income recognized 83 million 106 million 63 million respectively warranties company accrues warranty costs based associated material labor customer support overhead time revenue recognized accrual reported within accrued liabilities consolidated balance sheets changes company’s warranty reserve follows millions juniper networks inc notes consolidated financial statements continued deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria circumstances costs deferred product revenue recorded net related costs product revenue deferred service revenue represents billed amounts service contracts include technical support hardware software maintenance professional services training services rendered expense net expense net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments promissory note issued company connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements gain loss investments net primarily includes gains sale investments public privatelyheld companies impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items juniper networks inc notes consolidated financial statements continued note 9 restructuring charges benefits following table presents restructuring charges benefits included cost revenues restructuring charges benefits consolidated statements operations millions 2017 restructuring plan first quarter 2017 company initiated restructuring plan “2017 restructuring plan” realign workforce increase operational efficiencies 2017 restructuring plan consisted severance contract termination costs recorded restructuring charges benefits consolidated statement operations fourth quarter 2017 company amended 2017 restructuring plan realign workforce also incurred charges related contract terminations year ended december 31 2017 company recorded 577 million severance costs 79 million contract terminations respectively recorded restructuring charges benefits consolidated statement operations company expect incur material future charges 2017 restructuring plan prior restructuring activities 2016 company recorded restructuring charges related severance costs certain former bti employees well restructuring costs related facilities 2015 company recorded favorable adjustments changes previous estimates associated restructuring activities initiated 2014 activities substantially completed december 31 2017 restructuring liabilities reported within accrued liabilities consolidated balance sheets following table provides summary changes restructuring liabilities millions company expects substantially pay remaining restructuring liabilities first quarter 2018 juniper networks inc notes consolidated financial statements continued note 10 debt financing debt following table summarizes companys longterm debt millions except percentages 2024 notes issued march 2014 february 2016 form single series fully fungible notes company’s senior unsecured unsubordinated obligations ranking equally right payment company’s existing future senior unsecured unsubordinated indebtedness senior right payment company’s future indebtedness expressly subordinated notes december 31 2017 companys aggregate debt maturities based outstanding principal follows millions company may redeem 2020 notes 2025 notes either whole part time one month prior maturity date 2020 notes three months prior maturity date 2025 notes redemption price equal greater 100 aggregate principal amount 2020 notes 2025 notes redeemed ii sum present values remaining scheduled payments discounted treasury rate plus 30 basis points 2020 notes treasury rate plus 375 basis points 2025 notes plus case clauses ii accrued unpaid interest time may 15 2020 case 2020 notes time march 15 2025 case 2025 notes company may redeem notes series whole part redemption price equal 100 principal amount 2020 notes 2025 notes redeemed plus accrued unpaid interest company may redeem notes either whole part time redemption price equal greater 100 aggregate principal amount notes redeemed ii sum present values remaining scheduled payments discounted redemption date plus either case accrued unpaid interest juniper networks inc notes consolidated financial statements continued event change control repurchase event holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principal amount plus accrued unpaid interest notes payable cash semiannually effective interest rates notes include interest notes accretion discount amortization issuance costs indentures govern notes also contain various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2017 company compliance covenants indentures governing notes revolving credit facility june 2014 company entered credit agreement credit agreement certain institutional lenders citibank na administrative agent provides 5000 million unsecured revolving credit facility option company increase amount credit facility additional 2000 million subject certain conditions proceeds loans made credit agreement may used company working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid borrowing may denominated companys option us dollars pounds sterling euro borrowings credit agreement bear interest either floating rate per annum equal base rate plus margin 000 050 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 090 150 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 050 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period december 31 2017 company borrowed funds credit agreement compliance covenants credit agreement financing arrangements company provides certain customers access extended financing arrangements allow longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing providers due company within 1 90 days sale receivable transactions financing providers company surrenders control transferred assets pursuant financing arrangements sale receivables company sold receivables 1694 million 956 million 725 million years ended december 31 2017 2016 2015 respectively company received cash proceeds financing providers 1693 million 832 million 993 million years ended december 31 2017 2016 2015 respectively december 31 2017 december 31 2016 amounts owed financing providers 137 million 136 million respectively recorded accounts receivable company’s consolidated balance sheets portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities consolidated balance sheets december 31 2017 cash received financing provider recognized revenue 169 million outstanding balance december 31 2016 juniper networks inc notes consolidated financial statements continued note 11 equity following table summarizes dividends paid stock repurchase activities millions except per share amounts cash dividends shares common stock 2017 company declared four quarterly cash dividends 010 per share common stock january 26 2017 april 25 2017 july 25 2017 october 24 2017 paid march 22 2017 june 22 2017 september 22 2017 december 22 2017 respectively stockholders record close business march 1 2017 june 1 2017 september 1 2017 december 1 2017 respectively future dividends establishment record payment dates subject approval board directors board juniper networks authorized committee thereof see note 18 subsequent events discussion companys dividend declaration subsequent december 31 2017 stock repurchase activities 2014 2015 board approved stock repurchase program authorized company repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program subsequent increases authorization totaling 18 billion stock repurchase program february 2017 board authorized additional 500 million increase stock repurchase program total 44 billion december 31 2017 company utilized authorized funds stock repurchase program see note 18 subsequent events discussion companys stock repurchase activity subsequent december 31 2017 addition repurchases company’s stock repurchase program company also repurchases common stock certain employees connection net issuance shares satisfy minimum tax withholding obligations upon vesting certain stock awards issued employees repurchases associated tax withholdings 60 million 117 million 111 million years ended december 31 2017 2016 2015 respectively juniper networks inc notes consolidated financial statements continued accumulated comprehensive loss net tax components accumulated comprehensive loss net related taxes years ended december 31 2017 2016 2015 follows millions 1 reclassifications accumulated comprehensive loss years ended december 31 2017 2016 2015 realized gains availableforsale securities material included expense net consolidated statements operations 2 reclassifications accumulated comprehensive loss years ended december 31 2017 2016 2015 realized gains losses cash flow hedges material included within cost revenues research development sales marketing general administrative consolidated statements operations note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2015 equity incentive plan “2015 plan” 2006 equity incentive plan “2006 plan” 2008 employee stock purchase plan “espp” plans company granted stock options rsus psas addition connection certain past acquisitions company assumed stock options rsus rsas psas stock plans acquired companies exchanged assumed awards companys stock options rsus rsas psas respectively 2015 plan adopted approved companys stockholders may 2015 initial authorized share reserve 380 million shares common stock plus addition shares subject outstanding awards 2006 plan amended restated 1996 stock plan outstanding may 19 2015 subsequently expire otherwise terminate maximum additional 290 million shares may 2017 companys stockholders approved additional 230 million shares common stock issuance 2015 plan december 31 2017 aggregate 170 million shares subject outstanding equity awards 2015 plan 2006 plan december 31 2017 335 million shares available future issuance 2015 plan shares available future issuance 2006 plan 1996 plan espp adopted approved companys stockholders may 2008 date companys stockholders approved share reserve 350 million shares companys common stock issuance espp includes additional 70 million 90 million shares approved companys stockholders may 2015 may 2017 respectively juniper networks inc notes consolidated financial statements continued espp permits eligible employees acquire shares company’s common stock 15 discount offering price determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year november 6 2017 company’s compensation committee amended restated espp provide offering period begins february 1 2018 espp consist 24month offering period four 6month purchase periods offering period purchase price company’s common stock espp 85 lower fair market value shares 1 beginning rolling 2 year offering period 2 end 6month purchase period offering period espp continue effect february 25 2028 unless terminated earlier provisions espp december 31 2017 approximately 238 million shares issued 112 million shares remain available future issuance espp 2017 2016 company completed acquisitions cyphort appformix aurrion bti connection acquisitions company assumed aggregate 39 million shares stock options rsus rsas psas additional awards granted stock plans acquired companies december 31 2017 approximately 34 million shares common stock outstanding awards assumed companys acquisitions stock option activities company granted stock option awards maximum contractual life seven years date grant options assumed connection past acquisitions generally tenyear contractual life date grant following table summarizes company’s stock option activity related information year ended december 31 2017 millions except per share amounts years aggregate intrinsic value represents difference company’s closing stock price last trading day period 2850 per share december 29 2017 exercise price applicable options multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 71 million 2017 2016 275 million 2015 total fair value options vested 2017 2016 2015 07 million 39 million 70 million respectively following table summarizes additional information regarding outstanding exercisable options december 31 2017 juniper networks inc notes consolidated financial statements continued rsu rsa psa activities rsus rsas generally vest period three four years date grant psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes company’s rsu rsa psa activity related information year ended december 31 2017 millions except per share amounts years 1 includes servicebased marketbased rsus granted 2015 plan according terms 2 weightedaverage grantdate fair value rsus rsas psas granted assumed 2017 2016 2015 2753 2466 2345 respectively 3 total fair value rsus rsas psas vested 2017 2016 2015 1873 million 1857 million 2027 million respectively 4 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 07 million shares depending achievement performance goals range shares could issued awards 0 million 09 million shares 5 rsus assumed connection acquisition cyphort 6 excludes 14 million shares psas modified 2017 relate psas assumed company connection acquisitions consummated 2016 awards contingent upon achievement certain performance milestones total incremental compensation cost resulting modifications totaled 67 million recognized remaining terms modified awards juniper networks inc notes consolidated financial statements continued shares available grant following table presents stock activity total number shares available grant 2015 plan 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2015 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 canceled expired options canceled rsus psas 2006 plan longer available future grant plan however number shares available grant 2015 plan increased amount canceled expired options ii two onetenth shares canceled rsus psas applicable maximum 290 million additional shares common stock pursuant terms 2015 plan employee stock purchase plan companys espp implemented series offering periods six months duration shorter period determined board employees purchased 27 million shares common stock espp year 2017 2016 2015 average exercise price 2083 1966 1925 per share respectively valuation assumptions weightedaverage assumptions used resulting estimates fair value stock options espp marketbased rsus follows juniper networks inc notes consolidated financial statements continued sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions years ended december 31 2017 2016 2015 company recognized tax benefits total stockbased compensation expense reflected income tax provision consolidated statements operations 291 million 533 million 495 million respectively years ended december 31 2017 2016 2015 tax benefit realized related awards vested exercised period 641 million 586 million 671 million respectively amounts include indirect effects stockbased awards primarily relate research development tax credit december 31 2017 total unrecognized compensation cost related unvested sharebased awards 2701 million recognized weightedaverage period 17 years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 211 million 207 million 196 million 2017 2016 2015 respectively deferred compensation plan company’s nqdc plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds december 31 2017 liability company plan participants 276 million 49 million included within accrued liabilities 227 million included longterm liabilities consolidated balance sheets company investments 276 million correlating deferred compensation obligations 49 million included within prepaid expenses current assets 227 million included within restricted cash investments consolidated balance sheets december 31 2016 liability company 210 million included longterm liabilities consolidated balance sheets company investments 210 million correlating deferred compensation obligations included restricted cash investment consolidated balance sheets juniper networks inc notes consolidated financial statements continued nonus pension plans company maintains india gratuity trust israel retirement trust pension plans cover statutory severance obligations event termination india israel employees respectively pension plans primarily invested mutual funds measured fair value using level 1 hierarchy recurring basis company reports pension plans net basis consolidated balance sheets december 31 2017 december 31 2016 fair value pension plans 113 million 84 million respectively december 31 2017 december 31 2016 company recorded net plan liability 43 million 24 million respectively accrued compensation consolidated balance sheets note 13 segments company operates one reportable segment companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis purposes allocating resources evaluating financial performance accompanied disaggregated information net revenues product service customer vertical geographic region presented following table presents net revenues product service millions 2017 company began reporting revenue following verticals cloud telecomcable strategic enterprise summary types customers included verticals follows • cloud companies heavily reliant cloud business model’s success example customers cloud vertical include cloud service providers well enterprises provide softwareasaservice infrastructureasaservice platformasaservice • telecomcable includes wireline wireless carriers cable operators • strategic enterprise includes financial services national federal state local governments research educational institutions enterprises included cloud vertical juniper networks inc notes consolidated financial statements continued following table presents net revenues customer vertical millions company attributes revenues geographic region based end customer’s shipping address following table presents net revenues geographic region millions years ended december 31 2017 2016 2015 customer accounted greater 10 companys net revenues following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2017 december 31 2016 attributable us operations note 14 income taxes components pretax income summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate pretax income follows millions represents cumulative impact fiscal year 2014 change treatment sharebased compensation result us tax court decision altera corp v commissioner 145 tc 3 2015 december 22 2017 us tax cuts jobs act “tax act” enacted law effective january 1 2018 tax act provides significant changes us income tax law including reduction us federal corporate income tax rate 35 21 creation minimum tax foreign earnings addition tax act imposed onetime transition tax accumulated foreign earnings december 31 2017 company recognized provisional income tax charge 2895 million included component income tax provision consolidated statements operations included provisional amounts onetime transition tax 4312 million company’s accumulated foreign earnings company elected pay eight years ii 1345 million related remeasurement company’s deferred tax assets revised us statutory rates iii 651 million accrued taxes foreign distributable earnings primarily related withholding taxes certain foreign timing differences impacts partially offset 3413 million related reversal deferred tax liabilities previously accrued foreign earnings company’s tax expense 4312 million companys accumulated foreign earnings based estimates effects tax act analysis requires significant data companys foreign subsidiaries regularly collected analyzed including impact certain foreign timing differences well effect foreign earnings upon company’s ability utilize foreign tax credits juniper networks inc notes consolidated financial statements continued addition provisional amount includes remeasurement certain us deferred tax assets liabilities 1345 million foreign withholding taxes impact certain foreign timing differences 651 million company computed amounts based information available including expectation settlement certain foreign basis differences affect amount us minimum tax upon reversal however still uncertainty application tax act company collects prepares necessary data interprets tax act reviews additional guidance issued us treasury department state revenue taxation authorities standardsetting bodies company may make adjustments provisional amounts noted may materially impact provision income taxes continuing operations period adjustments made accounting tax effects tax act completed 2018 2015 united states tax court “court” issued opinion favorable altera corporation “altera” respect altera’s litigation internal revenue service “irs” litigation relates treatment sharebased compensation expense intercompany costsharing arrangement altera’s foreign subsidiary opinion court accepted altera’s position excluding sharebased compensation intercompany costsharing arrangement result company reversed inclusion sharebased compensation costsharing arrangement cumulative adjustment quarter ended september 30 2015 accordance tax act effect cumulative adjustment remeasured 2016 irs filed appeal altera decision rendered court appeal currently pending company continue monitor ongoing developments potential impacts financial statements juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys longterm deferred tax assets deferred tax liabilities follows millions based changes provided tax act company remeasured certain deferred tax assets liabilities based rates expected reverse future generally 21 december 31 2017 2016 company valuation allowance us domestic deferred tax assets approximately 2145 million 1544 million respectively balance december 31 2017 consisted approximately 1910 million 197 million companys california massachusetts deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 38 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 2017 2016 601 million 82 million respectively primarily related change california massachusetts rd tax credits december 31 2017 company federal california net operating loss carryforwards approximately 667 million 1239 million respectively california net operating loss carryforwards 1239 million expected expire unused company also federal california tax credit carryforwards approximately 26 million 2224 million respectively unused net operating loss carryforwards expire various dates beginning year 2018 california tax credit carryforwards carry forward indefinitely december 31 2017 2016 2015 total amount gross unrecognized tax benefits 2645 million 2231 million 2161 million respectively december 31 2017 approximately 2598 million 2645 million gross unrecognized tax benefits recognized would affect effective tax rate increase unrecognized tax benefits fiscal year 2017 primarily related changes estimates resulting tax act juniper networks inc notes consolidated financial statements continued reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2017 2016 2015 company accrued interest penalties related unrecognized tax benefits 407 million 313 million 241 million respectively longterm liabilities consolidated balance sheets company recognized expense net interest penalties 85 million 60 million 25 million consolidated statements operations years ended december 31 2017 2016 2015 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease approximately 480 million within next twelve months due lapses applicable statutes limitation completion tax review cycles various tax jurisdictions company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2007 company currently examination irs 2007 2009 tax years march 2016 irs concluded field audit issued final assessment company appealing assessment company regularly assesses likelihood adverse outcome resulting examinations december 31 2017 company believes resolution audits unlikely material effect consolidated financial condition results operations december 2017 uk tax authorities concluded audit 2013 2015 tax years material impact companys financial statements company also subject separate ongoing examinations uk tax authorities 2016 tax year german tax authorities 2010 2013 tax years australia tax authorities 2016 2017 tax years india tax authorities 2003 tax year 2004 2008 tax years 2009 2014 tax years december 31 2017 company aware examinations tax authorities major jurisdictions files income tax returns 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation companys 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands accordance administrative judicial process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative remedies relative matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however juniper networks inc notes consolidated financial statements continued still possibility adverse outcome matters could material effect consolidated financial condition results operations note 15 net income per share company computed basic diluted net income per share follows millions except per share amounts basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable antidilutive shares excluded computation diluted net income per share juniper networks inc notes consolidated financial statements continued note 16 commitments contingencies commitments following table summarizes company’s unconditional purchase obligations future minimum payments noncancelable operating lease arrangements next five years thereafter december 31 2017 millions unconditional purchase obligations unconditional purchase obligations consist agreements include firm noncancelable terms transfer funds future fixed minimum amounts quantities purchased fixed minimum prices operating leases company leases facilities certain equipment noncancelable operating leases expire various dates march 2028 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses rent expense 2017 2016 2015 approximately 393 million 379 million 432 million respectively lease arrangement july 2015 company entered lease arrangement march 2026 approximately 63000 square feet space state washington space used among things consolidate certain companys laboratory operations currently located sunnyvale california due certain contractual obligations construction period company deemed owner property period company capitalized construction costs recording buildtosuit lease asset corresponding buildtosuit financing liability upon completion construction 2016 company concluded certain form continuing economic involvement facility precluded saleleaseback accounting treatment result total 609 million costs capitalized placed service depreciated lease term december 31 2017 total payment lease agreement tenyear term approximately 1120 million 626 million included otherlong term liabilities consolidated balance sheets purchase commitments contract manufacturers suppliers order reduce manufacturing lead times interest access adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments purchase commitments totaled 6152 million december 31 2017 company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2017 company accrued 220 million based estimate charges juniper networks inc notes consolidated financial statements continued clocksignal supplier component remediation liability december 31 2017 december 31 2016 company approximately zero 108 million respectively accrued liabilities consolidated balance sheets expected remediation costs certain products containing defect clocksignal component manufactured thirdparty supplier company advised component supplier components may begin fail product operation 18 months december 31 2017 company substantially completed remediation process customers debt interest payment debt december 31 2017 company held longterm debt consisting notes carrying value 21363 million see note 10 debt financing discussion companys longterm debt expected future principal maturities tax liability december 31 2017 company made reasonable estimate effects onetime transition tax result tax act includes estimated charges 4312 million tax company’s accumulated foreign earnings 3940 million included within longterm income taxes payable consolidated balance sheets see note 14 income taxes discussion december 31 2017 company 2566 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products solely combination third party products infringe intellectual property rights thirdparty december 31 2017 company recorded 204 million indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets company also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs 230 million 60 million december 31 2017 december 31 2016 respectively legal proceedings investigations company previously disclosed us securities exchange commission sec us department justice doj conducting investigations possible violations company us foreign corrupt practices act fcpa company cooperating agencies regarding matters fourth quarter 2017 doj notified company doj closed investigation related matters without taking action company’s audit committee assistance independent advisors investigating conducting thorough review possible violations fcpa made recommendations remedial measures including employee disciplinary actions foreign jurisdictions company implemented continues implement company unable predict duration scope outcome ongoing sec investigation believes adverse outcome reasonably possible however company able estimate reasonable range possible loss sec could take action company could agree settle event company could required pay substantial fines sanctions andor implement additional remedial measures addition may determined company violated fcpa litigations investigations addition investigations discussed company involved investigations disputes litigations legal proceedings company records accrual loss contingencies legal proceedings believes unfavorable outcome probable b amount range possible loss reasonably estimable company intends aggressively defend matters assurances outcome matters currently juniper networks inc notes consolidated financial statements continued determinable company currently believes none existing claims proceedings likely material adverse effect financial position notwithstanding foregoing many uncertainties associated litigation matters thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses note 17 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter years ended december 31 2017 december 31 2016 millions except per share amounts 1 net loss fourth quarter 2017 includes estimated 2895 million tax expense related tax act restructuring charges 362 million 2 net income loss per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 3 potentially dilutive common shares fourth quarter 2017 excluded computation diluted net loss per share effect would antidilutive note 18 subsequent events dividend declaration january 30 2018 company announced board declared quarterly cash dividend 018 per share common stock paid march 22 2018 stockholders record close business march 1 2018 reflects increase 80 compared previous quarterly dividends stock repurchase activities january 2018 board approved new 20 billion share repurchase authorization 2018 stock repurchase program replaces previous authorization board also authorized company enter accelerated share repurchase program asr amount 7500 million 2018 stock repurchase program february 2018 company entered asr agreements two financial institutions repurchase aggregate 7500 million companys common stock company made upfront payment 7500 million pursuant asr received retired initial 233 million shares companys common stock aggregate price 6000 million based market value companys common stock date transaction company aggregate 13 billion authorized funds remaining 2018 stock repurchase program filing date annual report form 10k future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys 2018 stock repurchase program may discontinued time item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm stockholders board directors juniper networks inc opinion financial statements audited accompanying consolidated balance sheets juniper networks inc company december 31 2018 2017 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2018 related notes financial statement schedule listed index item 15a2 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows three years period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 22 2019 expressed unqualified opinion thereon adoption asu 201409 discussed note 2 consolidated financial statements company changed method recognizing revenue result adoption accounting standards update asu 201409 revenue contracts customers topic 606 amendments asu’s 201514 201610 201612 effective january 1 2018 basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion ernst young llp served company’s auditor since 1996 san jose california february 22 2019 report independent registered public accounting firm stockholders board directors juniper networks inc opinion internal control financial reporting audited juniper networks incs internal control financial reporting december 31 2018 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion juniper networks inc company maintained material respects effective internal control financial reporting december 31 2018 based coso criteria also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2018 2017 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2018 related notes financial statement schedule listed index item 15a2 report dated february 22 2019 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california february 22 2019 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2018 based framework set forth committee sponsoring organizations treadway commission internal control integrated framework published 2013 based assessment management concluded december 31 2018 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2018 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2018 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility improved operating efficiency automation company sells highperformance routing switching security networking products service offerings customers within verticals cloud service provider enterprise view network critical success basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated company adopted financial accounting standards board fasb asu 201618 topic 230 statement cash flow restricted cash effective january 1 2018 using retrospective transition method restricted cash 474 million 526 million included within cash equivalents restricted cash reconciling beginning ending total amounts respectively statement cash flows year ended december 31 2017 restricted cash 04 million 474 million included within cash equivalents restricted cash reconciling beginning ending total amounts respectively statement cash flows year ended december 31 2016 conform current period presentation adoption material impact cash flow activity presented companys consolidated statement cash flows years ended december 31 2017 2016 see note 4 cash equivalents investments reconciliation cash balances within consolidated statements cash flows consolidated balance sheets note 2 significant accounting policies use estimates preparation financial statements related disclosures accordance us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposits time deposits corporate debt securities readily convertible cash highly liquid investments original maturities three months less junipers purchase date classified cash equivalents investments availableforsale debt securities companys investments debt securities classified availableforsale include companys fixed income securities investments privatelyheld companies consisting debt redeemable preferred stock securities fixed income securities initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive loss consolidated balance sheets realized gains losses determined based specific identification method reported consolidated statements operations juniper networks inc notes consolidated financial statements continued fixed income securities primarily consist assetbacked securities certificate deposits commercial paper corporate debt securities time deposits foreign government debt securities us government agency securities us treasury securities company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments value temporary difference recognized impairment loss consolidated statements operations companys privatelyheld debt redeemable preferred stock securities included longterm assets consolidated balance sheets recorded fair value fair value reassessed company made aware information indicating change enterprise value investee including known acquisition offers subsequent funding rounds investees plans liquidation company periodically evaluates securities indicators impairment including inability recover portion entire carrying amount investment inability investee sustain earnings reduction termination financial commitment investee investors intention sell investment whether likely company required sell investment recovery entire amortized cost basis company determines decline investments value temporary difference recognized impairment loss consolidated statements operations investments equity securities companys investments equity securities readily determinable fair values consist money market funds nonqualified compensation plan nqdc invested mutual funds investments public companies investments measured fair value changes fair value recognized consolidated statements operations equity securities without readily determinable fair values include companys investments privatelyheld companies consisting nonredeemable preferred stock common stock securities company accounts securities cost adjusted changes observable transactions identical similar investments issuer less impairments fair value equity securities reassessed company identifies observable price changes indicating adjustment upward downward carrying value necessary observable changes fair value recognized earnings date observable transaction took place rather current reporting date addition company periodically evaluates equity securities without readily determinable fair values determine impairment charges required evaluating whether event change circumstance occurred may significant adverse effect fair value investment qualitative assessment performed reporting period assess whether impairment indicators including limited significant deterioration investees earnings performance credit rating asset quality business prospects adverse change regulatory economic technological environment change general market condition geographic area industry acquisition offers ability continue going concern indicators present company estimates fair value impaired investments recognizes impairment loss consolidated statement operations equal difference carrying value fair value fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models juniper networks inc notes consolidated financial statements continued derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive loss upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments expense net consolidated statements operations cash flows hedges classified operating activities company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense net consolidated statements operations period changes fair value remeasurement underlying assets liabilities cash flows derivatives classified operating activities company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party company neither required pledge entitled receive cash collateral related derivative transactions inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets construction progress related construction development property equipment yet placed service intended use goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill tested impairment annually fourth quarter frequently certain circumstances indicate carrying value goodwill impaired qualitative assessment first made determine whether necessary quantitatively test goodwill impairment initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed determining fair value reporting unit using combination income approach market approach based outcome quantitative juniper networks inc notes consolidated financial statements continued assessments company compares estimated fair value reporting unit respective carrying values including goodwill impairment loss recognized extent carrying amount goodwill exceeds assets implied fair value intangible assets acquired business combination related inprocess research development iprd projects considered indefinitelived completion abandonment associated research development efforts indefinitelived intangibles amortized results operations instead evaluated impairment development complete associated assets would deemed finitelived would amortized cost revenues respective estimated useful lives point time research development project abandoned acquired iprd assets written charged expense period abandonment longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives revenue recognition revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services following fivestep process 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price 5 recognize revenue company satisfies performance obligation described identify contract customer company generally considers sales contract agreement approved purchase order customer contract provided collection considered probable assessed based creditworthiness customer determined credit checks payment histories andor circumstances company combines contracts customer contracts negotiated single commercial substance contain price dependencies identify performance obligations contract product performance obligations include hardware software licenses service performance obligations include maintenance software postcontract support training professional services certain software licenses related postcontract support combined single performance obligation maintenance updates critical continued functionality software determine transaction price transaction price company’s contracts customers consists fixed variable consideration provided probable significant reversal revenue occur uncertainty related variable consideration resolved fixed consideration includes amounts contractually billed customer variable consideration includes estimates rights return rebates price protection based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time company generally invoices customers hardware software licenses related maintenance arrangements time delivery professional services either upfront upon meeting certain milestones customer invoices generally due within 30 90 days issuance company’s contracts customers typically include significant financing components period transfer performance obligations timing payment generally within one year allocate transaction price performance obligations contract contracts contain multiple performance obligations company allocates transaction price performance obligations relative standalone selling price basis standalone selling prices based multiple factors including limited historical discounting trends products services pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles recognize revenue company satisfies performance obligation revenue hardware certain software licenses recognized point time generally upon shipment delivery certain software licenses combined postcontract support recognized time ratable basis term license revenue maintenance software juniper networks inc notes consolidated financial statements continued postcontract support recognized time ratable basis contract term revenue training professional services recognized time services completed ratably contractual period generally one year less deferred commissions sales commissions earned company’s sales force considered incremental recoverable costs obtaining contract customer costs deferred amortized period benefit typically term customer contracts initial commission rates renewal rates amortization expense included sales marketing expenses accompanying consolidated statements operations allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems application development stage capitalized costs include external direct costs incurred developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 200 million 199 million 158 million 2018 2017 2016 respectively foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using rates approximate juniper networks inc notes consolidated financial statements continued effect period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive loss company records foreign exchange transaction gains losses assets liabilities denominated nonfunctional currencies remeasurement adjustments recorded expense net consolidated statements operations loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options restricted stock awards rsas restricted stock units rsus performance share awards psas employee stock purchases related employee stock purchase plan espp service condition awards sharebased compensation expense based fair value underlying awards amortized straightline basis psas marketbased rsus sharebased compensation expense amortized straightline basis separate vesting portion awards company accounts forfeitures occur company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value espp purchase rights bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s espp expected life espp purchase rights approximates offering period company determines grant date fair value rsus rsas psas based closing market price company’s common stock date grant adjusted present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte carlo model affected companys stock price comparative marketbased returns well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes juniper networks inc notes consolidated financial statements continued concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments derivatives accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits mitigate concentration credit risk investment portfolio diversification investments various industries asset classes limits amount credit exposure single issuer credit rating company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable years ended december 31 2018 2017 2016 single customer accounted 10 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers original design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recently adopted accounting standard comprehensive income effective january 1 2018 company early adopted fasb asu 201802 topic 220 income statement reporting comprehensive income issued february 2018 election reclassify stranded tax effects resulting us tax cuts jobs act tax act accumulated comprehensive income retained earnings adoption resulted reclassification 57 million income accumulated comprehensive loss accumulated deficit adoption date comparative information restated continues reported accounting standards effect periods financial instruments january 1 2018 company adopted fasb asu 201601 financial instrumentsoverall recognition measurement financial assets financial liabilities fasb asu 201803 technical corrections improvements financial instruments overall changes entities classify measure equity investments present changes fair value financial liabilities measured fair value option guidance also updates certain presentation disclosure requirements company adopted asu 201601 january 1 2018 using modified retrospective method equity securities readily determinable fair values prospective method equity securities without readily determinable fair values resulting impact opening accumulated deficit balance company elected use measurement alternative equity investments without readily determinable fair value defined cost adjusted changes observable transactions identical similar investments issuer less impairment see note 4 cash equivalents investments additional disclosures required upon adopting standard revenue recognition january 1 2018 company adopted fasb asu 201409 topic 606 revenue contracts customers “asu 201409” topic 606 provides guidance revenue recognition superseded revenue recognition requirements accounting standards codification asc topic 605 revenue recognition topic 605 industry specific guidance asu 201409 revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services company adopted asu 201409 modified retrospective approach applying amendments prospective reporting periods results reporting periods beginning january 1 2018 presented topic 606 prior period amounts adjusted continue reported accordance historic accounting topic 605 juniper networks inc notes consolidated financial statements continued cumulative effect changes made companys consolidated balance sheet january 1 2018 adoption topic 606 contracts customers completed december 31 2017 recorded adjustment accumulated deficit adoption date follows upon adoption company recorded cumulative effect adjustment 3247 million net tax adjustment 639 million decreased january 1 2018 opening accumulated deficit balance consolidated balance sheet primarily result following items • distributor sales topic 606 company recognizes revenue sales distributors upon delivery product distributor rather upon delivery product endcustomer rebates incentives offered distributors earned sales endcustomers completed estimated point revenue recognition • software revenue topic 605 company deferred revenue software licenses vendorspecific objective evidence fair value established undelivered items primarily services topic 606 revenue software licenses recognized time delivery unless ongoing services provide frequent critical updates software without software functionality would rapidly diminished • variable consideration companys contracts include penalties extended payment terms acceptance provisions price variability precluded revenue recognition topic 605 requirement amounts fixed determinable topic 606 requires company estimate account variable consideration reduction transaction price • revenue allocation similar topic 605 topic 606 requires allocation revenue deliverables performance obligations within arrangement topic 605 restricted allocation revenue contingent future deliverables current deliverables however topic 606 removes restriction addition nature performance obligations identified within contract topic 606 compared topic 605 impact allocation transaction price product services • contract acquisition costs topic 606 requires deferral amortization “incremental” costs incurred obtain contract associated contract duration greater one year primary contract acquisition cost company sales commissions prior january 1 2018 company expensed sales commissions change required topic 606 resulted creation asset january 1 2018 juniper networks inc notes consolidated financial statements continued impact adoption topic 606 companys consolidated statements operations consolidated balance sheet follows millions except disclosed adoption topic 606 material impact company’s consolidated statements operations year ended december 31 2018 juniper networks inc notes consolidated financial statements continued recent accounting standards yet adopted cloud computing arrangement august 2018 fasb issued asu 201815 subtopic 35040 intangibles goodwill otherinternaluse software customers accounting implementation costs incurred cloud computing arrangement service contract provides guidance customers accounting implementation setup upfront costs incurred cloud computing arrangement hosted service contract new standard applied either retrospective prospective basis implementation costs incurred date adoption standard effective interim annual periods beginning december 15 2019 early adoption permitted company early adopted standard effective january 1 2019 prospectively apply standard implementation costs incurred adoption date fair value measurement august 2018 fasb issued asu 201813 topic 820 disclosure framework changes disclosure requirements fair value measurement eliminates adds modifies certain disclosure requirements fair value measurements asc 820 asu applied prospective basis certain modified new disclosure requirements amendments standard applied retrospective basis new standard effective interim annual periods beginning december 15 2019 early adoption permitted company currently evaluating impact adoption consolidated financial statements derivatives hedging august 2017 fasb issued asu 201712 topic 815 derivatives hedging targeted improvements accounting hedging activities amendment thereafter expands entitys ability hedge financial nonfinancial risk components amends companies assess effectiveness well changes presentation disclosure requirements new standard applied modified retrospective basis amendment presentation disclosure requirements applied prospective basis standard along amendment effective interim annual periods beginning december 15 2018 early adoption permitted company expect adoption material impact consolidated financial statements amortization purchased callable debt securities march 2017 fasb issued asu 201708 receivablesnonrefundable fees costs subtopic 31020 premium amortization purchased callable debt securities shortens amortization period premium certain purchased callable debt securities earliest call date asu impact debt securities held discount standard effective annual reporting periods beginning december 15 2018 including interim reporting periods within annual reporting periods applied modified retrospective basis early adoption permitted adoption standard impact consolidated financial statements simplifying test goodwill impairment january 2017 fasb issued asu 201704 topic 350 intangiblesgoodwill simplifying test goodwill impairment removes step 2 goodwill impairment test requires hypothetical purchase price allocation amended guidance goodwill impairment charge recognized amount carrying value reporting unit exceeds fair value exceed carrying amount goodwill asu applied prospective basis effective interim annual periods beginning december 15 2019 early adoption permitted impairment tests performed january 1 2017 company expect adoption material impact consolidated financial statements credit losses financial instruments june 2016 fasb issued asu 201613 topic 326 financial instrumentscredit losses measurement credit losses financial instruments provides decisionuseful information expected credit losses financial instruments changes loss impairment methodology amendment issued fasb november 2018 clarifies receivables arising operating leases within scope topic 326 accounted accordance topic 842 pronouncement amendment effective reporting periods beginning december 15 2019 interim periods within fiscal years using modified retrospective adoption method early adoption permitted company currently evaluating impact adoption consolidated financial statements leases february 2016 fasb issued asu 201602 topic 842 leases several amendments thereafter require recognition rightofuse rou assets lease liabilities leases consolidated balance sheets lessees guidance also requires enhanced disclosures asu effective annual reporting periods beginning december 15 2018 juniper networks inc notes consolidated financial statements continued company adopted standard january 1 2019 modified retrospective approach upon adoption company elected • package practical expedients allows reassessing 1 whether existing contracts contain leases 2 lease classification existing leases 3 whether existing initial direct costs meet new definition • practical expedient asc subtopic 84210 separate nonlease components lease components instead account separate lease component nonlease components associated lease component single lease component class underlying asset • recognize rou assets lease liabilities shortterm leases lease term twelve months less include option purchase underlying asset company reasonably certain exercise adoption standard resulted recognition rou assets lease liabilities approximately 2000 million 2300 million respectively companys consolidated balance sheets primarily relating real estate operating leases adoption standard result material impact companys consolidated statements operations additionally adoption standard impact company’s debtcovenant compliance current agreements juniper networks inc notes consolidated financial statements continued note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material primary areas preliminary purchase price allocation subject change relate certain legal income tax matters residual goodwill company acquired htbase corporation htbase 2018 cyphort inc cyphort 2017 appformix inc appformix aurrion inc aurrion bti systems inc “bti” 2016 following table summarizes fair values assets acquired liabilities assumed acquisition dates millions 1 primary areas preliminary purchase price allocation subject change relate certain legal income tax matters 2 see note 7 goodwill purchased intangible assets adjustments made measurement period subsequent acquisition dates 3 goodwill recognized acquisitions primarily attributable expected synergies deductible us federal income tax purposes following table summarizes fair value separately identifiable intangible assets time acquisition period intangible asset amortized millions except years juniper networks inc notes consolidated financial statements continued 2018 acquisition htbase december 7 2018 company acquired 100 equity htbase 196 million cash acquisition htbase software company developed unique disruptive platform softwaredefined enterprise multicloud expected accelerate junipers leadership multicloud function compute orchestration capabilities contrail enterprise multicloud prior acquisition company outstanding promissory note bridge notes totaling 16 million measured fair value effectively settled upon acquisition terms acquisition agreement htbase company granted certain sharebased awards continuing employees substitution awards held employees granted contemplation future services fair value sharebased awards 38 million expensed sharebased compensation remaining service period 2017 acquisition cyphort september 18 2017 company acquired 100 cyphort 335 million cash acquisition cyphort software company providing security analytics advanced threat defense expected strengthen junipers security product portfolio terms acquisition agreement cyphort company assumed certain sharebased awards continuing employees granted contemplation future services fair value sharebased awards 38 million expensed sharebased compensation remaining service period 2016 acquisitions appformix december 6 2016 company acquired 100 appformix 479 million cash appformix company focused cloud infrastructure optimization software company acquired appformix expectation would complement analytics capabilities contrail help customers enhance cloud operations terms acquisition agreement company assumed sharebased awards continuing employees acquisition appformix granted contemplation future services fair value sharebased awards 239 million expensed sharebased compensation remaining service period aurrion august 9 2016 company acquired remaining ownership interest aurrion increasing ownership 18 100 743 million cash aurrion privatelyheld provider fabless silicon photonic technology company acquired aurrion expectation would strengthen companys longterm competitive advantage costeffective highdensity highspeed networks prior acquisition company preexisting investment aurrions equity also held convertible debt remeasured fair value 172 million 104 million respectively based upon perspective market participant estimating fair value terms acquisition agreement company assumed sharebased awards continuing employees acquisition aurrion granted contemplation future services fair value sharebased awards 550 million expensed sharebased compensation remaining service period juniper networks inc notes consolidated financial statements continued additionally company acquired iprd consisting existing research development projects yet reached technological feasibility time acquisition acquired iprd involves technology costeffective highspeed networks iprd valued using multiperiod excess earnings method income approach discounting forecasted cash flows directly related products expected result associated project bti april 1 2016 company acquired remaining ownership interest bti increasing ownership 12 100 258 million cash bti privatelyheld provider cloud metro networking systems software content cloud service providers company acquired bti expectation would help accelerate companys ability deliver open automated packet optical transport solutions prior acquisition company preexisting investment btis equity remeasured investment fair value 171 million based upon perspective market participant estimating fair value company also held 09 million convertible debt measured fair value settled upon acquisition company also repaid upon acquisition 186 million certain outstanding bti liabilities assumed additionally terms acquisition agreement company assumed sharebased awards continuing employees acquisition bti granted contemplation future services fair value sharebased awards 86 million expensed sharebased compensation remaining service period acquisition costs company recognized 44 million 21 million 118 million acquisitionrelated costs years ended december 31 2018 december 31 2017 december 31 2016 respectively acquisitionrelated costs expensed period incurred within general administrative expense companys consolidated statements operations juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale debt securities following table summarizes companys unrealized gains losses fair value investments designated availableforsale debt securities december 31 2018 december 31 2017 millions following table presents contractual maturities companys total fixed income securities december 31 2018 millions juniper networks inc notes consolidated financial statements continued following tables present companys total fixed income securities unrealized loss position december 31 2018 december 31 2017 millions december 31 2018 company 490 investments unrealized loss positions gross unrealized losses related investments primarily due changes market interest rates company intend sell investments believe likely required sell investments recovery entire amortized cost basis therefore company determined otherthantemporary impairments associated credit losses required recognized years ended december 31 2018 2017 2016 years ended december 31 2018 2017 2016 material gross realized gains losses availableforsale debt securities juniper networks inc notes consolidated financial statements continued investments equity securities following table presents companys investments equity securities december 31 2018 2017 millions 1 prior january 1 2018 money market funds classified availableforsale securities accounted fair value unrealized gains losses recognized accumulated comprehensive income loss realized gains losses sales impairments recognized consolidated statements operations 2 prior january 1 2018 mutual funds related companys nqdc plan classified trading securities unrealized gains losses recognized consolidated statements operations 3 prior january 1 2018 certain investments privatelyheld companies accounted cost less impairment realized gains losses sales impairments recognized consolidated statements operations year ended december 31 2018 32 million unrealized losses recognized equity investments years ended 2017 2016 material unrealized gains losses recognized equity investments restricted cash investments company restricted cash investments amounts held escrow accounts required connection certain acquisitions completed primarily 2015 2018 ii amounts held companys shortterm disability plan california iii amounts nqdc plan seniorlevel employees restricted investments designated equity investments december 31 2018 carrying value restricted cash investments 527 million 276 million included prepaid expenses current assets 251 million included longterm assets consolidated balance sheets following table provides reconciliation cash equivalents restricted cash included consolidated balance sheets december 31 2018 december 31 2017 millions juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following table provides summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes 116 million 168 million restricted investments measured fair value related companys acquisitionrelated escrows years ended december 31 2018 2017 respectively december 31 2017 balance also includes 250 million related companys directors officers indemnification trust subsequently terminated 2 balance relates restricted investments measured fair value related companys nqdc plan juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale debt securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level 2 level 3 beginning quarter change circumstances resulted transfer years ended december 31 2018 2017 company transfers levels fair value hierarchy assets liabilities measured fair value companys privatelyheld debt redeemable preferred stock securities classified level 3 assets due lack observable inputs determine fair value company estimates fair value privatelyheld debt redeemable preferred stock securities recurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure year ended december 31 2018 significant activities related privatelyheld debt redeemable preferred stock notes settled upon acquisition htbase see note 3 business combinations information assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill measured fair value nonrecurring basis deemed otherthan temporarily impaired impairment charges recognized years ended december 31 2018 2017 2016 equity investments without readily determinable fair value measured fair value deemed impaired adjustment observable price changes year ended december 31 2018 material impairment charges adjustments resulting observable price changes equity investments without readily determinable fair value december 31 2018 2017 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable accounts payable accrued liabilities approximate fair value due short maturities december 31 2018 december 31 2017 estimated fair value companys total outstanding debt consolidated balance sheets 21587 million 22529 million respectively based observable market inputs level 2 carrying value promissory note issued company connection previously completed sale junos pulse note along accumulated interest paid kind 690 million 612 million approximates fair value december 31 2018 december 31 2017 respectively notes receivable generally classified level 3 asset due lack observable inputs determine fair value carrying value contract manufacturer deposit 239 million longterm trade accounts receivable 150 million reported within longterm assets consolidated balance sheets approximates fair value december 31 2018 see note 8 financial information pulse note contract manufacturer deposit juniper networks inc notes consolidated financial statements continued note 6 derivative instruments notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward contracts hedge companys planned cost revenues operating expenses denominated foreign currencies derivatives designated cash flow hedges cash flow hedge derivatives typically maturities seventeen months less december 31 2018 estimated 16 million unrealized net loss within accumulated comprehensive loss expected reclassified earnings within next twelve months company recognized unrealized loss 87 million unrealized gain 202 million unrealized loss 13 million accumulated comprehensive loss effective portion derivative instruments years ended december 31 2018 2017 2016 respectively company reclassified gains 09 million 76 million 18 million accumulated comprehensive loss cost revenues operating expenses consolidated statement operations years ended december 31 2018 2017 2016 respectively ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2018 2017 2016 respectively see note 5 fair value measurements fair values company’s derivative instruments consolidated balance sheets nondesignated derivatives company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one three months outstanding nondesignated derivative instruments carried fair value changes fair value derivatives recorded expense net within consolidated statements operations 76 million 18 million 05 million years ended december 31 2018 2017 2016 respectively see note 2 significant accounting policies company’s policy regarding offsetting derivative assets derivative liabilities juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill companys goodwill activity follows millions primarily consists certain purchase accounting adjustments related acquisitions bti cyphort fourth quarter 2018 company performed annual goodwill impairment test companys three reporting units routing switching security goodwill impairment years ended december 31 2018 2017 2016 purchased intangible assets company’s purchased intangible assets net follows millions amortization expense 174 million 175 million 163 million years ended december 31 2018 2017 2016 respectively impairment charges related purchased intangible assets years ended december 31 2018 2017 2016 juniper networks inc notes consolidated financial statements continued december 31 2018 estimated future amortization expense purchased intangible assets finite lives follows millions note 8 financial information inventory majority companys inventory production components used manufacturing process finished goods inventory transit addition company purchases holds inventory provide adequate component supplies life underlying products total inventory consisted following millions property equipment net property equipment net consisted following millions depreciation expense 1932 million 2028 million 1845 million 2018 2017 2016 respectively juniper networks inc notes consolidated financial statements continued notes receivable deposit total outstanding notes receivable deposit net issuance costs reported within longterm assets consolidated balance sheets follows millions connection sale junos pulse product portfolio 2014 company issued noncontingent interestbearing promissory note 1250 million 2017 company received payment 750 million outstanding interest due maturity date pulse note extended september 30 2022 terms amended agreement amended agreement also provided interest due note paid kind increasing principal amount interest rate pulse note outstanding balance pulse note classified longterm asset based expected collection beyond twelve months consolidated balance sheet date 2018 company paid deposit 250 million contract manufacturer exchange improved pricing savings inventory carrying charges deposit recorded face value 250 million less unamortized discount 11 million calculated based imputed interest rate 48 amortized term deposit interest income along corresponding amount cost revenues deposit due demand first quarter 2020 classified longterm assets consolidated balance sheets january 2019 company paid additional noninterest bearing deposit 220 million contract manufacturer per terms agreement interest income notes receivable accrued credited interest income earned unless probable company collect amounts due present value expected cash flows less recorded investment interest income recognized 84 million 83 million 106 million years ended december 31 2018 2017 2016 respectively company considers notes receivable impaired based current information events probable company able collect scheduled payments principal interest due impairment charge required december 31 2018 2017 2016 warranties company accrues warranty costs based associated material labor customer support overhead time revenue recognized accrual reported within accrued liabilities consolidated balance sheets changes company’s warranty reserve follows millions juniper networks inc notes consolidated financial statements continued deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related undelivered product commitments shipments met revenue recognition criteria deferred service revenue represents billed amounts service contracts include technical support hardware software maintenance professional services training services rendered december 31 2017 deferred product revenue also included unrecognized revenue related shipments distributors sold endusers revenue see note 13 segments disaggregated revenue product service customer vertical geographic region product revenue 1042 million included deferred revenue january 1 2018 recognized year ended december 31 2018 service revenue 6903 million included deferred revenue january 1 2018 recognized year ended december 31 2018 following table summarizes transaction price contracts yet recognized revenue december 31 2018 company expects recognize amounts revenue millions deferred commissions deferred commissions 337 million december 31 2018 year ended december 31 2018 amortization expense deferred commissions 1442 million impairment charges recognized juniper networks inc notes consolidated financial statements continued expense net expense net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments promissory note issued company connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements loss gain investments net primarily includes gains sale investments public privatelyheld companies observable changes fair value impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items note 9 restructuring charges following table presents restructuring charges included consolidated statements operations millions 2018 restructuring plan third quarter 2018 company initiated restructuring plan 2018 restructuring plan realign workforce result organizational leadership changes connection 2018 restructuring plan company recorded 50 million severance costs restructuring charges consolidated statements operations year ended december 31 2018 restructuring plan substantially complete prior restructuring activities 2017 company initiated restructuring plan “2017 restructuring plan” realign workforce increase operational efficiencies 2017 restructuring plan consisted severance contract termination costs recorded restructuring charges consolidated statement operations year ended december 31 2018 connection 2017 restructuring plan company recorded 33 million severance costs restructuring charges insignificant favorable adjustments changes previous estimates consolidated statements operations 2017 restructuring plan substantially complete 2016 company recorded restructuring charges related severance costs certain former bti employees well restructuring costs related facilities activities substantially completed december 31 2017 juniper networks inc notes consolidated financial statements continued restructuring liabilities restructuring liabilities reported within accrued liabilities consolidated balance sheets following table provides summary changes restructuring liabilities associated 2018 restructuring plan prior year plans millions company expects substantially pay remaining restructuring liabilities first quarter 2019 see note 18 subsequent events discussion companys restructuring plan initiated subsequent december 31 2018 note 10 debt financing debt following table summarizes companys total debt millions except percentages 2024 notes issued march 2014 february 2016 form single series fully fungible notes company’s senior unsecured unsubordinated obligations ranking equally right payment company’s existing future senior unsecured unsubordinated indebtedness senior right payment company’s future indebtedness expressly subordinated notes december 31 2018 companys aggregate debt maturities based outstanding principal follows millions juniper networks inc notes consolidated financial statements continued company may redeem 2020 notes 2025 notes either whole part time one month prior maturity date 2020 notes three months prior maturity date 2025 notes redemption price equal greater 100 aggregate principal amount 2020 notes 2025 notes redeemed ii sum present values remaining scheduled payments discounted treasury rate plus 30 basis points 2020 notes treasury rate plus 375 basis points 2025 notes plus case clauses ii accrued unpaid interest time may 15 2020 case 2020 notes time march 15 2025 case 2025 notes company may redeem notes series whole part redemption price equal 100 principal amount 2020 notes 2025 notes redeemed plus accrued unpaid interest company may redeem notes either whole part time redemption price equal greater 100 aggregate principal amount notes redeemed ii sum present values remaining scheduled payments discounted redemption date plus either case accrued unpaid interest event change control repurchase event holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principal amount plus accrued unpaid interest notes payable cash semiannually effective interest rates notes include interest notes accretion discount amortization issuance costs indentures govern notes also contain various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2018 company compliance covenants indentures governing notes revolving credit facility june 2014 company entered credit agreement credit agreement certain institutional lenders citibank na administrative agent provides 5000 million unsecured revolving credit facility option company increase amount credit facility additional 2000 million subject lenders approval proceeds loans made credit agreement may used company working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid borrowing may denominated companys option us dollars pounds sterling euro borrowings credit agreement bear interest either floating rate per annum equal base rate plus margin 000 050 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 090 150 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 050 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period december 31 2018 company borrowed funds credit agreement compliance covenants credit agreement financing arrangements company provides certain customers access extended financing arrangements allow longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing providers due company within 1 90 days sale receivable transactions financing providers company surrenders control transferred assets pursuant financing arrangements sale receivables company sold receivables 1228 million 1694 million 956 million years ended december 31 2018 2017 2016 respectively company received cash proceeds financing providers 1232 million 1693 million 832 million years ended december 31 2018 2017 2016 respectively december 31 2018 december 31 2017 amounts owed financing providers 172 million 137 million respectively recorded accounts receivable company’s consolidated balance sheets juniper networks inc notes consolidated financial statements continued portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities consolidated balance sheets outstanding balance december 31 2018 cash received financing provider recognized revenue 169 million december 31 2017 note 11 equity following table summarizes dividends paid stock repurchases retirements companys stock repurchase programs stock repurchases tax withholdings millions except per share amounts 1 shares repurchased 2018 stock repurchase program 7500 million represents full amount asr 233 million shares received initially first quarter 2018 additional 60 million shares received final settlement third quarter 2018 2 shares repurchased 2014 stock repurchase program cash dividends shares common stock 2018 company declared four quarterly cash dividends 018 per share common stock january 30 2018 may 2 2018 july 26 2018 october 24 2018 paid march 22 2018 june 22 2018 september 25 2018 december 26 2018 respectively stockholders record close business march 1 2018 june 1 2018 september 4 2018 december 5 2018 respectively future dividends establishment record payment dates subject approval board directors board juniper networks authorized committee thereof see note 18 subsequent events discussion companys dividend declaration subsequent december 31 2018 stock repurchase activities january 2018 board approved 20 billion share repurchase program 2018 stock repurchase program including 7500 million used pursuant accelerated share repurchase program 2018 stock repurchase program replaces previous authorization approved board 2014 stock repurchase program part 2018 stock repurchase program february 2018 company entered accelerated share repurchase program asr two financial institutions repurchase 7500 million companys common stock first quarter 2018 company made upfront payment 7500 million pursuant asr received initial 233 million shares companys common stock based market value companys common stock date transaction third quarter 2018 asr completed additional 60 million shares received financial institutions total repurchase 293 million shares companys common stock volume weighted average repurchase price less agreed upon discount 2562 per share shares received respect asr retired accounted reduction stockholders equity consolidated balance sheets december 31 2018 13 billion authorized funds remaining 2018 stock repurchase program future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys 2018 stock repurchase program may discontinued time juniper networks inc notes consolidated financial statements continued accumulated comprehensive loss net tax components accumulated comprehensive loss net related taxes years ended december 31 2018 2017 2016 follows millions 1 reclassifications accumulated comprehensive loss years ended december 31 2018 2017 2016 realized gains availableforsale debt securities material included expense net consolidated statements operations 2 reclassifications accumulated comprehensive loss years ended december 31 2018 2017 2016 realized gains losses cash flow hedges material included within cost revenues research development sales marketing general administrative consolidated statements operations juniper networks inc notes consolidated financial statements continued note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2015 equity incentive plan “2015 plan” 2006 equity incentive plan “2006 plan” 2008 employee stock purchase plan “espp” plans company granted stock options rsus psas addition connection certain past acquisitions company assumed substituted stock options rsus rsas psas granted stock plans acquired companies awards converted replaced companys stock options rsus rsas psas respectively 2015 plan adopted approved companys stockholders may 2015 initial authorized share reserve 380 million shares common stock plus addition shares subject outstanding awards 2006 plan amended restated 1996 stock plan outstanding may 19 2015 subsequently expire otherwise terminate maximum additional 290 million shares may 2017 companys stockholders approved additional 230 million shares common stock issuance 2015 plan december 31 2018 aggregate 153 million shares subject outstanding equity awards 2015 plan 2006 plan december 31 2018 219 million shares available future issuance 2015 plan shares available future issuance 2006 plan 1996 plan espp adopted approved companys stockholders may 2008 date companys stockholders approved share reserve 350 million shares companys common stock issuance espp permits eligible employees acquire shares company’s common stock 15 discount determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year november 6 2017 company’s compensation committee amended restated espp provide offering period began february 1 2018 would 24 months four 6month purchase periods new 24month offering period commence every six months thereafter purchase price company’s common stock espp 85 lower fair market value shares 1 beginning applicable offering period 2 end 6month purchase period offering period espp continue effect february 25 2028 unless terminated earlier provisions espp december 31 2018 approximately 263 million shares issued 87 million shares remain available future issuance espp 2018 2017 2016 company completed acquisitions htbase cyphort appformix aurrion bti connection acquisitions company assumed substituted aggregate 41 million shares stock options rsus rsas psas additional awards granted stock plans acquired companies december 31 2018 approximately 22 million shares common stock outstanding awards assumed substituted companys acquisitions juniper networks inc notes consolidated financial statements continued rsu rsa psa activities rsus rsas generally vest three years date grant psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes company’s rsu rsa psa activity related information year ended december 31 2018 millions except per share amounts years 1 includes servicebased marketbased rsus granted 2015 plan according terms 2 weightedaverage grantdate fair value rsus rsas psas granted assumed substituted 2018 2017 2016 2533 2753 2466 respectively 3 total fair value rsus rsas psas vested 2018 2017 2016 2005 million 1873 million 1857 million respectively 4 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 07 million shares depending achievement performance goals range shares could issued awards 0 million 10 million shares 5 rsus rsas substituted connection acquisition htbase 6 excludes 19 million shares psas modified 2018 relate primarily psas assumed company connection acquisitions consummated 2016 awards contingent upon achievement certain performance milestones total incremental compensation cost resulting modifications totaled 69 million recognized remaining terms modified awards juniper networks inc notes consolidated financial statements continued shares available grant following table presents stock activity total number shares available grant 2015 plan millions 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2015 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 canceled expired options canceled rsus psas 2006 plan longer available future grant plan however number shares available grant 2015 plan increased amount canceled expired options ii two onetenth shares canceled rsus psas applicable maximum 290 million additional shares common stock pursuant terms 2015 plan employee stock purchase plan companys espp implemented series offering periods six months duration shorter period determined board employees purchased 25 million shares common stock espp 2018 27 million shares 2017 2016 average exercise price 2231 2083 1966 per share respectively valuation assumptions weightedaverage assumptions used resulting estimates fair value espp marketbased rsus follows juniper networks inc notes consolidated financial statements continued sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions years ended december 31 2018 2017 2016 company recognized tax benefits total stockbased compensation expense reflected income tax provision consolidated statements operations 338 million 291 million 533 million respectively years ended december 31 2018 2017 2016 realized tax benefit related awards vested exercised period 389 million 641 million 586 million respectively amounts include indirect effects stockbased awards primarily relate research development tax credit december 31 2018 total unrecognized compensation cost related unvested sharebased awards 2804 million recognized weightedaverage period 14 years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 202 million 211 million 207 million 2018 2017 2016 respectively deferred compensation plan company’s nqdc plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds december 31 2018 liability company plan participants 243 million 36 million included within accrued liabilities 207 million included longterm liabilities consolidated balance sheets company investments 243 million correlating deferred compensation obligations 36 million included within prepaid expenses current assets 207 million included within longterm assets consolidated balance sheets december 31 2017 liability company 276 million 49 million included within accrued liabilities 227 million included longterm liabilities consolidated balance sheets company investments 276 million correlating deferred compensation obligations 49 million included within prepaid expenses current assets 227 million included within longterm assets consolidated balance sheets juniper networks inc notes consolidated financial statements continued nonus pension plans company maintains india gratuity trust israel retirement trust pension plans cover statutory severance obligations event termination india israel employees respectively pension plans primarily invested mutual funds measured fair value using level 1 hierarchy recurring basis company reports pension plans net basis consolidated balance sheets december 31 2018 december 31 2017 fair value pension plans 131 million 113 million respectively december 31 2018 december 31 2017 company recorded net plan liability 25 million 43 million respectively accrued compensation consolidated balance sheets note 13 segments company operates one reportable segment companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis purposes allocating resources evaluating financial performance accompanied disaggregated information net revenues product service customer vertical geographic region presented following table presents net revenues product service millions following table presents net revenues customer vertical millions certain priorperiod amounts reclassified conform currentperiod classifications company attributes revenues geographic region based customer’s shipping address following table presents net revenues geographic region millions juniper networks inc notes consolidated financial statements continued years ended december 31 2018 2017 2016 customer accounted greater 10 companys net revenues following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2018 december 31 2017 attributable us operations note 14 income taxes components pretax income summarized follows millions benefit provision income taxes summarized follows millions juniper networks inc notes consolidated financial statements continued benefit provision income taxes differs amount computed applying federal statutory rate 21 2018 35 2017 2016 respectively pretax income follows millions 2018 company recorded 676 million benefit related lapse federal statute limitations relative tax years 2010 2014 including interest 332 million benefit result filing change accounting method tax recognition deferred product revenue us better align financial statement recognition revenue 322 million benefit resulting tax accounting method change related foreign deferred service revenue tax act introduced significant changes us income tax law effective january 1 2018 tax act reduced us federal corporate income tax rate 35 21 created minimum tax foreign earnings imposed onetime transition tax accumulated foreign earnings december 31 2017 company recorded provisional amounts effects tax act 2895 million primarily related net taxes accumulated foreign earnings remeasurement company’s deferred tax assets revised us statutory rate fourth quarter 2018 company completed analysis determine effect tax act recorded immaterial adjustments december 31 2018 company accounts us tax certain foreign subsidiaries income referred global intangible lowtaxed income “gilti” year earned therefore company provided deferred tax impacts gilti consolidated financial statements year ended december 31 2018 juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys longterm deferred tax assets deferred tax liabilities follows millions based changes provided tax act company remeasured certain deferred tax assets liabilities based rates expected reverse future generally 21 december 31 2018 2017 company valuation allowance us domestic deferred tax assets approximately 2337 million 2145 million respectively balance december 31 2018 consisted approximately 2060 million 202 million 31 million companys california massachusetts canadian deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 44 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 2018 2017 192 million 601 million respectively primarily related change california massachusetts canadian rd tax credits december 31 2018 company federal california net operating loss carryforwards approximately 544 million 1504 million respectively california net operating loss carryforwards 1504 million expected expire unused company also federal california tax credit carryforwards approximately 26 million 2441 million respectively unused net operating loss carryforwards expire various dates beginning year 2019 california tax credit carryforwards carry forward indefinitely december 31 2018 2017 2016 total amount gross unrecognized tax benefits 1781 million 2645 million 2231 million respectively december 31 2018 approximately 1753 million 1781 million gross unrecognized tax benefits recognized would affect effective tax rate juniper networks inc notes consolidated financial statements continued reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2018 2017 2016 company accrued interest penalties related unrecognized tax benefits 338 million 407 million 313 million respectively longterm liabilities consolidated balance sheets due changes level gross unrecognized tax benefit company recognized benefit net interest penalties 52 million expense 85 million 60 million consolidated statements operations years ended december 31 2018 2017 2016 respectively november 30 2018 company received final order india supreme court resolved company’s dispute india tax authorities 2004 2008 income tax years final order court effectively concludes tax investigation respective tax years result company released 54 million previously unrecognized tax benefits including 46 million interest penalties 2018 uk german australian tax authorities concluded examinations 2016 tax year 2010 2013 tax years 2016 2017 tax years respectively material impact company’s financial statements company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease approximately 77 million within next twelve months due lapses applicable statutes limitation completion tax review cycles various tax jurisdictions company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2007 company currently examination irs 2007 2009 tax years india tax authorities 2009 2015 tax years march 2016 irs concluded field audit issued final assessment company appealing assessment examinations india tax authorities ongoing company regularly assesses likelihood adverse outcome resulting examinations december 31 2018 company believes resolution audits unlikely material effect consolidated financial condition results operations company pursuing available administrative remedies relative ongoing matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations juniper networks inc notes consolidated financial statements continued note 15 net income per share company computed basic diluted net income per share follows millions except per share amounts basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable antidilutive shares excluded computation diluted net income per share note 16 commitments contingencies commitments following table summarizes company’s unconditional purchase obligations future minimum payments noncancelable operating lease arrangements next five years thereafter december 31 2018 millions december 2018 company entered master services agreement certain statements work collectively “agreement” international business machines corporation ibm pursuant company outsource significant portions administrative functions following transition period agreement ibm provide company broad range services applications including support development maintenance infrastructure management support including servers storage network devices end user support including service desk agreement initial term 2026 period company pay ibm combination fixed variable fees fluctuating based companys actual need services utilized company expects pay ibm juniper networks inc notes consolidated financial statements continued approximately 3250 million table include fees payable ibm contract company unable make reasonably reliable estimate amount payments related contract due uncertainties usage services unconditional purchase obligations unconditional purchase obligations consist agreements include firm noncancelable terms transfer funds future fixed minimum amounts quantities purchased fixed minimum prices obligations primarily result contracts entered acquisition software development services product development obligations cancellation provisions amounts included preceding table limited noncancelable portion agreement terms minimum cancellation fee may 2018 company entered strategic alliance ericsson ab ericsson companies agreed undertake certain development testing related work bring specific products market alliance initial term 2023 december 31 2018 minimum fixed fees payable ericsson 180 million operating leases company leases facilities certain equipment noncancelable operating leases expire various dates november 2029 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses rent expense 2018 2017 2016 approximately 390 million 393 million 379 million respectively lease arrangement july 2015 company entered lease arrangement march 2026 approximately 63000 square feet space state washington space used among things consolidate certain companys laboratory operations currently located sunnyvale california due certain contractual obligations construction period company deemed owner property period company capitalized construction costs recording buildtosuit lease asset corresponding buildtosuit financing liability upon completion construction 2016 company concluded certain form continuing economic involvement facility precluded saleleaseback accounting treatment result total 609 million costs capitalized placed service depreciated lease term december 31 2018 total payment lease agreement tenyear term approximately 1010 million 597 million included otherlong term liabilities consolidated balance sheets purchase commitments contract manufacturers suppliers order reduce manufacturing lead times interest access adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments purchase commitments totaled 6633 million december 31 2018 company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2018 company accrued 304 million based estimate charges debt interest payment debt december 31 2018 company held total outstanding debt consisting notes carrying value 21390 million see note 10 debt financing discussion companys longterm debt expected future principal maturities juniper networks inc notes consolidated financial statements continued tax liability fourth quarter 2018 company completed analysis determine effect tax act recorded immaterial adjustments december 31 2018 company elected pay transition tax net applicable tax refunds eightyear period provided tax act longterm income taxes payable 2452 million represents remaining balance companys transition tax obligation december 31 2018 company 1592 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products solely combination thirdparty products infringe intellectual property rights thirdparty december 31 2018 2017 company recorded 119 million 204 million respectively indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets company also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs 231 million 230 million december 31 2018 december 31 2017 respectively legal proceedings investigations company previously disclosed subject investigations us securities exchange commission sec us department justice doj possible violations company us foreign corrupt practices act fcpa cooperation investigations company audit committee board directors assistance outside counsel independent advisors conducted thorough internal investigation result internal investigation company made significant improvements internal controls carried number disciplinary actions fourth quarter 2017 doj notified company doj closed investigation related matters without taking action company continuing fully cooperate sec’s ongoing investigation based company’s recent communications staff sec company believes likely staff sec seek bring enforcement action company believes probable could incur loss established estimated legal reserve 120 million related ongoing sec investigation however discussions continuing assurance timing terms final resolution matter litigations investigations addition investigations discussed company involved investigations disputes litigations legal proceedings company records accrual loss contingencies legal proceedings believes unfavorable outcome probable b amount range possible loss reasonably estimable company intends aggressively defend matters assurances outcome matters currently determinable company currently believes none existing claims proceedings likely material adverse effect financial position notwithstanding foregoing many uncertainties associated litigation matters thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses juniper networks inc notes consolidated financial statements continued note 17 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter years ended december 31 2018 december 31 2017 millions except per share amounts 1 net income third fourth quarters 2018 include lower statutory tax rate due tax act tax benefits related items unique 2018 see note 14 income taxes discussion net loss fourth quarter 2017 includes estimated 2895 million tax expense related tax act restructuring charges 362 million 2 net income loss per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 3 potentially dilutive common shares fourth quarter 2017 excluded computation diluted net loss per share effect would antidilutive note 18 subsequent events restructuring january 2019 company initiated restructuring plan 2019 restructuring plan designed realign workforce companys sales strategy improve productivity enhance cost efficiencies 2019 restructuring plan consists workforce reductions facility consolidations closures company estimates implementation 2019 restructuring plan result total charges approximately 180 million 220 million dividend declaration january 29 2019 company announced board declared quarterly cash dividend 019 per share common stock paid march 22 2019 stockholders record close business march 1 2019 item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm stockholders board directors juniper networks inc opinion financial statements audited accompanying consolidated balance sheets juniper networks inc company december 31 2019 2018 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2019 related notes financial statement schedule listed index item 15a2 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 20 2020 expressed unqualified opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate identification distinct performance obligations revenue contracts description matter described note 2 consolidated financial statements company’s contracts customers sometimes contain multiple performance obligations accounted separately distinct cases transaction price allocated distinct performance obligations relative standalone selling price basis revenue recognized control distinct performance obligation transferred example product revenue recognized time hardware shipment delivery software license support revenue recognized time services performed auditing company’s revenue recognition challenging specifically related effort required identify determine distinct performance obligations associated timing revenue recognition example nonstandard terms conditions required judgment determine distinct performance obligations impact timing revenue recognition addressed matter audit obtained understanding evaluated design tested operating effectiveness controls company’s revenue recognition process including controls identify determine distinct performance obligations timing revenue recognition among procedures performed test identification determination distinct performance obligations timing revenue recognition read executed contract purchase order understand contract identified performance obligations determined distinct performance obligations evaluated timing amount revenue recognized sample individual sales transactions evaluated accuracy company’s contract summary documentation specifically related identification determination distinct performance obligations timing revenue recognition accounting acquisitions description matter 2019 company completed acquisition mist systems inc “mist” consideration 3592 million disclosed note 3 consolidated financial statements transaction accounted business combination auditing companys accounting acquisition mist complex due significant estimation uncertainty company’s determination fair value identified intangible assets 102 million principally consisted existing technology 81 million customer relationships 15 million significant estimation uncertainty primarily due sensitivity respective fair values underlying assumptions future performance acquired business limited historical data market data assumptions based company used discounted cash flow model measure existing technology customer relationship intangible assets significant assumptions used estimate value intangible assets included discount rates certain assumptions form basis forecasted results eg revenue growth rates market share technology migration curves significant assumptions forward looking could affected future economic market conditions addressed matter audit obtained understanding evaluated design tested operating effectiveness controls company’s accounting acquisitions included testing controls estimation process supporting recognition measurement technology customer relationships intangible assets including valuation models underlying assumptions used develop estimates test estimated fair value technology customer relationships intangible assets performed audit procedures included among others evaluating companys selection valuation methodology evaluating methods significant assumptions used company evaluating completeness accuracy underlying data supporting significant assumptions estimates example compared significant assumptions current industry market economic trends companys budgets forecasts involved valuation specialists assist evaluation methodology used company significant assumptions included fair value estimates ernst young llp served company’s auditor since 1996 san jose california february 20 2020 report independent registered public accounting firm stockholders board directors juniper networks inc opinion internal control financial reporting audited juniper networks incs internal control financial reporting december 31 2019 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion juniper networks inc company maintained material respects effective internal control financial reporting december 31 2019 based coso criteria indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls mist systems inc included 2019 consolidated financial statements company constituted less 41 total assets net assets respectively december 31 2019 less 1 net revenues net income respectively year ended audit internal control financial reporting company also include evaluation internal control financial reporting mist systems inc also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2019 2018 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2019 related notes financial statement schedule listed index item 15a2 report dated february 20 2020 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california february 20 2020 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2019 based framework set forth committee sponsoring organizations treadway commission internal control integrated framework published 2013 management excluded assessment internal control financial reporting mist systems inc included december 31 2019 consolidated financial statements constituted less 41 total assets net assets respectively december 31 2019 less 1 net revenues net income year ended based assessment management concluded december 31 2019 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2019 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2019 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility improved operating efficiency automation company sells highperformance routing switching security networking products service offerings customers within verticals cloud service provider enterprise view network critical success basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated juniper networks inc notes consolidated financial statements continued note 2 significant accounting policies use estimates preparation financial statements related disclosures accordance us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposits time deposits corporate debt securities readily convertible cash highly liquid investments original maturities three months less junipers purchase date classified cash equivalents investments availableforsale debt securities companys investments debt securities classified availableforsale include companys fixed income securities investments privatelyheld companies consisting debt redeemable preferred stock securities fixed income securities initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive loss consolidated balance sheets realized gains losses determined based specific identification method reported consolidated statements operations fixed income securities primarily consist assetbacked securities certificate deposits commercial paper corporate debt securities time deposits foreign government debt securities us government agency securities us treasury securities company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments value temporary difference recognized impairment loss consolidated statements operations companys privatelyheld debt redeemable preferred stock securities included longterm assets consolidated balance sheets recorded fair value fair value reassessed company made aware information indicating change enterprise value investee including known acquisition offers subsequent funding rounds investees plans liquidation company periodically evaluates securities indicators impairment including inability recover portion entire carrying amount investment inability investee sustain earnings reduction termination financial commitment investee investors intention sell investment whether likely company required sell investment recovery entire amortized cost basis company determines decline investments value temporary difference recognized impairment loss consolidated statements operations investments equity securities companys investments equity securities readily determinable fair values consist money market funds nonqualified compensation plan nqdc invested mutual funds investments public companies investments measured fair value changes fair value recognized consolidated statements operations juniper networks inc notes consolidated financial statements continued equity securities without readily determinable fair values include companys investments privatelyheld companies consisting nonredeemable preferred stock common stock securities company accounts securities cost adjusted changes observable transactions identical similar investments issuer less impairments fair value equity securities reassessed company identifies observable price changes indicating adjustment upward downward carrying value necessary observable changes fair value recognized earnings date observable transaction took place rather current reporting date addition company periodically evaluates equity securities without readily determinable fair values determine impairment charges required evaluating whether event change circumstance occurred may significant adverse effect fair value investment qualitative assessment performed reporting period assess whether impairment indicators including limited significant deterioration investees earnings performance credit rating asset quality business prospects adverse change regulatory economic technological environment change general market condition geographic area industry acquisition offers ability continue going concern indicators present company estimates fair value impaired investments recognizes impairment loss consolidated statement operations equal difference carrying value fair value fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using marketbased approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models derivative instruments company uses derivative instruments primarily foreign currency forward interest rate swap contracts hedge certain foreign currency interest rate exposures company enter derivatives speculative trading purposes company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges carried fair value derivatives gain loss initially reported component accumulated comprehensive loss upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates cash flows hedges classified operating activities company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense net consolidated statements operations period changes fair value remeasurement underlying assets liabilities cash flows derivatives classified operating activities company uses interest rate swaps convert certain fixed interest rate notes floating interest rates based london interbank offered rate libor interest rate swaps expire within ten years less company recognizes change fair value derivative instrument well offsetting change fair value hedged item expense net consolidated statements operations period change derivatives classified consolidated statements cash flows section underlying item juniper networks inc notes consolidated financial statements continued company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party company neither required pledge entitled receive cash collateral related derivative transactions inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost net realizable value addition company purchases holds inventory provide adequate component supplies life underlying products cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis leases company determines arrangement lease inception company evaluates classification leases either operating finance commencement necessary modification december 31 2019 company finance leases operating leases included operating lease rightofuse rou assets accrued liabilities operating lease liabilities companys consolidated balance sheets rou assets represent companys right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease operating lease rou assets liabilities recognized commencement date based present value lease payments lease term leases provide implicit rate use incremental borrowing rate based information available commencement date determining present value lease payments use incremental borrowing rate january 1 2019 operating leases commenced prior date operating lease rou asset also includes lease payments made prior lease commencement excludes lease incentives variable lease payments dependent index rate expensed incurred included within rou asset lease liability calculation variable lease payments primarily include reimbursements costs incurred lessors common area maintenance utilities companys lease terms noncancelable period including rentfree periods provided lessor include options extend terminate lease reasonably certain exercise option lease inception subsequent periods necessary company estimates lease term based assessment extension termination options reasonably certain exercised lease costs recognized straightline basis lease term company separate nonlease components lease components underlying classes assets addition company recognize rou assets lease liabilities shortterm leases lease term twelve months less include option purchase underlying asset company reasonably certain exercise lease cost shortterm leases recognized straightline basis lease term property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets land depreciated constructioninprocess related construction development property equipment yet placed service intended use juniper networks inc notes consolidated financial statements continued business combinations purchase price acquired entity allocated tangible assets liabilities intangible assets including inprocess research development iprd based estimated fair values residual purchase price recorded goodwill determination value intangible assets acquired involves certain estimates expected future cash flows include consideration future growth rates margins attrition rates future changes technology discount rates expected use acquired assets factors also considered determining useful life acquired intangible assets iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project completed iprd reclassed amortizable purchased intangible asset amortized asset’s estimated useful life acquisition related expenses recognized separately business combination expensed incurred companys consolidated financial statements include operating results acquired businesses date acquisition goodwill intangible assets goodwill tested impairment annually fourth quarter frequently certain circumstances indicate carrying value goodwill impaired goodwill tested impairment reporting unit level qualitative assessment first performed determine whether necessary quantitatively test goodwill impairment initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed determining fair value reporting unit using combination discounted cash flow market approaches goodwill considered impaired carrying value reporting unit exceeds fair value impairment loss recognized extent carrying amount goodwill exceeds assets implied fair value conducted annual impairment test goodwill fourth quarters 2019 2018 determined adjustment carrying value goodwill reporting units required intangible assets consist existing technology customer relationships trade name amortized period estimated benefit using straightline method estimated useful lives 4 5 years intangible assets acquired business combination related iprd projects considered indefinitelived completion abandonment associated research development efforts indefinitelived intangibles amortized results operations instead evaluated impairment development complete associated assets would deemed finitelived would amortized cost revenues respective estimated useful lives point time research development project abandoned acquired iprd assets written charged expense period abandonment impairment longlived assets longlived assets property plant equipment rou assets purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period warranty reserve reported within accrued liabilities consolidated balance sheets contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions juniper networks inc notes consolidated financial statements continued loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using rates approximate effect period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive loss company remeasures monetary assets monetary liabilities nonfunctional currencies records resulting foreign exchange transaction gains losses expense net consolidated statements operations revenue recognition revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services following fivestep process 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price 5 recognize revenue company satisfies performance obligation described identify contract customer company generally considers sales contract andor agreement approved purchase order customer contract provided collection considered probable assessed based creditworthiness customer determined credit checks payment histories andor circumstances company combines contracts customer contracts negotiated single commercial substance contain price dependencies identify performance obligations contract product performance obligations include hardware software licenses service performance obligations include hardware maintenance software postcontract support training professional services certain software licenses related postcontract support combined single performance obligation maintenance updates critical continued delivery software functionality determine transaction price transaction price company’s contracts customers consists fixed variable consideration provided probable significant reversal revenue occur uncertainty related variable consideration resolved fixed consideration includes amounts contractually billed customer variable consideration includes estimates rights return rebates price protection based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time company generally invoices customers hardware software licenses related maintenance arrangements time delivery professional services either upfront upon meeting certain milestones customer invoices generally due within 30 90 days issuance company’s contracts customers typically include significant financing components period transfer performance obligations timing payment generally within one year allocate transaction price performance obligations contract contracts contain multiple performance obligations company allocates transaction price performance obligations relative standalone selling price basis standalone selling prices based multiple factors including limited historical discounting trends products services pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles recognize revenue company satisfies performance obligation revenue hardware certain software licenses recognized point time generally upon shipment delivery certain software licenses combined postcontract support recognized time ratable basis term license revenue maintenance software postcontract support recognized time ratable basis contract term revenue training professional services recognized time services completed ratably contractual period generally one year less juniper networks inc notes consolidated financial statements continued deferred product revenue represents unrecognized revenue related undelivered product commitments shipments met revenue recognition criteria deferred service revenue represents billed amounts service contracts include technical support hardware software maintenance professional services training services rendered revenue recognized net taxes collected subsequently remitted governmental authorities deferred commissions sales commissions earned company’s sales force considered incremental recoverable costs obtaining contract customer costs recorded prepaid expenses longer assets deferred amortized period benefit typically term customer contracts amortization expense included sales marketing expenses accompanying consolidated statements operations research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems application development stage capitalized costs include external direct costs incurred developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 146 million 200 million 199 million 2019 2018 2017 respectively sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options restricted stock awards rsas restricted stock units rsus performance share awards psas employee stock purchases related employee stock purchase plan espp service condition awards sharebased compensation expense based fair value underlying awards amortized straightline basis psas sharebased compensation expense amortized straightline basis separate vesting portion awards company accounts forfeitures occur company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value espp purchase rights bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s espp expected life espp purchase rights approximates offering period company determines grant date fair value rsus rsas psas based closing market price company’s common stock date grant adjusted present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte juniper networks inc notes consolidated financial statements continued carlo model affected companys stock price comparative marketbased returns well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax basis assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes company accounts current impacts us tax certain foreign subsidiaries income referred global intangible lowtaxed income year earned concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments derivatives accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits mitigate concentration credit risk investment portfolio diversification investments various industries asset classes limits amount credit exposure single issuer credit rating company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities typically relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable years ended december 31 2019 2018 2017 single customer accounted 10 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers original design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recently adopted accounting standards cloud computing arrangement january 1 2019 company early adopted fasb asu 201815 subtopic 35040 intangibles goodwill otherinternaluse software customers accounting implementation costs incurred cloud computing arrangement service contract provides guidance customers accounting implementation setup upfront costs incurred cloud computing arrangement hosted service contract company adopted standard prospective approach adoption material impact consolidated financial statements juniper networks inc notes consolidated financial statements continued derivatives hedging january 1 2019 company adopted fasb asu 201712 topic 815 derivatives hedging targeted improvements accounting hedging activities amendment thereafter expands entitys ability hedge financial nonfinancial risk components amends companies assess effectiveness well changes presentation disclosure requirements company adopted standard modified retrospective approach amendment presentation disclosure requirements prospective basis adoption material impact consolidated financial statements see note 6 derivative instruments additional disclosures required upon adopting standard amortization purchased callable debt securities january 1 2019 company adopted fasb asu 201708 receivablesnonrefundable fees costs subtopic 31020 premium amortization purchased callable debt securities shortens amortization period premium certain purchased callable debt securities earliest call date standard impact debt securities held discount company adopted standard modified retrospective approach adoption material impact consolidated financial statements leases january 1 2019 company adopted fasb asu 201602 leases topic 842 related subsequent amendments asc 842 require recognition lessees rightofuse rou assets lease liabilities leases companys consolidated balance sheets company adopted new standard modified retrospective approach recorded cumulativeeffect adjustment opening balance accumulated deficit effective date modified retrospective method financial results reported periods prior 2019 unchanged company elected package practical expedients require reassessment existing leases new guidance company also elected separate nonlease components lease components recognize rou assets lease liabilities shortterm leases cumulative effect adjustments made companys consolidated balance sheet adoption date detailed follows millions adoption standard impact companys consolidated statements operations consolidated statements cash flows debtcovenant compliance current agreements see note 16 commitments contingencies additional disclosures required upon adopting standard juniper networks inc notes consolidated financial statements continued recent accounting standards yet adopted simplifying accounting income taxes december 2019 fasb issued asu 201912 topic 740 income taxes simplifying accounting income taxes enhances simplifies various aspects income tax accounting guidance related intraperiod tax allocation exception incremental approach interimperiod accounting enacted change tax law yeartodate loss limitation interim period tax accounting asu applied prospective basis exception certain amendments applied either retrospective modified retrospective basis new standard effective interim annual periods beginning december 15 2020 early adoption permitted company currently evaluating impact adoption consolidated financial statements fair value measurement august 2018 fasb issued asu 201813 topic 820 disclosure framework changes disclosure requirements fair value measurement eliminates adds modifies certain disclosure requirements fair value measurements asc 820 asu applied prospective basis certain modified new disclosure requirements amendments standard applied retrospective basis new standard effective interim annual periods beginning december 15 2019 company expect adoption material impact consolidated financial statements simplifying test goodwill impairment january 2017 fasb issued asu 201704 topic 350 intangiblesgoodwill simplifying test goodwill impairment removes step 2 goodwill impairment test requires hypothetical purchase price allocation amended guidance goodwill impairment charge recognized amount carrying value reporting unit exceeds fair value exceed carrying amount goodwill asu applied prospective basis effective interim annual periods beginning december 15 2019 company expect adoption material impact consolidated financial statements credit losses financial instruments june 2016 fasb issued asu 201613 financial instrumentscredit losses topic 326 measurement credit losses financial instruments clarified fasb issuance additional related asus requires measurement recognition expected credit losses financial assets held amortized cost asu 201613 replaces existing incurred loss impairment model expected loss model requires use forwardlooking information calculate credit loss estimates also eliminates concept otherthantemporary impairment requires credit losses related availableforsale debt securities recorded allowance credit losses rather reduction amortized cost basis securities changes result earlier recognition credit losses company adopt asu 201613 effective january 1 2020 modified retrospective basis cumulative effect adoption recorded adjustment retained earnings upon adoption implement new credit loss models update processes accounting controls company expect adoption new standard significant impact company’s consolidated financial statements juniper networks inc notes consolidated financial statements continued note 3 business combinations company acquired mist systems inc mist 2019 htbase corporation htbase 2018 cyphort inc cyphort 2017 pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material goodwill recognized acquisitions primarily attributable expected synergies deductible us federal income tax purposes 2019 acquisition mist april 1 2019 company acquired 100 ownership mist systems inc “mist” 3592 million purchase consideration consisted cash 3545 million approximately 46 million sharebased awards attributable services prior acquisition mist company provides cloudmanaged wireless networks powered artificial intelligence expected enhance junipers enterprise networking portfolio combining mist’s nextgeneration wireless lan platform junipers wired lan sdwan security solutions deliver integrated endtoend user experiences terms acquisition agreement mist company assumed certain sharebased awards continuing employees granted contemplation future services fair value sharebased awards 385 million expensed sharebased compensation remaining service period 2018 acquisition htbase december 7 2018 company acquired 100 equity htbase 196 million cash acquisition htbase software company developed unique disruptive platform softwaredefined enterprise multicloud expected accelerate junipers leadership multicloud function compute orchestration capabilities contrail enterprise multicloud prior acquisition company outstanding promissory note bridge notes totaling 16 million measured fair value effectively settled upon acquisition terms acquisition agreement htbase company granted certain sharebased awards continuing employees substitution awards held employees granted contemplation future services fair value sharebased awards 38 million expensed sharebased compensation remaining service period 2017 acquisition cyphort september 18 2017 company acquired 100 cyphort 335 million cash acquisition cyphort software company providing security analytics advanced threat defense expected strengthen junipers security product portfolio terms acquisition agreement cyphort company assumed certain sharebased awards continuing employees granted contemplation future services fair value sharebased awards 38 million expensed sharebased compensation remaining service period acquisition costs company recognized 166 million 44 million 21 million acquisitionrelated costs years ended december 31 2019 december 31 2018 december 31 2017 respectively acquisitionrelated costs expensed period incurred within general administrative expense companys consolidated statements operations following table summarizes fair values assets acquired liabilities assumed acquisition dates millions juniper networks inc notes consolidated financial statements continued following table summarizes fair value separately identifiable intangible assets time acquisition period intangible asset amortized millions except years juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale debt securities following table summarizes companys unrealized gains losses fair value investments designated availableforsale debt securities december 31 2019 december 31 2018 millions following table presents contractual maturities companys total fixed income securities december 31 2019 millions juniper networks inc notes consolidated financial statements continued following tables present companys total fixed income securities unrealized loss position december 31 2019 december 31 2018 millions availableforsale debt securities unrealized losses company assesses impairment evaluating various factors including whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2019 company 179 investments unrealized loss positions gross unrealized losses related investments primarily due changes market interest rates company intend sell investments believe likely required sell investments recovery entire amortized cost basis therefore company determined otherthantemporary impairments associated credit losses required recognized years ended december 31 2019 2018 2017 years ended december 31 2019 2018 2017 material gross realized gains losses availableforsale debt securities juniper networks inc notes consolidated financial statements continued investments equity securities following table presents companys investments equity securities december 31 2019 2018 millions october 2019 company invested 899 million 137 equity ownership privatelyheld company investment accounted measurement alternative approach cost investment classified longterm assets consolidated balance sheets years ended december 31 2019 2018 2017 material unrealized gains losses recognized equity investments restricted cash investments company restricted cash investments amounts held escrow accounts required connection certain acquisitions completed primarily 2015 2019 ii amounts held companys shortterm disability plan california iii amounts nqdc plan seniorlevel employees restricted investments designated equity investments december 31 2019 carrying value restricted cash investments 916 million 646 million included prepaid expenses current assets 270 million included longterm assets consolidated balance sheets following table provides reconciliation cash equivalents restricted cash included consolidated balance sheets december 31 2019 december 31 2018 millions juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following table provides summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale debt securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level 2 level 3 beginning quarter change circumstances resulted transfer years ended december 31 2019 2018 company transfers levels fair value hierarchy assets liabilities measured fair value companys privatelyheld debt redeemable preferred stock securities classified level 3 assets due lack observable inputs determine fair value company estimates fair value privatelyheld debt redeemable preferred stock securities recurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure year ended december 31 2019 material activities related privatelyheld debt redeemable preferred stock assets liabilities measured fair value nonrecurring basis companys investments equity securities without readily determinable fair value classified level 3 assets due lack observable inputs determine fair value company estimates fair value nonrecurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure december 31 2019 upward material downward adjustments price changes equity securities without readily determinable fair value certain companys assets including intangible assets goodwill measured fair value nonrecurring basis deemed otherthan temporarily impaired impairment charges recognized years ended december 31 2019 2018 2017 december 31 2019 2018 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable accounts payable accrued liabilities approximate fair value due short maturities december 31 2019 december 31 2018 estimated fair value companys total outstanding debt consolidated balance sheets 18521 million 21587 million respectively based observable market inputs level 2 carrying value promissory note issued company connection previously completed sale junos pulse note along accumulated interest paid kind 789 million 690 million approximates fair value december 31 2019 december 31 2018 respectively notes receivable generally classified level 3 asset due lack observable inputs determine fair value carrying value contract manufacturer deposit 460 million reported within longterm assets consolidated balance sheets approximates fair value december 31 2019 see note 8 financial information pulse note contract manufacturer deposit juniper networks inc notes consolidated financial statements continued note 6 derivative instruments notional amount companys derivative instruments summarized follows millions fair value derivative instruments consolidated balance sheets follows designated derivatives company uses foreign currency forward contracts hedge companys planned cost revenues operating expenses denominated foreign currencies derivatives designated cash flow hedges cash flow hedge derivatives typically maturities twentyfour months less december 31 2019 estimated 44 million unrealized net loss within accumulated comprehensive loss expected reclassified earnings within next twelve months 2019 company entered interest rate swaps aggregate notional amount 3000 million designated fair value hedges fixedrate 2041 notes swaps convert fixed interest rates notes floating interest rates based london interbank offered rate libor interest rate swaps expire within ten years less effect derivative instruments consolidated statements operations foreign currency forward contracts company recognized unrealized losses 63 million 87 million unrealized gain 202 million accumulated comprehensive loss effective portion derivative instruments years ended december 31 2019 2018 2017 respectively company reclassified loss 38 million gains 09 million 76 million accumulated comprehensive loss cost revenues operating expenses consolidated statement operations years ended december 31 2019 2018 2017 respectively juniper networks inc notes consolidated financial statements continued nondesignated derivatives company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one four months outstanding nondesignated derivative instruments carried fair value changes fair value derivatives recorded expense net within consolidated statements operations 36 million 76 million 18 million years ended december 31 2019 2018 2017 respectively see note 2 significant accounting policies company’s policy regarding offsetting derivative assets derivative liabilities juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill companys goodwill activity follows millions primarily consists certain purchase accounting adjustments related acquisition cyphort fourth quarter 2019 company performed annual goodwill impairment test three reporting units routing switching security goodwill impairment years ended december 31 2019 2018 2017 purchased intangible assets company’s purchased intangible assets net follows millions amortization expense related purchased intangible assets finite lives 347 million 174 million 175 million years ended december 31 2019 2018 2017 respectively impairment charges related purchased intangible assets years ended december 31 2019 2018 2017 juniper networks inc notes consolidated financial statements continued december 31 2019 estimated future amortization expense purchased intangible assets finite lives follows millions juniper networks inc notes consolidated financial statements continued note 8 financial information inventory total inventory consisted following millions property equipment net property equipment net consisted following millions depreciation expense 1840 million 1932 million 2028 million 2019 2018 2017 respectively notes receivable deposit total outstanding notes receivable deposit net issuance costs reported within longterm assets consolidated balance sheets follows millions connection sale junos pulse product portfolio 2014 company issued noncontingent interestbearing promissory note 1250 million 2017 company received payment 750 million outstanding interest due maturity date pulse note extended september 30 2022 terms amended agreement amended agreement also provided interest due note paid kind increasing principal amount interest rate pulse note outstanding balance pulse note classified longterm asset based expected collection beyond twelve months consolidated balance sheet date juniper networks inc notes consolidated financial statements continued 2018 company paid deposit 250 million contract manufacturer exchange improved pricing savings inventory carrying charges deposit recorded face value 250 million less unamortized discount 11 million calculated based imputed interest rate 48 amortized term deposit interest income along corresponding amount cost revenues 2019 company paid additional noninterest bearing deposit 236 million total balance 486 million less unamortized discount 26 million calculated based imputed interest rate 50 december 31 2019 deposit due demand first quarter 2021 classified longterm assets consolidated balance sheets interest income notes receivable accrued credited interest income earned unless probable company collect amounts due present value expected cash flows less recorded investment interest income recognized 104 million 84 million 83 million years ended december 31 2019 2018 2017 respectively company considers notes receivable impaired based current information events probable company able collect scheduled payments principal interest due impairment charge required december 31 2019 2018 2017 warranties changes company’s warranty reserve follows millions deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions juniper networks inc notes consolidated financial statements continued revenue see note 13 segments disaggregated revenue product service customer vertical geographic region product revenue 686 million included deferred revenue january 1 2019 recognized year ended december 31 2019 service revenue 7068 million included deferred revenue january 1 2019 recognized year ended december 31 2019 following table summarizes transaction price contracts yet recognized revenue december 31 2019 company expects recognize amounts revenue millions represents unearned service revenue allocated performance obligations delivered partially delivered december 31 2019 unearned service revenue comprised deferred revenue unbilled revenue deferred commissions deferred commissions 241 million 337 million december 31 2019 2018 respectively years ended december 31 2019 2018 amortization expense deferred commissions 1309 million 1442 million respectively impairment charges recognized expense net expense net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments promissory note issued company connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements loss extinguishment debt resulted early repayment senior notes due 2020 2021 loss gain investments net primarily includes loss gains sale investments public privatelyheld companies observable changes fair value impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items juniper networks inc notes consolidated financial statements continued note 9 restructuring charges following table presents restructuring charges included consolidated statements operations millions 2019 restructuring plan 2019 company initiated restructuring plan 2019 restructuring plan designed realign workforce companys sales strategy improve productivity enhance cost efficiencies resulted severance facility consolidation contract termination costs recorded restructuring charges consolidated statement operations 2019 restructuring plan substantially completed december 31 2019 prior restructuring activities 2018 company initiated restructuring plan 2018 restructuring plan realign workforce result organizational leadership changes 2018 restructuring plan consisted severance contract termination costs recorded restructuring charges consolidated statement operations 2017 company initiated restructuring plan “2017 restructuring plan” realign workforce increase operational efficiencies 2017 restructuring plan consisted severance contract termination costs recorded restructuring charges consolidated statement operations restructuring liabilities restructuring liabilities reported within accrued liabilities consolidated balance sheets following table provides summary changes restructuring liabilities associated 2019 restructuring plan prior year plans millions juniper networks inc notes consolidated financial statements continued note 10 debt financing debt following table summarizes companys total debt millions except percentages 1 2024 notes issued march 2014 february 2016 form single series fully fungible 2 represents fair value adjustments interest rate swap contracts aggregate notional amount 3000 million designated fair value hedges fixedrate 2041 notes see note 6 derivative instruments discussion companys interest rate swaps notes company’s senior unsecured unsubordinated obligations ranking equally right payment company’s existing future senior unsecured unsubordinated indebtedness senior right payment company’s future indebtedness expressly subordinated notes december 31 2019 companys aggregate debt maturities based outstanding principal follows millions august 2019 company issued 5000 million aggregate principal amount 375 senior notes due 2029 net proceeds issuance 2029 notes together cash hand used repayment 6000 million aggregate principal amount companys 330 senior notes due 2020 460 senior notes due 2021 repayments made august september 2019 repayments resulted loss extinguishment debt 153 million recorded expense net within consolidated statements operations company may redeem 2025 notes 2029 notes either whole part time three months prior maturity date 2025 notes three months prior maturity date 2029 notes respectively redemption price equal greater 100 aggregate principal amount 2025 notes 2029 notes redeemed ii sum present values remaining scheduled payments discounted treasury rate plus 375 basis points 2025 notes treasury rate plus 350 basis points 2029 notes plus case clauses ii accrued unpaid interest time march 15 2025 case 2025 notes time march 15 2029 case 2029 notes company may redeem notes series whole part redemption price equal 100 principal amount 2025 notes 2029 notes redeemed plus accrued unpaid interest company may redeem notes either whole part time redemption price juniper networks inc notes consolidated financial statements continued equal greater 100 aggregate principal amount notes redeemed ii sum present values remaining scheduled payments discounted redemption date plus either case accrued unpaid interest event change control repurchase event holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principal amount plus accrued unpaid interest notes payable cash semiannually effective interest rates notes include interest notes accretion discount amortization issuance costs indentures govern notes also contain various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2019 company compliance covenants indentures governing notes revolving credit facility april 2019 company entered new credit agreement credit agreement certain institutional lenders provides fiveyear 5000 million unsecured revolving credit facility revolving credit facility option increase revolving credit facility additional 2000 million subject lenders approval proceeds loans made revolving credit facility may used company working capital general corporate purposes revolving credit facility terminate april 2024 subject two oneyear maturity extension options terms conditions set forth credit agreement december 31 2019 amounts outstanding revolving credit facility borrowings revolving credit facility bear interest either floating rate per annum equal base rate plus margin 000 0375 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 0910 1375 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 0500 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period revolving credit facility requires company maintain leverage ratio greater 30x provided material acquisition consummated company permitted maintain leverage ratio greater 35x four quarters interest coverage ratio less 30x term credit facility december 31 2019 company borrowed funds credit agreement compliance covenants credit agreement financing arrangements company provides certain customers access extended financing arrangements allow longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing providers due company within 1 90 days sale receivable transactions financing providers company surrenders control transferred assets pursuant financing arrangements sale receivables company sold receivables 640 million 1228 million 1694 million years ended december 31 2019 2018 2017 respectively company received cash proceeds financing providers 697 million 1232 million 1693 million years ended december 31 2019 2018 2017 respectively december 31 2019 december 31 2018 amounts owed financing providers 53 million 172 million respectively recorded accounts receivable company’s consolidated balance sheets juniper networks inc notes consolidated financial statements continued note 11 equity following table summarizes dividends paid stock repurchases retirements companys stock repurchase programs stock repurchases tax withholdings millions except per share amounts 1 2536 average price per share 2019 excludes 400 million covered forward contract discussed 2 2019 2018 shares repurchased 2018 stock repurchase program 2017 shares repurchased 2014 stock repurchase program cash dividends shares common stock 2019 company declared four quarterly cash dividends 019 per share common stock january 29 2019 april 25 2019 july 25 2019 october 24 2019 respectively paid march 22 2019 june 24 2019 september 25 2019 december 23 2019 respectively stockholders record close business march 1 2019 june 3 2019 september 4 2019 december 2 2019 respectively future dividends establishment record payment dates subject approval board directors board juniper authorized committee thereof see note 18 subsequent events discussion companys dividend declaration subsequent december 31 2019 stock repurchase activities january 2018 board approved 20 billion share repurchase program 2018 stock repurchase program october 2019 board authorized 10 billion increase 2018 stock repurchase program total 30 billion 2018 stock repurchase program replaces previous authorization approved board 2014 stock repurchase program part 2018 stock repurchase program february 2018 april 2019 company entered two accelerated share repurchase programs asr repurchased 7500 million 3000 million companys common stock respectively aggregate number shares ultimately repurchased 293 million 116 million shares companys common stock determined based volume weighted average repurchase price less agreed upon discount 2562 2579 per share respectively shares received company retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share part 2018 stock repurchase program october 2019 company entered asr financial institution repurchase aggregate 2000 million companys outstanding common stock company made upfront payment 2000 million pursuant asr received retired initial 64 million shares companys common stock aggregate price 1600 million based market price 2515 per share company’s common stock date transaction initial shares received company retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share forward contract remaining 400 million considered indexed companys common stock met applicable criteria equity classification see note 18 subsequent events discussion companys asr completion subsequent december 31 2019 fiscal year ended december 31 2019 company also repurchased 21 million shares common stock open market aggregate purchase price 500 million average price 2363 per share 2018 stock repurchase program december 31 2019 17 billion authorized funds remaining 2018 stock repurchase program see note 18 subsequent events discussion companys stock repurchase activity subsequent december 31 2019 juniper networks inc notes consolidated financial statements continued future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys 2018 stock repurchase program may discontinued time accumulated comprehensive loss net tax components accumulated comprehensive loss net related taxes years ended december 31 2019 2018 2017 follows millions 1 reclassifications accumulated comprehensive loss years ended december 31 2019 2018 2017 realized gains availableforsale debt securities material included expense net consolidated statements operations 2 reclassifications accumulated comprehensive loss years ended december 31 2019 2018 2017 realized gains losses cash flow hedges material included within cost revenues research development sales marketing general administrative consolidated statements operations juniper networks inc notes consolidated financial statements continued note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2015 equity incentive plan “2015 plan” 2006 equity incentive plan “2006 plan” 2008 employee stock purchase plan “espp” plans company granted stock options rsus psas addition connection certain past acquisitions company assumed substituted stock options rsus rsas psas granted stock plans acquired companies awards converted replaced companys stock options rsus rsas psas respectively 2015 plan adopted approved companys stockholders may 2015 initial authorized share reserve 380 million shares common stock plus addition shares subject outstanding awards 2006 plan amended restated 1996 stock plan outstanding may 19 2015 subsequently expire otherwise terminate maximum additional 290 million shares may 2017 companys stockholders approved additional 230 million shares common stock issuance 2015 plan may 2019 companys stockholders approved additional 37 million shares common stock issuance 2015 plan december 31 2019 aggregate 137 million shares subject outstanding equity awards 2015 plan 2006 plan december 31 2019 166 million shares available future issuance 2015 plan shares available future issuance 2006 plan 1996 plan espp adopted approved companys stockholders may 2008 date companys stockholders approved share reserve 350 million shares companys common stock issuance espp permits eligible employees acquire shares company’s common stock 15 discount determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year espp provides 24 month offering periods four 6month purchase periods new 24month offering period commence every six months thereafter purchase price company’s common stock espp 85 lower fair market value shares 1 beginning applicable offering period 2 end 6month purchase period offering period espp continue effect february 25 2028 unless terminated earlier provisions espp december 31 2019 approximately 287 million shares issued 63 million shares remain available future issuance espp 2019 2018 2017 company completed acquisitions mist htbase cyphort connection acquisitions company assumed substituted aggregate 22 million shares stock options rsus rsas psas additional awards granted stock plans acquired companies december 31 2019 approximately 38 million shares common stock outstanding awards assumed substituted companys acquisitions juniper networks inc notes consolidated financial statements continued rsu rsa psa activities rsus rsas generally vest three years date grant psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes company’s rsu rsa psa activity related information year ended december 31 2019 millions except per share amounts years 1 weightedaverage grantdate fair value rsus rsas psas granted assumed substituted 2019 2018 2017 2526 2533 2753 respectively grant date fair value rsus psas reduced present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested 2019 company declared quarterly cash dividend 019 per share common stock january 29 2019 april 25 2019 july 25 2019 october 24 2019 2 includes performancebased marketbased rsus granted 2015 plan according terms number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject performancebased conditions would issued performance goals determined compensation committee achieved target 07 million shares depending achievement performance goals range shares could issued awards zero 10 million shares aggregate number shares subject marketbased conditions would issued market criteria achieved target 02 million shares depending achievement market criteria range shares could issued awards zero 04 million shares 3 total fair value rsus rsas psas vested 2019 2018 2017 1700 million 2005 million 1873 million respectively 4 09 million shares psas modified 2019 relate psas granted 2018 psas assumed company connection acquisitions consummated 2016 compensation cost resulting modifications totaled 212 million recognized remaining terms modified awards juniper networks inc notes consolidated financial statements continued shares available grant following table presents stock activity total number shares available grant 2015 plan millions 1 may 2019 2015 plan amended amendment removed fungible share adjustment used determine shares available issuance original terms 2015 plan rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant counted shares authorized plan two onetenth shares common stock share subject award pursuant amendment beginning may 14 2019 share award granted 2015 plan reduces share reserve one share awards granted may 14 2019 thereafter later forfeited canceled terminated returned share reserve manner number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 canceled expired options canceled rsus psas 2006 plan longer available future grant plan however number shares available grant 2015 plan increased amount canceled expired options rsus psas applicable maximum 290 million additional shares common stock pursuant terms 2015 plan employee stock purchase plan 2019 2018 2017 employees purchased 24 million 25 million 27 million shares common stock espp average exercise price 2204 2231 2083 per share respectively valuation assumptions weightedaverage assumptions used resulting estimates fair value espp marketbased rsus follows juniper networks inc notes consolidated financial statements continued sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions years ended december 31 2019 2018 2017 company recognized tax benefits total stockbased compensation expense reflected income tax provision consolidated statements operations 296 million 338 million 291 million respectively years ended december 31 2019 2018 2017 realized tax benefit related awards vested exercised period 306 million 389 million 641 million respectively amounts include indirect effects stockbased awards primarily relate research development tax credit juniper networks inc notes consolidated financial statements continued december 31 2019 total unrecognized compensation cost related unvested sharebased awards 2807 million recognized weightedaverage period 16 years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 202 million 202 million 211 million 2019 2018 2017 respectively deferred compensation plan company’s nqdc plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds december 31 2019 liability company plan participants 268 million 41 million included within accrued liabilities 227 million included longterm liabilities consolidated balance sheets company investments 268 million correlating deferred compensation obligations 41 million included within prepaid expenses current assets 227 million included within longterm assets consolidated balance sheets december 31 2018 liability company 243 million 36 million included within accrued liabilities 207 million included longterm liabilities consolidated balance sheets company investments 243 million correlating deferred compensation obligations 36 million included within prepaid expenses current assets 207 million included within longterm assets consolidated balance sheets juniper networks inc notes consolidated financial statements continued note 13 segments company operates one reportable segment companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis purposes allocating resources evaluating financial performance accompanied disaggregated information net revenues product service customer vertical geographic region presented following table presents net revenues product service millions following table presents net revenues customer vertical millions company attributes revenues geographic region based customer’s shipping address following table presents net revenues geographic region millions years ended december 31 2019 2018 2017 customer accounted greater 10 companys net revenues juniper networks inc notes consolidated financial statements continued following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2019 december 31 2018 attributable us operations juniper networks inc notes consolidated financial statements continued note 14 income taxes components pretax income summarized follows millions provision benefit income taxes summarized follows millions provision benefit income taxes differs amount computed applying federal statutory rate 21 2019 21 2018 35 2017 respectively pretax income follows millions 2019 company recorded 254 million benefit including interest related recognition previously unrecognized tax benefits pursuant resolution tax audit 75 million benefit including interest lapse statute limitations 2018 company recorded 676 million benefit including interest related lapse statute limitations relative tax years 2010 2014 332 million benefit result filing change accounting method tax recognition juniper networks inc notes consolidated financial statements continued deferred product revenue 332 million benefit resulting tax accounting method change related foreign deferred service revenue tax cuts jobs act tax act enacted december 22 2017 tax act introduced significant changes us income tax law effective january 1 2018 tax act reduced us federal corporate income tax rate 35 21 created minimum tax foreign earnings imposed onetime transition tax accumulated foreign earnings december 31 2017 company recorded provisional amounts effects tax act 2895 million primarily related net taxes accumulated foreign earnings remeasurement company’s deferred tax assets revised us statutory rate fourth quarter 2018 company completed analysis determine effect tax act recorded immaterial adjustments december 31 2018 deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys longterm deferred tax assets deferred tax liabilities follows millions december 31 2019 2018 company valuation allowance us domestic deferred tax assets approximately 2494 million 2337 million respectively balance december 31 2019 consisted approximately 2216 million 202 million 31 million companys california massachusetts canadian deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 45 million related losses capital nature may carry forward offset future capital gains valuation allowance increased 2019 2018 157 million 192 million respectively primarily related change california massachusetts canadian rd tax credits december 31 2019 company federal california net operating loss carryforwards approximately 1012 million 1340 million respectively california net operating loss carryforwards 1340 million expected expire unused company also federal california tax credit carryforwards approximately 47 million 2625 million respectively unused net operating loss carryforwards expire various dates beginning year 2020 california tax credit carryforwards carry forward indefinitely company provides deferred tax liabilities tax consequences associated undistributed earnings expected repatriated subsidiaries parent unless subsidiaries earnings considered indefinitely reinvested company juniper networks inc notes consolidated financial statements continued made provision deferred taxes approximately 358 million cumulative undistributed earnings certain foreign subsidiaries december 31 2019 earnings considered indefinitely invested operations subsidiaries company intends utilize amounts fund future expansion operations earnings distributed parent company would subject additional taxes approximately 71 million december 31 2019 2018 2017 total amount gross unrecognized tax benefits 1513 million 1781 million 2645 million respectively december 31 2019 approximately 1509 million 1513 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2019 2018 2017 company accrued interest penalties related unrecognized tax benefits 299 million 338 million 407 million respectively longterm liabilities consolidated balance sheets due changes level gross unrecognized tax benefits company recognized benefit net interest penalties 28 million 52 million expense 85 million consolidated statements operations years ended december 31 2019 2018 2017 respectively company recognizes interest penalties related unrecognized tax benefits component income tax expense december 2019 internal revenue service company concluded appeals process 2007 2009 tax years result company released 309 million previously unrecognized tax benefits including 84 million interest penalties company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease range approximately 96 million 246 million within next twelve months due completion tax review cycles various tax jurisdictions lapses applicable statutes limitation company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2009 company currently examination india tax authorities 2009 2015 tax years examinations india tax authorities ongoing company regularly assesses likelihood adverse outcome resulting examinations december 31 2019 company believes resolution audits unlikely material effect consolidated financial condition results operations company pursuing available administrative remedies relative ongoing matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations juniper networks inc notes consolidated financial statements continued note 15 net income per share company computed basic diluted net income per share follows millions except per share amounts basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable antidilutive shares excluded computation diluted net income per share juniper networks inc notes consolidated financial statements continued note 16 commitments contingencies commitments unconditional purchase obligations unconditional purchase obligations consist agreements include firm noncancelable terms transfer funds future fixed minimum amounts quantities purchased fixed minimum prices obligations primarily result contracts entered acquisition software development services product development obligations cancellation provisions amounts included preceding table limited noncancelable portion agreement terms minimum cancellation fee following table summarizes company’s unconditional purchase obligations next five years thereafter december 31 2019 millions december 2018 company entered master services agreement certain statements work collectively “agreement” international business machines corporation ibm pursuant company outsource significant portions administrative functions following transition period agreement ibm provide company broad range services applications including support development maintenance infrastructure management support including servers storage network devices end user support including service desk agreement initial term 2026 period company pay ibm combination fixed variable fees fluctuating based companys actual need services utilized december 31 2019 company expects pay ibm approximately 3000 million table include fees payable ibm contract company unable make reasonably reliable estimate amount payments related contract due uncertainties usage services december 2019 company entered 15year energy services agreement supplier purchase energy environmental attributes generated thirdparty fuel cell systems installed operated maintained supplier companys premises company pay supplier service fees fluctuate based actual amount electricity delivered company given operational year december 31 2019 company expects pay supplier approximately 290 million 15year period table include fees payable supplier due uncertainties associated system outputs leases company leases facilities certain equipment noncancelable operating leases remaining lease terms 1 10 years 1 4 years respectively leased facility subject individual lease sublease could provide various options extend terminate lease agreement facilities primarily comprised corporate offices data centers rd facilities equipment includes vehicles various office equipment company also variable lease payments primarily comprised common area maintenance utility charges companys lease agreements contain residual value guarantees restrictive covenants components lease costs information related leases follows millions except years percentages juniper networks inc notes consolidated financial statements continued december 31 2019 future operating lease payments next five years thereafter follows millions december 31 2018 prior adoption asc 842 future minimum payments noncancelable operating lease arrangements next five years thereafter follows millions represents buildtosuit lease arrangement entered july 2015 rent expense 2018 2017 approximately 390 million 393 million respectively rent expense prior years recognized accordance asc 840 leases using straightline method term lease juniper networks inc notes consolidated financial statements continued purchase commitments contract manufacturers suppliers order reduce manufacturing lead times interest access adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments following table summarizes company’s purchase commitments next five years thereafter december 31 2019 millions company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2019 company accrued 286 million based estimate charges debt interest payment debt december 31 2019 company held total outstanding debt consisting notes carrying value 16839 million see note 10 debt financing discussion companys longterm debt expected future principal maturities tax liability fourth quarter 2018 company completed analysis determine effect tax act recorded immaterial adjustments december 31 2018 company elected pay transition tax net applicable tax refunds eightyear period provided tax act longterm income taxes payable 2452 million represents remaining balance companys transition tax obligation december 31 2019 company 1274 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products solely combination thirdparty products infringe intellectual property rights thirdparty december 31 2019 2018 company recorded 90 million 119 million respectively indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets company also financial guarantees consisting guarantees product service performance standby letters credit certain lease facilities insurance programs 306 million 231 million december 31 2019 december 31 2018 respectively legal proceedings company involved investigations disputes litigations legal proceedings company records accrual loss contingencies legal proceedings believes unfavorable outcome probable b amount range possible loss reasonably estimable company intends aggressively defend matters assurances outcome matters currently determinable company currently believes none existing claims proceedings likely material adverse effect financial position notwithstanding juniper networks inc notes consolidated financial statements continued foregoing many uncertainties associated litigation matters thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses juniper networks inc notes consolidated financial statements continued note 17 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter years ended december 31 2019 december 31 2018 millions except per share amounts 1 net income third fourth quarters 2018 include lower statutory tax rate due tax act tax benefits related items unique 2018 see note 14 income taxes discussion 2 net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period note 18 subsequent events dividend declaration january 27 2020 company announced board declared quarterly cash dividend 020 per share common stock paid march 23 2020 stockholders record close business march 2 2020 stock repurchase activities first quarter 2020 asr completed company received additional 18 million shares financial institution 18 million shares retired first quarter 2020 completion asr resulted total settlement 82 million shares companys common stock volume weighted average repurchase price less agreed upon discount 2444 per share subsequent december 31 2019 date filing report filing date company also repurchased 76 million shares common stock open market aggregate purchase price 1798 million average price 2368 per share 2018 stock repurchase program repurchases approximately 67 million shares settled prior filing report remaining shares settled filing date company aggregate 15 billion authorized funds remaining stock repurchase program filing date item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm stockholders board directors juniper networks inc opinion financial statements audited accompanying consolidated balance sheets juniper networks inc company december 31 2020 2019 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2020 related notes financial statement schedule listed index item 15a2 collectively referred “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 12 2021 expressed unqualified opinion thereon basis opinion financial statements responsibility company’s management responsibility express opinion company’s financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation financial statements believe audits provide reasonable basis opinion critical audit matters critical audit matters communicated matters arising current period audit financial statements communicated required communicated audit committee 1 relate accounts disclosures material financial statements 2 involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate identification distinct performance obligations revenue contracts description matteras described note 1 consolidated financial statements company’s contracts customers sometimes contain multiple performance obligations accounted separately distinct cases transaction price allocated distinct performance obligations relative standalone selling price basis revenue recognized control distinct performance obligation transferred example product revenue recognized time hardware shipment delivery software license support revenue recognized time services performed auditing company’s revenue recognition challenging specifically related effort required identify determine distinct performance obligations associated timing revenue recognition example nonstandard terms conditions required judgment determine distinct performance obligations impact timing revenue recognition addressed matter auditwe obtained understanding evaluated design tested operating effectiveness controls company’s revenue recognition process including controls identify determine distinct performance obligations timing revenue recognition among procedures performed test identification determination distinct performance obligations timing revenue recognition read executed contract purchase order understand contract identified performance obligations determined distinct performance obligations evaluated timing amount revenue recognized sample individual sales transactions evaluated accuracy company’s contract summary documentation specifically related identification determination distinct performance obligations timing revenue recognition accounting acquisition 128 technology inc description matterduring 2020 company completed acquisition 128 technology inc consideration 4482 million disclosed note 2 consolidated financial statements transaction accounted business combination auditing companys accounting acquisition 128 technology inc complex due significant estimation uncertainty company’s determination fair value identified intangible assets 116 million principally consisted developed technology 88 million customer relationships 27 million significant estimation uncertainty primarily due sensitivity respective fair values underlying assumptions future performance acquired business limited historical data market data assumptions based company used discounted cash flow model measure developed technology customer relationship intangible assets significant assumptions used estimate value intangible assets included discount rates certain assumptions form basis forecasted results eg revenue growth rates market share technology migration curves significant assumptions forward looking could affected future economic market conditions addressed matter auditwe obtained understanding evaluated design tested operating effectiveness controls company’s accounting acquisitions included testing controls estimation process supporting recognition measurement technology customer relationships intangible assets including valuation models underlying assumptions used develop estimates test estimated fair value technology customer relationships intangible assets performed audit procedures included among others evaluating companys selection valuation methodology evaluating methods significant assumptions used company evaluating completeness accuracy underlying data supporting significant assumptions estimates example compared significant assumptions current industry market economic trends companys budgets forecasts involved valuation specialists assist evaluation methodology used company significant assumptions included fair value estimates ernst young llp served company’s auditor since 1996 san jose california february 12 2021 report independent registered public accounting firm stockholders board directors juniper networks inc opinion internal control financial reporting audited juniper networks incs internal control financial reporting december 31 2020 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria opinion juniper networks inc company maintained material respects effective internal control financial reporting december 31 2020 based coso criteria indicated accompanying management’s report internal control financial reporting management’s assessment conclusion effectiveness internal control financial reporting include internal controls 128 technology inc netrounds ab included 2020 consolidated financial statements company constituted less 50 total assets net assets respectively december 31 2020 less 10 net revenues less 20 net income year ended audit internal control financial reporting company also include evaluation internal control financial reporting 128 technology inc netrounds ab also audited accordance standards public company accounting oversight board united states pcaob consolidated balance sheets company december 31 2020 2019 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2020 related notes financial statement schedule listed index item 15a2 report dated february 12 2021 expressed unqualified opinion thereon basis opinion company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audit accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion definition limitations internal control financial reporting companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate ernst young llp san jose california february 12 2021 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2020 based framework set forth committee sponsoring organizations treadway commission internal control integrated framework published 2013 management excluded assessment internal control financial reporting 128 technology inc netrounds ab included december 31 2020 consolidated financial statements constituted less 50 total assets net assets respectively december 31 2020 less 10 net revenues less 20 net income year ended based assessment management concluded december 31 2020 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2020 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2020 juniper networks inc consolidated statements operations millions except per share amounts amount year ended december 31 2019 reclassified conform current period presentation see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation significant accounting policies description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility improved operating efficiency automation company sells highperformance network products services solutions across routing switching security technologies customers within verticals cloud service provider enterprise view network critical success basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated use estimates preparation financial statements related disclosures accordance us generally accepted accounting principles gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources actual results could differ estimates cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposits time deposits corporate debt securities readily convertible cash highly liquid investments original maturities three months less junipers purchase date classified cash equivalents investments availableforsale debt securities companys investments debt securities classified availableforsale include companys fixed income securities investments privatelyheld companies consisting debt redeemable preferred stock securities fixed income securities initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive loss consolidated balance sheets realized gains losses determined based specific identification method reported consolidated statements operations fixed income securities primarily consist corporate debt securities us treasury securities time deposits assetbacked securities certificate deposits commercial paper us government agency securities foreign government debt securities company periodically evaluates investments determine impairment charges required company determines whether credit loss exists availableforsale debt securities unrealized loss position fair value security amortized cost amortized cost reduced fair value resulting loss recorded consolidated statements operations likely required sell impaired security recovery amortized cost basis intention sell security neither conditions met company considers extent fair value less amortized cost changes rating security rating agency review issuer factors indicate credit loss exists allowance credit loss juniper networks inc notes consolidated financial statements continued recorded expense net limited amount fair value less amortized cost basis amount fair value change relating factors recognized comprehensive income oci companys privatelyheld debt redeemable preferred stock securities included longterm assets consolidated balance sheets recorded fair value fair value reassessed company made aware information indicating change enterprise value investee including known acquisition offers subsequent funding rounds investees plans liquidation company periodically evaluates securities indicators impairment including inability recover portion entire carrying amount investment inability investee sustain earnings reduction termination financial commitment investee investors intention sell investment whether likely company required sell investment recovery entire amortized cost basis company determines decline investments value indicates credit losses difference recognized impairment loss consolidated statements operations investments equity securities companys investments equity securities readily determinable fair values consist money market funds amounts nonqualified compensation plan nqdc invested mutual funds investments public companies investments measured fair value changes fair value recognized consolidated statements operations equity securities without readily determinable fair values include companys investments privatelyheld companies consisting nonredeemable preferred stock common stock securities company accounts securities cost adjusted changes observable transactions identical similar investments issuer less impairments fair value equity securities reassessed company identifies observable price changes indicating adjustment upward downward carrying value necessary observable changes fair value recognized earnings date observable transaction took place rather current reporting date addition company periodically evaluates equity securities without readily determinable fair values determine impairment charges required evaluating whether event change circumstance occurred may significant adverse effect fair value investment qualitative assessment performed reporting period assess whether impairment indicators including limited significant deterioration investees earnings performance credit rating asset quality business prospects adverse change regulatory economic technological environment change general market condition geographic area industry acquisition offers ability continue going concern indicators present company estimates fair value impaired investments recognizes impairment loss consolidated statement operations equal difference carrying value fair value fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using marketbased approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models juniper networks inc notes consolidated financial statements continued derivative instruments company uses derivative instruments primarily foreign currency forward interest rate swap contracts hedge certain foreign currency interest rate exposures company enter derivatives speculative trading purposes company uses foreign currency forward contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges carried fair value derivatives gain loss initially reported component accumulated comprehensive loss upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates cash flows hedges classified operating activities company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense net consolidated statements operations period changes fair value remeasurement underlying assets liabilities cash flows derivatives classified operating activities company uses interest rate swaps convert certain fixed interest rate notes floating interest rates based london interbank offered rate libor interest rate swaps expire within nine years less company recognizes change fair value derivative instrument well offsetting change fair value hedged item expense net consolidated statements operations period change derivatives classified consolidated statements cash flows section underlying item company uses interest rate locks fix benchmark interest rates future debt issuance company records changes fair value interest rate locks accumulated comprehensive income loss consolidated balance sheets period change forecasted transaction occurs company start amortize accumulated gains losses included component comprehensive income loss related interest rate lock cash flow hedges interest expense event underlying forecasted transaction occur becomes probable occur gains losses related cash flow hedge accumulated comprehensive income loss reclassified income expense within income statement company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts interest rate derivatives subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party company neither required pledge entitled receive cash collateral related derivative transactions inventory consists primarily component parts used manufacturing process finished goods stated lower cost net realizable value addition company purchases holds inventory provide adequate component supplies life underlying products cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis leases company determines arrangement lease inception company evaluates classification leases either operating finance commencement necessary modification december 31 2020 company finance leases operating leases included operating lease rightofuse rou assets accrued liabilities operating lease liabilities companys consolidated balance sheets rou assets represent companys right use underlying asset lease term lease liabilities represent obligation make lease payments arising lease operating lease rou assets liabilities recognized commencement date based present value lease payments lease term leases provide implicit rate use incremental borrowing rate based information available commencement date determining present value lease payments operating juniper networks inc notes consolidated financial statements continued lease rou asset also includes lease payments made prior lease commencement excludes lease incentives variable lease payments dependent index rate expensed incurred included within rou asset lease liability calculation variable lease payments primarily include reimbursements costs incurred lessors common area maintenance utilities companys lease terms noncancelable period including rentfree periods provided lessor include options extend terminate lease reasonably certain exercise option lease inception subsequent periods necessary company estimates lease term based assessment extension termination options reasonably certain exercised lease costs recognized straightline basis lease term company separate nonlease components lease components underlying classes assets addition company recognize rou assets lease liabilities shortterm leases lease term twelve months less include option purchase underlying asset company reasonably certain exercise lease cost shortterm leases recognized straightline basis lease term property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets land depreciated constructioninprocess related construction development property equipment yet placed service intended use business combinations purchase price acquired entity allocated tangible assets liabilities intangible assets including inprocess research development iprd based estimated fair values residual purchase price recorded goodwill determination value intangible assets acquired involves certain estimates expected future cash flows include consideration future growth rates margins attrition rates future changes technology discount rates expected use acquired assets factors also considered determining useful life acquired intangible assets iprd initially capitalized fair value intangible asset indefinite life assessed impairment thereafter iprd project completed iprd reclassed amortizable purchased intangible asset amortized asset’s estimated useful life acquisition related expenses recognized separately business combination expensed incurred companys consolidated financial statements include operating results acquired businesses date acquisition goodwill intangible assets goodwill tested impairment annually fourth quarter frequently certain circumstances indicate carrying value goodwill impaired goodwill tested impairment reporting unit level qualitative assessment first performed determine whether necessary quantitatively test goodwill impairment initial assessment includes among others consideration macroeconomic conditions financial performance qualitative assessment indicates likely impairment exists quantitative analysis performed determining fair value reporting unit using combination discounted cash flow market approaches goodwill considered impaired carrying value reporting unit exceeds fair value goodwill impairment loss recognized amount carrying amount reporting unit including goodwill exceeds fair value limited total amount goodwill allocated reporting unit conducted annual impairment test goodwill fourth quarters 2020 2019 determined adjustment carrying value goodwill reporting units required juniper networks inc notes consolidated financial statements continued intangible assets consist existing technology customer relationships trade name amortized period estimated benefit using straightline method estimated useful lives 4 5 years intangible assets acquired business combination related iprd projects considered indefinitelived completion abandonment associated research development efforts indefinitelived intangibles amortized results operations instead evaluated impairment development complete associated assets would deemed finitelived would amortized cost revenues respective estimated useful lives point time research development project abandoned acquired iprd assets written charged expense period abandonment impairment longlived assets longlived assets property plant equipment rou assets purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value warranty reserves company generally offers oneyear warranty limited lifetime warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period warranty reserve reported within accrued liabilities consolidated balance sheets contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using rates approximate effect period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive loss company remeasures monetary assets monetary liabilities nonfunctional currencies records resulting foreign exchange transaction gains losses expense net consolidated statements operations revenue recognition revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services following fivestep process 1 identify contract customer 2 identify performance obligations contract 3 determine juniper networks inc notes consolidated financial statements continued transaction price 4 allocate transaction price 5 recognize revenue company satisfies performance obligation described identify contract customer company generally considers sales contract andor agreement approved purchase order customer contract provided collection considered probable assessed based creditworthiness customer determined credit checks payment histories andor circumstances company combines contracts customer contracts negotiated single commercial substance contain price dependencies identify performance obligations contract product performance obligations include hardware software licenses service performance obligations including hardware maintenance software postcontract support maintenance softwareasaservice saas education training professional services certain software licenses related postcontract support combined single performance obligation maintenance updates critical continued delivery software functionality determine transaction price transaction price company’s contracts customers consists fixed variable consideration provided probable significant reversal revenue occur uncertainty related variable consideration resolved fixed consideration includes amounts contractually billed customer variable consideration includes estimates rights return rebates price protection based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time company generally invoices customers hardware software licenses related maintenance arrangements time delivery professional services either upfront upon meeting certain milestones customer invoices generally due within 30 90 days issuance company’s contracts customers typically include significant financing components period transfer performance obligations timing payment generally within one year allocate transaction price performance obligations contract contracts contain multiple performance obligations company allocates transaction price performance obligations relative standalone selling price ssp basis ssp based multiple factors including limited historical discounting trends products services pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles recognize revenue company satisfies performance obligation revenue hardware certain software licenses recognized point time generally upon shipment delivery certain software licenses combined postcontract support maintenance recognized time ratable basis term license revenue maintenance software postcontract support maintenance recognized time ratable basis contract term revenue saas education training professional services recognized time services completed ratably contractual period generally one year less deferred product revenue represents unrecognized revenue related undelivered product commitments shipments met revenue recognition criteria deferred service revenue represents billed amounts service contracts include technical support hardware software maintenance professional services saas education training services rendered revenue recognized net taxes collected subsequently remitted governmental authorities deferred commissions sales commissions earned company’s sales force considered incremental recoverable costs obtaining contract customer costs recorded prepaid expenses longterm assets deferred amortized period benefit typically term customer contracts amortization expense included sales marketing expenses accompanying consolidated statements operations research development costs research design develop companys products expensed incurred juniper networks inc notes consolidated financial statements continued software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems application development stage capitalized costs include external direct costs incurred developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 217 million 146 million 200 million 2020 2019 2018 respectively sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options restricted stock awards rsas restricted stock units rsus performance share awards psas employee stock purchases related employee stock purchase plan espp service condition awards sharebased compensation expense based fair value underlying awards amortized straightline basis psas sharebased compensation expense amortized straightline basis separate vesting portion awards company accounts forfeitures occur company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value espp purchase rights bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s espp expected life espp purchase rights approximates offering period company determines grant date fair value rsus rsas psas based closing market price company’s common stock date grant adjusted present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte carlo model affected companys stock price comparative marketbased returns well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax basis assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions juniper networks inc notes consolidated financial statements continued recognized provision income taxes company accounts current impacts us tax certain foreign subsidiaries income referred global intangible lowtaxed income year earned concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments derivatives accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits mitigate concentration credit risk investment portfolio diversification investments various industries asset classes limits amount credit exposure single issuer credit rating company’s derivatives expose credit risk extent counterparties may unable meet terms agreement company risk assessment mitigation framework evaluate potential risk loss one counterparty resulting type credit risk part risk mitigation framework company transacts major financial institutions high credit ratings also enters master netting agreements permit net settlement transactions counterparty company performs periodic evaluations relative credit standing financial institutions therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable years ended december 31 2020 2019 2018 single customer accounted 10 net revenues company relies sole suppliers certain critical components applicationspecific integrated circuits additionally company relies primarily limited number significant independent contract manufacturers original design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recently adopted accounting standards fair value measurement january 1 2020 company adopted asu 201813 topic 820 disclosure framework changes disclosure requirements fair value measurement eliminates adds modifies certain disclosure requirements fair value measurements asc 820 company adopted standard prospective approach certain modified new disclosure requirements amendments standard retrospective approach see note 4 fair value measurements required disclosures upon adoption standard material impact consolidated financial statements simplifying test goodwill impairment january 1 2020 company adopted asu 201704 topic 350 intangiblesgoodwill simplifying test goodwill impairment removes step 2 goodwill impairment test requires hypothetical purchase price allocation amended guidance goodwill impairment charge recognized amount carrying value reporting unit exceeds fair value exceed carrying amount goodwill company adopted standard prospective approach upon adoption standard material impact consolidated financial statements credit losses financial instruments january 1 2020 company adopted asu 201613 topic 326 financial instrumentscredit losses measurement credit losses financial instruments clarified financial accounting standards board fasb issuance additional related asus requires measurement recognition current expected credit losses financial assets held amortized cost asu 201613 replaces existing incurred loss impairment model expected loss model requires use forwardlooking information calculate credit loss estimates also eliminates concept otherthantemporary impairment requires credit losses related availableforsale debt securities recorded allowance credit losses rather reduction amortized cost basis securities changes result earlier recognition credit losses company adopted standard modified retrospective approach upon adoption standard material impact consolidated financial statements continue monitor financial implications covid19 pandemic expected credit losses juniper networks inc notes consolidated financial statements continued recent accounting standards yet adopted reference rate reform march 2020 fasb issued asu 202004 topic 848 reference rate reform facilitation effects reference rate reform financial reporting provides temporary optional expedients exceptions existing guidance contract modifications hedge accounting ease financial reporting burdens related expected market transition london interbank offered rate libor interbank offered rates alternative reference rates secured overnight financing rate standard effective upon issuance may generally applied december 31 2022 new amended contracts hedging relationships transactions reference libor company currently evaluating impact transition disclosure requirements standard consolidated financial statements simplifying accounting income taxes december 2019 fasb issued asu 201912 topic 740 income taxes simplifying accounting income taxes enhances simplifies various aspects related accounting income taxes asu applied prospective basis exception certain amendments applied either retrospective modified retrospective basis new standard effective interim annual periods beginning december 15 2020 company expect adoption material impact consolidated financial statements juniper networks inc notes consolidated financial statements continued note 2 business combinations company acquired 128 technology inc 128 technology netrounds ab netrounds 2020 mist systems inc mist 2019 pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material goodwill recognized acquisitions primarily attributable expected synergies deductible us federal income tax purposes continue process identifying evaluating pending escrow claims related certain tax legal matters accordingly preliminary purchase price allocations 128 technology netrounds subject potential measurement period adjustments 2020 acquisitions 128 technology november 30 2020 company acquired 100 ownership 128 technology 4482 million purchase consideration consisted cash 4468 million approximately 14 million sharebased awards attributable employee services prior acquisition expected enhance junipers aidriven enterprise network portfolio uniting 128 technology’s sessionsmart networking junipers campus branch solutions driven mist ai terms acquisition agreement 128 technology company assumed certain sharebased awards continuing employees granted contemplation future services fair value sharebased awards 293 million expensed sharebased compensation remaining service period netrounds october 26 2020 company acquired 100 ownership netrounds 336 million cash acquisition netrounds company provides programmable softwarebased active test service assurance platform suitable fixed mobile networks expected enhance juniper’s automated wan solutions simplifying operations service providers ensuring positive enduser experiences 2019 acquisition mist april 1 2019 company acquired 100 ownership mist systems inc “mist” 3592 million purchase consideration consisted cash 3545 million approximately 46 million sharebased awards attributable employee services prior acquisition mist company provides cloudmanaged wireless networks powered artificial intelligence enhanced junipers enterprise networking portfolio combining mist’s nextgeneration wireless lan platform junipers wired lan sdwan security solutions deliver integrated endtoend user experiences terms acquisition agreement mist company assumed certain sharebased awards continuing employees granted contemplation future services fair value sharebased awards 385 million expensed sharebased compensation remaining service period acquisition costs company recognized 246 million 166 million acquisitionrelated costs years ended december 31 2020 december 31 2019 respectively acquisitionrelated costs expensed period incurred within general administrative expense companys consolidated statements operations following table summarizes fair values assets acquired liabilities assumed acquisition dates millions juniper networks inc notes consolidated financial statements continued following table summarizes fair value separately identifiable intangible assets time acquisition period intangible asset amortized millions except years juniper networks inc notes consolidated financial statements continued note 3 cash equivalents investments availableforsale debt securities following table summarizes companys unrealized gains losses fair value investments designated availableforsale debt securities december 31 2020 december 31 2019 millions following table presents contractual maturities companys total fixed income securities december 31 2020 millions juniper networks inc notes consolidated financial statements continued following tables present companys total fixed income securities unrealized loss position december 31 2020 december 31 2019 millions availableforsale debt securities unrealized losses company assesses impairment evaluating various factors including whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2020 company 69 investments unrealized loss positions gross unrealized losses related investments primarily due changes market interest rates company anticipates recover entire amortized cost basis availableforsale debt securities determined allowance credit losses required recognized years ended december 31 2020 2019 2018 years ended december 31 2020 2019 2018 material gross realized gains losses availableforsale debt securities juniper networks inc notes consolidated financial statements continued investments equity securities following table presents companys investments equity securities december 31 2020 2019 millions years ended december 31 2020 2019 2018 material unrealized gains losses recognized equity investments restricted cash investments company restricted cash investments amounts held escrow accounts required connection certain acquisitions completed primarily 2019 2020 ii amounts held companys shortterm disability plan california iii amounts companys nonqualified deferred compensation plan seniorlevel employees restricted investments consist equity investments december 31 2020 carrying value restricted cash investments 672 million 290 million included prepaid expenses current assets 382 million included longterm assets consolidated balance sheets following table provides reconciliation cash equivalents restricted cash included consolidated balance sheets december 31 2020 december 31 2019 millions juniper networks inc notes consolidated financial statements continued note 4 fair value measurements assets liabilities measured fair value recurring basis following table provides summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale debt securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs years ended december 31 2020 2019 company transfers level 3 fair value hierarchy assets liabilities measured fair value companys privatelyheld debt redeemable preferred stock securities classified level 3 assets due lack observable inputs determine fair value company estimates fair value privatelyheld debt redeemable preferred stock securities recurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure year ended december 31 2020 material activities related privatelyheld debt redeemable preferred stock assets liabilities measured fair value nonrecurring basis companys investments equity securities without readily determinable fair value classified level 3 assets due lack observable inputs determine fair value company estimates fair value nonrecurring basis ie observable transaction occurs using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure december 31 2020 december 31 2019 material adjustments price changes equity securities without readily determinable fair value certain companys assets including intangible assets goodwill measured fair value nonrecurring basis significant impairment charges recognized years ended december 31 2020 2019 2018 december 31 2020 2019 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable accounts payable accrued liabilities approximate fair value due short maturities december 31 2020 december 31 2019 estimated fair value companys total outstanding debt consolidated balance sheets 23866 million 18521 million respectively based observable market inputs level 2 carrying value contract manufacturer deposit 436 million reported within longterm assets consolidated balance sheets approximates fair value december 31 2020 see note 7 financial information contract manufacturer deposit juniper networks inc notes consolidated financial statements continued note 5 derivative instruments notional amount companys derivative instruments summarized follows millions fair value derivative instruments consolidated balance sheets follows designated derivatives company uses foreign currency forward contracts hedge companys planned cost revenues operating expenses denominated foreign currencies derivatives designated cash flow hedges typically maturities thirtysix months less 2020 company entered interest rate locks large financial institutions fix benchmark interest rates future debt issuance aggregate notional amount 6500 million contracts designated cash flow hedges expected terminate within 4 years 9 months juniper networks inc notes consolidated financial statements continued 2019 company entered interest rate swaps aggregate notional amount 3000 million designated fair value hedges fixedrate 2041 notes swaps convert fixed interest rates notes floating interest rates based london interbank offered rate libor interest rate swaps expire within nine years less effect derivative instruments consolidated statements operations cash flow hedges company recognized unrealized gain 635 million unrealized losses 63 million 87 million accumulated comprehensive loss effective portion derivative instruments years ended december 31 2020 2019 2018 respectively foreign currency forward contracts company reclassified losses 90 million 38 million gain 09 million accumulated comprehensive loss cost revenues operating expenses consolidated statement operations years ended december 31 2020 2019 2018 respectively december 31 2020 estimated 277 million unrealized net gain within accumulated comprehensive loss expected reclassified earnings within next twelve months nondesignated derivatives company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies foreign exchange forward contracts typically maturities approximately one four months outstanding nondesignated derivative instruments carried fair value changes fair value derivatives recorded expense net within consolidated statements operations material years ended december 31 2020 2019 2018 respectively see note 1 description business basis presentation significant accounting policies company’s policy regarding offsetting derivative assets derivative liabilities juniper networks inc notes consolidated financial statements continued note 6 goodwill purchased intangible assets goodwill companys goodwill activity follows millions fourth quarter 2020 company performed annual goodwill impairment test three reporting units routing switching security goodwill impairment years ended december 31 2020 2019 2018 purchased intangible assets company’s purchased intangible assets net follows millions amortization expense related purchased intangible assets finite lives 406 million 347 million 174 million years ended december 31 2020 2019 2018 respectively significant impairment charges related purchased intangible assets years ended december 31 2020 2019 2018 december 31 2020 estimated future amortization expense purchased intangible assets finite lives follows millions juniper networks inc notes consolidated financial statements continued note 7 financial information inventory total inventory consisted following millions property equipment net property equipment net consisted following millions depreciation expense 1662 million 1840 million 1932 million 2020 2019 2018 respectively notes receivable deposit total outstanding notes receivable deposit net issuance costs reported within longterm assets consolidated balance sheets follows millions 2020 company received payment promissory note receivable maturity date september 30 2022 connection previously completed sale junos pulse note borrower exercised prepayment option paid outstanding principal 500 million along accumulated interest 377 million payments 41 million aggregating 918 million full juniper networks inc notes consolidated financial statements continued company noninterest bearing deposit balance 436 million net unamortized discount balance 16 million contract manufacturer discount calculated based imputed interest rate 50 december 31 2020 imputed interest amortized term deposit interest income along corresponding charge cost revenues deposit classified longterm asset consolidated balance sheets company considers contract manufacturer deposits impaired based current information events probable company able collect outstanding amounts impairment charge required december 31 2020 2019 2018 warranties changes company’s warranty reserve follows millions deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions juniper networks inc notes consolidated financial statements continued revenue see note 12 segments disaggregated revenue product service customer vertical geographic region product revenue 723 million included deferred revenue january 1 2020 recognized year ended december 31 2020 service revenue 7173 million included deferred revenue january 1 2020 recognized year ended december 31 2020 following table summarizes transaction price contracts yet recognized revenue december 31 2020 company expects recognize amounts revenue millions represents unearned service revenue allocated performance obligations delivered partially delivered december 31 2020 unearned service revenue comprised deferred revenue noncancellable contract revenue invoiced yet deferred commissions deferred commissions 274 million 241 million december 31 2020 2019 respectively years ended december 31 2020 2019 amortization expense deferred commissions 1459 million 1309 million respectively impairment charges recognized expense net expense net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments promissory note issued company connection sale junos pulse interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements loss gain investments net primarily includes loss gains sale investments public privatelyheld companies observable changes fair value impairment charges recorded investments typically consists foreign exchange gains losses nonoperational income expense items juniper networks inc notes consolidated financial statements continued note 8 restructuring charges following table presents restructuring charges included consolidated statements operations millions 2020 restructuring plan 2020 company initiated restructuring plan 2020 restructuring plan designed realign workforce companys sales strategy enhance productivity cost efficiencies enable reinvestment certain key priority areas resulted severance costs 168 million exit related costs including impairment charges 52 million connection 2020 restructuring plan fourth quarter 2020 company implemented voluntary early retirement program employees met certain eligibility requirements resulted additional severance costs 460 million recorded restructuring charges consolidated statement operations 2020 restructuring plan related activities expected completed 2021 prior restructuring activities 2019 company initiated restructuring plan 2019 restructuring plan realign workforce companys sales strategy improve productivity enhance cost efficiencies resulted severance facility consolidation contract termination costs recorded restructuring charges consolidated statement operations 2018 company initiated restructuring plan realign workforce result organizational leadership changes resulted severance contract termination costs recorded restructuring charges consolidated statement operations restructuring liabilities restructuring liabilities reported within accrued liabilities consolidated balance sheets following table provides summary changes restructuring liabilities associated 2020 restructuring plan 2019 restructuring plan millions juniper networks inc notes consolidated financial statements continued note 9 debt financing debt following table summarizes companys total debt millions except percentages 1 2024 notes issued march 2014 february 2016 form single series fully fungible effective interest rate 2014 2016 issuance 463 487 respectively weighted average effective interest rate 470 2 represents fair value adjustments interest rate swap contracts aggregate notional amount 3000 million designated fair value hedges fixedrate 2041 notes see note 5 derivative instruments discussion companys interest rate swaps december 2020 company issued 4000 million aggregate principal amount 120 senior notes due 2025 2025ii notes 4000 million aggregate principal amount 200 senior notes due 2030 notes net proceeds issuances 2025ii notes 2030 notes together cash hand used repayment 5000 million aggregate principal amount companys 450 senior notes due 2024 3000 million aggregate principal amount companys 435 senior notes due 2025 december 2020 company cash tender offer partly repurchased 2342 million aggregate principal amount 2024 notes 1420 million aggregate principal amount 2025i notes repayments resulted loss extinguishment debt 550 million consisting primarily premium tender offer acceleration unamortized debt discount fees redeemed debt recorded within consolidated statements operations subsequently january 2021 company redeemed remaining outstanding 2024 notes 2025i notes see note 17 subsequent events discussion redemption notes company’s senior unsecured unsubordinated obligations ranking equally right payment company’s existing future senior unsecured unsubordinated indebtedness senior right payment company’s future indebtedness expressly subordinated notes december 31 2020 companys aggregate debt maturities based outstanding principal follows millions represents remaining outstanding 2024 notes 2025i notes redeemed company january 2021 see note 17 subsequent events discussion redemption juniper networks inc notes consolidated financial statements continued company may redeem notes either whole part time redemption price equal greater 100 aggregate principal amount notes redeemed ii sum present values remaining scheduled payments discounted redemption date plus either case accrued unpaid interest event change control repurchase event holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principal amount plus accrued unpaid interest notes payable cash semiannually effective interest rates notes include interest notes accretion discount amortization issuance costs indentures govern notes also contain various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2020 company compliance covenants indenture governing notes revolving credit facility april 2019 company entered credit agreement credit agreement certain institutional lenders provides fiveyear 5000 million unsecured revolving credit facility revolving credit facility option increase revolving credit facility additional 2000 million subject lenders approval proceeds loans made revolving credit facility may used company working capital general corporate purposes revolving credit facility terminate april 2024 subject oneyear maturity extension option terms conditions set forth credit agreement borrowings revolving credit facility bear interest either floating rate per annum equal base rate plus margin 000 0375 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 0910 1375 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 0500 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period revolving credit facility requires company maintain leverage ratio greater 30x provided material acquisition consummated company permitted maintain leverage ratio greater 35x four quarters interest coverage ratio less 30x term credit facility december 31 2020 company borrowed funds credit agreement compliance covenants credit agreement financing arrangements company provides certain customers access extended financing arrangements allow longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing providers due company within 1 90 days sale receivable transactions financing providers company surrenders control transferred assets pursuant financing arrangements sale receivables company sold receivables 575 million 640 million 1228 million years ended december 31 2020 2019 2018 respectively company received cash proceeds financing providers 574 million 697 million 1232 million years ended december 31 2020 2019 2018 respectively december 31 2020 december 31 2019 amounts owed financing providers 39 million 53 million respectively recorded accounts receivable company’s consolidated balance sheets juniper networks inc notes consolidated financial statements continued note 10 equity following table summarizes dividends paid stock repurchases retirements companys stock repurchase programs stock repurchases tax withholdings millions except per share amounts 2347 average price per share 2020 includes 3750 million open market purchases settlement forward contract 400 million asr initiated fourth quarter 2019 cash dividends shares common stock 2020 2019 2018 company declared paid quarterly cash dividends 020 019 018 per common share totaling 2641 million 2601 million 2493 million respectively outstanding common stock future dividends establishment record payment dates subject approval board directors board juniper authorized committee thereof see note 17 subsequent events discussion companys dividend declaration subsequent december 31 2020 stock repurchase activities january 2018 board approved 20 billion share repurchase program 2018 stock repurchase program october 2019 board authorized 10 billion increase 2018 stock repurchase program total 30 billion part 2018 stock repurchase program february 2018 april 2019 company entered two accelerated share repurchase programs asr repurchased 7500 million 3000 million companys common stock respectively aggregate number shares ultimately repurchased 293 million 116 million shares companys common stock determined based volume weighted average repurchase price less agreed upon discount 2562 2579 per share respectively shares received company retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share part 2018 stock repurchase program october 2019 company entered asr financial institution repurchase aggregate 2000 million companys outstanding common stock company made upfront payment 2000 million pursuant asr received retired initial 64 million shares companys common stock aggregate price 1600 million based market price 2515 per share company’s common stock date transaction january 2020 asr completed additional 18 million shares received total repurchase 82 million shares companys common stock volume weighted average repurchase price less agreed upon discount 2444 per share shares received company retired accounted reduction stockholder’s equity consolidated balance sheets treated repurchase common stock purposes calculating earnings per share fiscal year ended december 31 2020 company repurchased 161 million shares common stock open market aggregate purchase price 3750 million average price 2336 per share 2018 stock repurchase program december 31 2020 13 billion authorized funds remaining 2018 stock repurchase program see note 17 subsequent events discussion companys stock repurchase activity subsequent december 31 2020 future share repurchases 2018 stock repurchase program subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements juniper networks inc notes consolidated financial statements continued addition repurchases 2018 stock repurchase program company withholds shares common stock certain employees connection vesting stock awards issued employees satisfy applicable tax withholding requirements withheld shares treated common stock repurchases financial statements reduce number shares would issued upon vesting repurchases associated tax withholdings material years ended december 31 2020 2019 2018 accumulated comprehensive loss net tax components accumulated comprehensive loss net related taxes years ended december 31 2020 2019 2018 follows millions 1 reclassifications accumulated comprehensive income loss years ended december 31 2020 2019 2018 realized gains availableforsale debt securities material included expense net consolidated statements operations 2 reclassifications accumulated comprehensive income loss years ended december 31 2020 2019 2018 realized gains losses cash flow hedges material included within cost revenues research development sales marketing general administrative consolidated statements operations juniper networks inc notes consolidated financial statements continued note 11 employee benefit plans equity incentive plans company’s equity incentive plans include 2015 equity incentive plan “2015 plan” 2008 employee stock purchase plan “espp” company granted rsus psas 2015 plan purchase rights espp addition connection certain past acquisitions company assumed substituted stock options rsus rsas psas granted stock plans acquired companies awards converted replaced companys stock options rsus rsas psas respectively 2015 plan adopted approved companys stockholders may 2015 initial authorized share reserve 380 million shares common stock plus addition shares subject outstanding awards 2006 equity incentive plan amended restated 1996 stock plan outstanding may 19 2015 subsequently expire otherwise terminate maximum additional 290 million shares may 2017 companys stockholders approved additional 230 million shares common stock issuance 2015 plan may 2019 companys stockholders approved additional 37 million shares common stock issuance 2015 plan december 31 2020 aggregate 154 million shares subject outstanding equity awards 2015 plan december 31 2020 121 million shares available future issuance 2015 plan espp adopted approved companys stockholders may 2008 may 2020 companys stockholders approved additional 80 million shares common stock issuance espp date companys stockholders approved share reserve 430 million shares companys common stock issuance espp permits eligible employees acquire shares company’s common stock 15 discount determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year espp provides 24 month offering periods four 6month purchase periods new 24month offering period commence every six months thereafter purchase price company’s common stock espp 85 lower fair market value shares 1 beginning applicable offering period 2 end 6month purchase period offering period espp continue effect february 25 2028 unless terminated earlier provisions espp december 31 2020 approximately 315 million shares issued 115 million shares remain available future issuance espp connection acquisitions 128 technology mist 2020 2019 respectively company assumed substituted aggregate 73 million shares stock options rsus rsas psas additional awards granted stock plans acquired companies december 31 2020 approximately 59 million shares common stock outstanding awards assumed substituted companys acquisitions juniper networks inc notes consolidated financial statements continued rsu rsa psa activities rsus generally vest three years date grant rsas psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding following table summarizes company’s rsu rsa psa activity related information year ended december 31 2020 millions except per share amounts years 1includes 71 million servicebased 09 million performancebased 04 million marketbased rsus psas applicable number shares subject performancebased marketbased conditions represents aggregate maximum number shares may issued pursuant award full term grant date fair value rsus psas reduced present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested 2the weightedaverage grantdate fair value rsus rsas psas granted assumed substituted 2020 2019 2018 2159 2526 2533 respectively grant date fair value rsus psas reduced present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested 2020 company declared quarterly cash dividend 020 per share common stock january 27 2020 april 28 2020 july 28 2020 october 27 2020 3total fair value rsus rsas psas vested 2020 2019 2018 1747 million 1700 million 2005 million respectively juniper networks inc notes consolidated financial statements continued shares available grant following table presents stock activity total number shares available grant 2015 plan millions may 2019 2015 plan amended amendment removed fungible share adjustment used determine shares available issuance original terms 2015 plan rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant counted shares authorized plan two onetenth shares common stock prior fungible rate share subject award pursuant amendment beginning may 14 2019 share award granted 2015 plan reduces share reserve one share awards granted may 14 2019 thereafter later forfeited canceled terminated returned share reserve manner 2020 among total 39 million canceled shares 35 million shares represent shares returned share reserve prior fungible rate number shares subject psas granted represents maximum number shares may issued pursuant award full term employee stock purchase plan 2020 2019 2018 employees purchased 27 million 24 million 25 million shares common stock espp average exercise price 1959 2204 2231 per share respectively valuation assumptions weightedaverage assumptions used resulting estimates fair value espp purchase rights marketbased rsus follows juniper networks inc notes consolidated financial statements continued sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp purchase rights recorded following cost expense categories companys consolidated statements operations millions following table summarizes sharebased compensation expense award type millions years ended december 31 2020 2019 2018 company recognized tax benefits total stockbased compensation expense reflected income tax provision consolidated statements operations 235 million 296 million 338 million respectively years ended december 31 2020 2019 2018 realized tax benefit related awards vested exercised period 217 million 306 million 389 million respectively amounts include indirect effects stockbased awards primarily relate research development tax credit december 31 2020 total unrecognized compensation cost related unvested sharebased awards 3331 million recognized weightedaverage period 18 years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 220 million 202 million 202 million 2020 2019 2018 respectively deferred compensation plan company’s nqdc plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds december 31 2020 liability company plan participants 293 million 31 million included within accrued liabilities 262 million included longterm liabilities consolidated balance sheets company investments 293 million correlating deferred compensation obligations 31 million included within prepaid expenses current assets 262 million included within longterm assets consolidated balance sheets december 31 2019 liability company 268 million 41 million included within accrued liabilities 227 million included longterm liabilities consolidated balance sheets company investments 268 million correlating juniper networks inc notes consolidated financial statements continued deferred compensation obligations 41 million included within prepaid expenses current assets 227 million included within longterm assets consolidated balance sheets juniper networks inc notes consolidated financial statements continued note 12 segments company operates one reportable segment companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis purposes allocating resources evaluating financial performance accompanied disaggregated information net revenues product service customer vertical geographic region presented following table presents net revenues product service millions following table presents net revenues customer vertical millions company attributes revenues geographic region based customer’s shipping address following table presents net revenues geographic region millions years ended december 31 2020 2019 2018 customer accounted greater 10 companys net revenues juniper networks inc notes consolidated financial statements continued following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2020 december 31 2019 attributable us operations juniper networks inc notes consolidated financial statements continued note 13 income taxes components pretax income summarized follows millions provision benefit income taxes summarized follows millions provision benefit income taxes differs amount computed applying federal statutory tax rate 21 pretax income years presented follows millions juniper networks inc notes consolidated financial statements continued 2020 company recorded 637 million benefit including interest penalties related multiyear recognition previously unrecognized tax benefits 201 million charge including interest cumulative impact cost sharing sharebased compensation described 2019 company recorded 254 million benefit including interest related recognition previously unrecognized tax benefits pursuant resolution tax audit 75 million benefit including interest lapse statute limitations june 7 2019 ninth circuit court appeals issued opinion altera corp v commissioner requiring related parties intercompany costsharing arrangement share expenses related sharebased compensation february 10 2020 altera appealed decision us supreme court june 22 2020 declined review decision based supreme courts decision companys sharebased compensation subject cost sharing company recorded 201 million charge referenced year ended december 31 2020 deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys longterm deferred tax assets deferred tax liabilities follows millions december 31 2020 2019 company valuation allowance us domestic deferred tax assets 2615 million 2494 million respectively balance december 31 2020 consisted 2252 million 286 million 34 million companys california massachusetts canadian deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance 16 million related capital losses may carry forward offset future capital gains valuation allowance increased 2020 2019 121 million 157 million respectively primarily related changes california massachusetts rd tax credits december 31 2020 company federal california net operating loss carryforwards approximately 1729 million 1340 million respectively california net operating loss carryforwards 1340 million expected expire unused company also federal california tax credit carryforwards approximately 63 million juniper networks inc notes consolidated financial statements continued 2660 million respectively unused net operating loss carryforwards expire various dates beginning year 2021 california tax credit carryforwards carry forward indefinitely company provides deferred tax liabilities tax consequences associated undistributed earnings expected repatriated subsidiaries parent unless subsidiaries earnings considered indefinitely reinvested company made provision deferred taxes approximately 602 million cumulative undistributed earnings certain foreign subsidiaries december 31 2020 earnings considered indefinitely invested operations subsidiaries company intends utilize amounts fund future expansion operations earnings distributed parent company would subject additional taxes approximately 120 million december 31 2020 2019 2018 total amount gross unrecognized tax benefits 1160 million 1513 million 1781 million respectively december 31 2020 approximately 928 million 1160 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2020 2019 2018 company accrued interest penalties related unrecognized tax benefits 53 million 299 million 338 million respectively longterm liabilities consolidated balance sheets due changes level gross unrecognized tax benefits company recognized benefit net interest penalties 207 million 28 million 52 million consolidated statements operations years ended december 31 2020 2019 2018 respectively company recognizes interest penalties related unrecognized tax benefits component income tax expense 2020 company received final orders us india competent authorities resolved company’s dispute india tax authorities 2010 2012 income tax years company also remeasured certain previously unrecognized tax benefits open years resulting total release 588 million including 184 million interest penalties addition company closed administrative procedure joint committee taxation resulting release previously unrecognized tax benefit 90 million company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease 106 million within next twelve months due completion tax review cycles various tax jurisdictions lapses applicable statutes limitation company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2009 company currently examination india tax authorities 2009 2015 tax years examinations india tax authorities ongoing company regularly assesses likelihood adverse outcome juniper networks inc notes consolidated financial statements continued resulting examinations december 31 2020 company believes resolution audits unlikely material effect consolidated financial condition results operations company pursuing available administrative remedies relative ongoing matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations juniper networks inc notes consolidated financial statements continued note 14 net income per share company computed basic diluted net income per share follows millions except per share amounts basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options purchase rights vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable antidilutive shares excluded computation diluted net income per share juniper networks inc notes consolidated financial statements continued note 15 commitments contingencies commitments unconditional purchase obligations unconditional purchase obligations consist agreements include firm noncancelable terms transfer funds future fixed minimum amounts quantities purchased fixed minimum prices obligations cancellation provisions amounts included following table limited noncancelable portion agreement terms minimum cancellation fee following table summarizes company’s unconditional purchase obligations next five years thereafter december 31 2020 millions december 2018 company entered master services agreement certain statements work collectively “agreement” international business machines corporation ibm pursuant company outsourced significant portions administrative functions ibm exchange combination fixed variable fees fluctuating based companys actual need services utilized second quarter 2020 company amended agreement resulting 794 million reduction fees payable ibm december 31 2020 company expects pay ibm 1833 million remaining initial term agreement table include fees payable ibm contract company unable make reasonably reliable estimate amount payments related contract due uncertainties usage services december 2019 company entered 15year energy services agreement esa supplier purchase energy environmental attributes generated thirdparty fuel cell systems installed operated maintained supplier companys premises service fees payable supplier fluctuate based actual amount electricity delivered company given operational year december 31 2020 company expects pay supplier approximately 290 million remaining initial term esa table include fees payable supplier due uncertainties associated system outputs leases company leases facilities certain equipment noncancelable operating leases remaining lease terms 1 10 years 1 4 years respectively leased facility subject individual lease sublease could provide various options extend terminate lease agreement facilities primarily comprised corporate offices data centers rd facilities equipment includes vehicles various office equipment company also variable lease payments primarily comprised common area maintenance utility charges companys lease agreements contain residual value guarantees restrictive covenants components lease costs information related leases follows millions except years percentages juniper networks inc notes consolidated financial statements continued december 31 2020 future operating lease payments next five years thereafter follows millions total include one operating lease total lease obligation 107 million yet commenced december 31 2020 purchase commitments contract manufacturers suppliers order reduce manufacturing lead times interest access adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments following table summarizes company’s purchase commitments next five years thereafter december 31 2020 millions company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s juniper networks inc notes consolidated financial statements continued demand forecast customer orders december 31 2020 company accrued 152 million based estimate charges debt interest payment debt december 31 2020 company held total outstanding debt consisting notes carrying value 21273 million see note 9 debt financing discussion companys longterm debt expected future principal maturities tax liability fourth quarter 2018 company completed analysis determine effect tax act recorded immaterial adjustments december 31 2018 company elected pay transition tax net applicable tax refunds eightyear period provided tax act longterm income taxes payable 2506 million represents remaining balance companys transition tax obligation december 31 2020 company 619 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products solely combination thirdparty products infringe intellectual property rights thirdparty december 31 2020 2019 company recorded 67 million 90 million respectively indemnification obligations accrued liabilities longterm liabilities consolidated balance sheets company also financial guarantees consisting standby letters credit certain lease facilities insurance programs customs 290 million 306 million december 31 2020 december 31 2019 respectively legal proceedings company involved investigations disputes litigation legal proceedings company records accrual loss contingencies legal proceedings believes unfavorable outcome probable b amount range possible loss reasonably estimable company intends aggressively defend matters assurances outcome matters currently determinable company currently believes none existing claims proceedings likely material adverse effect financial position notwithstanding foregoing many uncertainties associated litigation matters thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses juniper networks inc notes consolidated financial statements continued note 16 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter years ended december 31 2020 december 31 2019 millions except per share amounts net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period note 17 subsequent events apstra acquisition january 2021 company acquired apstra approximately 180 million subject customary adjustments cash assumption equity awards acquisition expected expand upon companys data center networking portfolio advance vision transform data center operations combining apstras full lifecycle management solution data center networking fabric automation initial design everyday management operations debt repayment january 11 2021 company redeemed full 2658 million remainder outstanding 2024 notes 1580 million remainder outstanding 2025i notes principal redemption amount aggregate approximately 4821 million plus accrued interest repayments resulted loss extinguishment debt 606 million consisting primarily premium early redemption acceleration unamortized debt discount fees redeemed debt dividend declaration january 28 2021 company announced board declared quarterly cash dividend 020 per share common stock paid march 22 2021 stockholders record close business march 1 2021 stock repurchase activities subsequent december 31 2020 date filing report filing date company repurchased 25 million shares common stock open market aggregate purchase price 617 million average price 2494 per share 2018 stock repurchase program repurchases approximately 20 million shares settled prior filing report remaining shares settled filing date company aggregate 13 billion authorized funds remaining stock repurchase program filing date item 9item 8 financial statements supplementary data juniper network inc index consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2014 2013 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2014 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2014 2013 consolidated results operations cash flows three years period ended december 31 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework report dated february 20 2015 expressed unqualified opinion thereon ernst young llp san jose california february 20 2015 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission 2013 framework coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2014 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2014 2013 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2014 juniper networks inc report dated february 20 2015 expressed unqualified opinion thereon ernst young llp san jose california february 20 2015 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2014 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework published 2013 based assessment management concluded december 31 2014 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2014 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2014 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services highperformance networks enable customers build scalable reliable secure costeffective networks businesses achieving agility efficiency value automation company serves highperformance networking requirements global service providers cloud environments enterprises governments research public sector organizations view network critical success addition companys products company offers technical support professional services well education training programs customers together highperformance product service offerings help companys customers convert legacy networks provide commoditized services valuable assets provide differentiation value increased performance reliability security endusers basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated certain amounts prior years consolidated financial statements reclassified conform current year presentation 2014 company realigned organization onejuniper structure includes consolidating companys research development rd gotomarket functions reduce complexity increase clarity responsibilities improve efficiency result changes companys consolidated business considered one reportable segment fiscal 2013 company operated two reportable segments platform systems division psd software solutions division ssd change impact previously reported consolidated results operations see note 13 segments discussion companys segment reorganization note 2 significant accounting policies use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected cash equivalents investments cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash highly liquid investments purchased original maturities three months less classified cash equivalents investments availableforsale trading securities companys investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income realized gains losses determined based specific identification method reported consolidated statements operations juniper networks inc notes consolidated financial statements continued company periodically evaluates investments determine impairment charges required company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments fair value temporary difference recognized impairment loss consolidated statements operations companys nonqualified compensation plan invested mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations privatelyheld investments company privatelyheld investments included longterm assets consolidated balance sheets investments include debt redeemable preferred stock securities carried fair value nonredeemable preferred stock securities carried cost investments carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stages time investment company markets may never significant company measures fair value privatelyheld investments using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified costs services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments income expense net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income expected reclassified earnings within next twelve months company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies derivatives carried fair value changes recorded income expense net consolidated statements operations changes fair juniper networks inc notes consolidated financial statements continued value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities one year less inventory consists primarily component parts used manufacturing process finished goods intransit stated lower cost market cost computed using standard cost approximates actual cost firstin firstout basis charge recorded cost product inventory determined excess anticipated demand considered obsolete point loss recognition new lowercost basis inventory established subsequent changes facts circumstances result restoration increase newly established cost basis property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives following assets construction progress related construction development property equipment yet placed service intended use depreciation equipment commences placed service depreciation buildings leasehold improvements commences ready intended use goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination acquisition individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill tested impairment annually fourth quarter frequently certain circumstances change would likely indicate fair value reporting unit carrying value impairment loss recognized extent carrying amount goodwill exceeds assets implied fair value intangible assets acquired business combination determined indefinite useful life amortized assessed potential impairment annually events circumstances indicate carrying amounts might impaired longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance juniper networks inc notes consolidated financial statements continued • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories changes circumstances indicate collectability reasonably assured sales arrangements contain multiple elements company allocates revenue element based selling price hierarchy selling price deliverable based either vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similar situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing thirdparty products similar functionality typically cannot obtained therefore tpe used esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using residual method vsoe fair value undelivered items exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance services undelivered element case entire arrangement fee recognized ratably maintenance service period company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time portion companys sales made distributors agreements allowing pricing credits rights return reliable estimates credits returns cannot made product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits given amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay juniper networks inc notes consolidated financial statements continued warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs logistics costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor logistics overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalization software development costs software sold leased otherwise marketed begins products technological feasibility established ends product available general release customers generally companys products released soon technological feasibility established result costs incurred achieving technological feasibility product general availability significant company capitalizes costs associated internaluse software systems reached application development stage primarily attributable companys enterprise resource planning erp implementation capitalized costs include external direct costs utilized developing obtaining applications payroll payrollrelated costs employees directly associated development applications advertising costs charged sales marketing expense incurred advertising expense 192 million 201 million 200 million 2014 2013 2012 respectively foreign currency assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive income company’s international subsidiaries functional currency us dollar company records foreign exchange gains losses assets liabilities denominated nonus dollar currencies remeasurement adjustments recorded income expense net consolidated statements operations loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required juniper networks inc notes consolidated financial statements continued sharebased compensation company measures recognizes compensation cost sharebased awards made employees directors including employee stock options stock awards stock units employee stock purchases related employee stock purchase plan espp sharebased compensation expense based fair value underlying awards amortized straightline basis net estimated forfeitures company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value stock options employee stock purchase plan espp shares bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options espp expected life stock option based historical experience employee exercises postvesting termination behavior well potential effect options exercised expected life espp approximates offering period company determines fair value restricted stock units rsus restricted stock awards rsas performance share awards psas based closing market price company’s common stock date grant adjusted present value expected dividend marketbased rsus company estimates fair value derived service period using monte carlo simulation option pricing model monte carlo model determination grant date fair value derived service periods using monte carlo model affected stock price well various highly subjective assumptions represent managements best estimates volatility riskfree interest rate dividend yield company estimates expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock contractual life companys marketbased rsus provision income taxes deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognize measure uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes concentrations risk financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal credit risk company’s derivatives expose credit risk extent counterparties may unable meet terms agreement mitigate concentration risk related derivatives company establishes counterparty limits major creditworthy financial institutions addition potential risk loss one counterparty resulting type credit risk monitored derivatives transacted entities relatively short duration therefore company expect material losses result defaults counterparties generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing juniper networks inc notes consolidated financial statements continued credit evaluations customers generally require collateral accounts receivable years ended december 31 2014 december 31 2013 single customer accounted 10 net revenues year ended december 31 2012 verizon communications inc verizon accounted 103 net revenues company relies sole suppliers certain components applicationspecific integrated circuits asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers outside design manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results recent accounting pronouncements january 2015 financial accounting standards board “fasb” issued accounting standards update “asu” 201501 subtopic 22520 income statement extraordinary unusual items eliminates concept extraordinary items asu 201501 effective fiscal years interim periods within fiscal years beginning december 15 2015 early adoption permitted adoption standard expected impact companys consolidated financial statements december 2014 fasb issued asu 201417 topic 805 business combinations provides acquired entity option apply pushdown accounting separate financial statements upon occurrence event acquirer obtains control acquired entity asu 201417 effective november 18 2014 adoption standard expected impact companys consolidated financial statements november 2014 fasb issued asu 201416 topic 815 derivatives hedging provides clarification current guidance interpreted evaluating economic characteristics risks host contract hybrid financial instrument issued form share specifically amendments clarify entity consider relevant terms features evaluating host contract single term feature would necessarily determine economic characteristics risks host contract asu 201416 effective fiscal years interim periods within fiscal years beginning december 15 2015 amendment applied modified retrospective basis existing hybrid financial instruments issued form share beginning year amendments effective early adoption permitted adoption standard expected material impact companys consolidated financial statements august 2014 financial accounting standards board “fasb” issued accounting standards update “asu” 201415 subtopic 20540 presentation financial statementsgoing concern disclosure uncertainties entity’s ability continue going concern asu 201415 provides guidance managements responsibility evaluate whether substantial doubt companys ability continue going concern provide related footnote disclosure asu 201415 effective fiscal years interim periods within fiscal years beginning december 15 2016 early application permitted adoption standard expected impact companys consolidated financial statements june 2014 fasb issued asu 201412 topic 718 compensation stock compensation asu 201412 provides guidance performance target affects vesting sharebased payment could achieved requisite service period performance condition result target reflected estimation award’s grant date fair value compensation cost award would recognized required service period probable performance condition achieved asu 201412 effective entities annual periods beginning december 15 2015 interim periods within annual periods asu 201412 applied prospective basis awards granted modified effective date adoption standard expected impact companys consolidated financial statements may 2014 fasb issued asu 201409 topic 606revenue contracts customers asu 201409 provides guidance revenue recognition asu affects contracts company enters customers transfer goods services transfer nonfinancial assets asu supersede revenue recognition requirements topic 605 industry specific guidance asu also supersedes cost guidance included subtopic 60535 revenue recognitionconstructiontype productiontype contracts standards core principle revenue recognized promised goods services transferred customers amount reflects consideration company expects entitled exchange goods services company need use additional judgment estimates existing guidance may include identifying performance obligations contract juniper networks inc notes consolidated financial statements continued estimating amount variable consideration include transaction price allocating transaction price separate performance obligation asu 201409 effective annual interim periods beginning december 15 2016 early adoption permitted accordingly asu effective company beginning fiscal year 2017 company currently evaluating impact adoption consolidated financial statements april 2014 fasb issued asu 201408 presentation financial statements topic 205 property plant equipment topic 360 reporting discontinued operations disclosures disposals components entity asu 201408 raises threshold disposal qualify discontinued operation requires new disclosures discontinued operations certain disposals meet definition discontinued operation asu 201408 effective annual periods beginning december 15 2014 early adoption permitted disposals reported financial statements previously issued company determined pronouncement would material impact companys financial position results operations note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material additional information existing acquisition dates unknown company may become known remainder measurement period exceed 12 months acquisition date may result changes amounts allocations recorded company completed one business combination 2014 one business combination 2013 three business combinations 2012 cash consideration including fair value vested sharebased awards assumed approximately 287 million 100 million 1873 million respectively following table presents purchase consideration allocations acquisitions based upon acquisitiondate fair values including cash equivalents acquired millions goodwill recognized 2014 2012 acquisitions primarily attributable expected synergies deductible us federal income tax purposes 2014 acquisition january 7 2014 company acquired 100 equity securities wandl inc wandl 287 million cash stock consideration wandl provider software solutions advanced planning management design optimization nextgeneration multilayer networks provides company technology experience traffic engineering multilayer optimization path computation help service provider customers optimize performance cost networks terms purchase agreement company assumed sharebased awards employees fair value 349 million granted contemplation future services expensed sharebased compensation remaining service period juniper networks inc notes consolidated financial statements continued intangible assets acquired following table presents details companys intangible assets acquired business combination completed twelve months ended december 31 2014 millions except years 2013 acquisition 2013 company completed business combination approximately 100 million cash consideration 01 million allocated net tangible assets acquired 99 million intangible assets intangible assets acquired consisted existing technology weightedaverage estimated useful life five years 2012 acquisitions contrail december 14 2012 company acquired remaining ownership interest contrail increasing ownership 12 100 cash stock transaction approximately 917 million contrail privatelyheld software networking company provides softwaredefined networking solutions technology augments junipers portfolio products services aggregate consideration 917 million allocated follows net tangible assets acquired 36 million including cash equivalents 86 million intangible assets 174 million recognized goodwill 707 million company previously accounted investment contrail cost 30 million prior acquisition date fair value companys previous equity interest contrail remeasured fair value 177 million based upon adjustments market participants would consider estimating fair value previously held interest contrail resulted 147 million gain reported within income expense net consolidated statements operations mykonos software inc february 13 2012 company acquired 100 equity securities mykonos software inc mykonos 826 million cash connection acquisition company acquired net tangible liabilities 02 million intangible assets 243 million recognized goodwill 585 million bitgravity inc march 8 2012 company acquired source code license patent jointownership related service management layer bitgravity incs bitgravity content delivery network cdn technology 130 million cash connection acquisition company acquired net tangible assets 01 million intangible assets 124 million recognized goodwill 05 million juniper networks inc notes consolidated financial statements continued intangible assets acquired following table presents details intangible assets acquired business combinations completed 2012 respective acquisition dates millions except years acquired inprocess research development “iprd” consists existing research development projects time acquisition projects qualify iprd assets represent yet reached technological feasibility alternative future use initial recognition acquired iprd assets accounted indefinitelived intangible assets development costs incurred acquisition acquired development projects expensed incurred upon completion development acquired iprd assets considered amortizable intangible assets iprd project abandoned related purchased intangible asset writtenoff period abandoned juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale trading securities following tables summarize companys unrealized gains losses fair value investments designated availableforsale trading securities december 31 2014 december 31 2013 millions 1 balance includes companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes companys nonqualified deferred compensation plan assets following table presents contractual maturities companys total fixed income securities december 31 2014 millions company 437 178 investments unrealized loss positions december 31 2014 december 31 2013 respectively gross unrealized losses related investments primarily due changes market interest rates stock prices company periodically reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation availableforsale debt securities unrealized losses company evaluates whether intention sell investments ii whether likely required sell investments recovery entire amortized cost basis december 31 2014 company anticipates recover entire amortized cost basis availableforsale debt securities determined otherthantemporary impairments associated credit losses required recognized year ended december 31 2014 2013 2012 availableforsale equity securities unrealized losses company evaluates whether indication otherthantemporary impairments determination based several factors including financial condition nearterm prospects issuer company’s intent ability hold publiclytraded equity securities period time sufficient allow anticipated recovery market value year ended december 31 2014 company determined certain availableforsale equity securities otherthan temporarily impaired resulting impairment charge 11 juniper networks inc notes consolidated financial statements continued million recorded within income expense net consolidated statement operations years ended december 31 2013 december 31 2012 company recognize otherthantemporary impairments associated investments year ended december 31 2014 gross realized gains availableforsale securities 1668 million gross realized losses material excluding impairment charge noted material gross realized gains losses trading securities year ended december 31 2014 material gross realized gains losses availableforsale trading securities years ended december 31 2013 december 31 2012 following tables present companys availableforsale securities unrealized loss position december 31 2014 december 31 2013 millions 1 balances less 12 months include investments immaterial unrealized loss position december 31 2014 1 balances 12 months greater include investments immaterial unrealized loss position december 31 2013 2 balances less 12 months include investments immaterial unrealized loss position december 31 2013 restricted cash investments company classifies certain cash investments restricted cash investments consolidated balance sheets amounts held escrow accounts required connection certain acquisitions completed 2005 2014 ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust restricted investments designated availableforsale securities juniper networks inc notes consolidated financial statements continued privatelyheld investments december 31 2014 december 31 2013 carrying values companys privatelyheld investments 899 million 572 million respectively included longterm assets consolidated balance sheets december 31 2014 carrying value privatelyheld investments includes debt redeemable preferred stock securities 475 million year ended december 31 2014 company recorded 150 million comprehensive income unrealized gains associated privatelyheld debt securities year ended december 31 2013 1027 million unrealized gains associated privatelyheld securities comprehensive income company reviews investments identify evaluate investments indication possible impairment company adjusts carrying value privatelyheld investments impairment fair value less carrying value respective assets otherthantemporary basis years ended december 31 2014 2013 2012 company determined certain privatelyheld investments otherthantemporarily impaired resulting impairment charges 11 million 28 million 200 million respectively recorded within income expense net consolidated statements operations juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following tables provide summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes 413 million restricted investments measured fair market value related companys trust acquisitions related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes 836 million restricted investments measured fair market value related companys trust acquisition related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued companys level 2 availableforsale fixed income securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys derivative instruments classified level 2 actively traded valued using pricing models use observable market inputs companys policy recognize asset liability transfers among level 1 level 2 level 3 beginning quarter change circumstances resulted transfer year ended december 31 2014 company transfers levels fair value hierarchy assets liabilities measured fair value year ended december 31 2013 company transferred approximately 2874 million government agency bonds within government sponsored enterprise obligations level 1 level 2 primarily due use additional valuation inputs appropriately classified level 2 inputs year ended december 31 2013 company transfers level 3 companys privatelyheld debt securities classified level 3 assets due absence quoted market prices inherent lack liquidity company estimates fair value privatelyheld debt investments recurring basis using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure year ended december 31 2014 purchases 50 million related privatelyheld debt securities assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill privatelyheld equity investments measured fair value nonrecurring basis impairment indicated privatelyheld equity investments normally carried cost measured fair value nonrecurring basis due events circumstances company identified significantly impacting fair value investments company estimates fair value privatelyheld equity investments using analysis financial condition nearterm prospects investee including recent financing activities investees capital structure december 31 2014 company recorded goodwill impairment charge 8500 million security reporting unit measured fair value nonrecurring basis remeasurement goodwill classified level 3 value assessment due significance unobservable inputs developed using companyspecific information refer note 7 goodwill purchased intangible assets information goodwill impairment charge unobservable inputs used december 31 2014 company significant privatelyheld equity investments measured fair value nonrecurring basis december 31 2013 company 20 million privatelyheld equity investments measured fair value nonrecurring basis classified level 3 assets due absence quoted market prices inherent lack liquidity impairment charges 28 million representing difference net book value fair value recorded income expense net consolidated statements operations december 31 2012 certain purchased intangible assets carrying value 54 million impaired writtendown fair value zero impairment charge 54 million recorded within cost revenues consolidated statement operations classified level 3 company measured fair value assets primarily using discounted cash flow projections december 31 2014 company impairments associated purchased intangible assets december 31 2014 2013 company liabilities measured fair value nonrecurring basis assets liabilities measured fair value carrying amounts companys accounts receivable financing receivables accounts payable accrued liabilities approximate fair value due short maturities december 31 2014 estimated fair value companys promissory note connection sale junos pulse recorded long term assets consolidated balance sheet 1250 million classified level 3 assets due absence quoted market prices inherent lack liquidity december 31 2014 december 31 2013 estimated fair value companys longterm debt consolidated balance sheets approximately 13952 million 10235 million respectively based observable market inputs level 2 juniper networks inc notes consolidated financial statements continued note 6 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company uses foreign currency forward option contracts hedge companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less see note 5 fair value measurements fair values company’s derivative instruments consolidated balance sheets december 31 2014 company recognized loss 34 million accumulated comprehensive loss income effective portion derivative instruments reclassified gain 34 million year ended december 31 2014 comprehensive income operating expense consolidated statements operations december 31 2013 company recognized loss 10 million accumulated comprehensive income effective portion derivative instruments reclassified gain 07 million year ended december 31 2013 comprehensive income operating expense consolidated statements operations december 31 2012 company recognized gain 72 million accumulated comprehensive income effective portion derivative instruments reclassified loss 75 million year ended december 31 2012 comprehensive income operating expense consolidated statements operations ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2014 2013 2012 nondesignated derivatives years ended december 31 2014 2013 2012 company recognized net loss 24 million net gain 09 million gain 10 million respectively nondesignated derivative instruments within income expense net consolidated statements operations offsetting derivatives company presents derivative assets derivative liabilities gross basis consolidated balance sheets however agreements containing provisions netting certain counterparties foreign exchange contracts subject applicable requirements company allowed netsettle transactions date currency single net amount payable one party december 31 2014 december 31 2013 potential effect rights setoff associated derivative instruments material company neither required pledge entitled receive cash collateral related derivative transactions juniper networks inc notes consolidated financial statements continued note 7 goodwill purchased intangible assets goodwill following table presents goodwill activity millions fourth quarter 2014 company performed annual goodwill impairment test companys three reporting units routing switching security company compared reporting units’ fair value current value determine whether impairment exists fair value determined using combination income approach market approach income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life cash flow projections based managements estimates revenue growth rates operating margins taking consideration industry market conditions discount rates used based weightedaverage cost capital adjusted relevant risk associated businessspecific characteristics uncertainty related reporting unit’s ability execute projected cash flows market approach company estimated fair value based market multiples revenue earnings derived comparable publiclytraded companies similar operating investment characteristics reporting units income approach market approach equally weighted derive fair value reporting unit fair value company’s routing switching reporting units significantly exceeded carrying value however fair value security reporting unit exceed carrying value therefore company determined security reporting unit’s goodwill impaired 2014 company realigned gotomarket research development resources projects highest potential growth continued leverage engineering efforts across routing switching security products fourth quarter 2014 company began implement new security strategy focused network resiliency performance based srx platform result company rationalized security product portfolio including developing new product roadmap exiting certain point products including divestiture junos pulse factors decreased companys short term near term revenue profitability forecasts security reporting unit determining impairment amount fair value security reporting unit allocated assets liabilities including unrecognized intangible assets based respective fair values assumptions used measuring value assets liabilities included discount rates customer renewal rates technology obsolescence rates used valuing intangible assets pricing comparable transactions market valuing tangible assets based allocation security reporting units carrying value goodwill exceeded implied fair value goodwill resulting goodwill impairment charge 8500 million recorded consolidated statement operations impairments goodwill years ended december 31 2013 2012 juniper networks inc notes consolidated financial statements continued purchased intangible assets company’s purchased intangible assets follows millions following table presents amortization intangible assets included consolidated statements operations millions connection restructuring plan 2014 2012 discussed note 9 restructuring charges company determined certain intangible assets 200 million 107 million respectively longer utilized additionally 2012 company recorded 54 million impairment charge result fair value assessment year ended december 31 2014 company recorded charges 193 million cost revenues 07 million restructuring charges consolidated statements operations year ended december 31 2012 company recorded charges 161 million cost revenues consolidated statements operations impairment charges purchased intangible assets years ended december 31 2013 december 31 2014 estimated future amortization expense purchased intangible assets finite lives follows millions juniper networks inc notes consolidated financial statements continued note 8 financial information inventories company purchases holds inventory provide adequate component supplies life underlying products majority companys inventory production components used manufacturing process finished goods inventory transit inventories reported within prepaid expenses current assets longterm assets consolidated balance sheets total inventories consisted following millions year ended december 31 2014 company recorded 155 million cost revenues related acceleration endoflife certain products connection 2014 restructuring plan discussed note 9 restructuring charges year ended december 31 2013 year ended december 31 2012 company recorded charges 443 million cost revenues representing inventory held excess forecasted demand 363 million connection restructuring plan 2012 discussed note 9 restructuring charges property equipment net property equipment net consisted following millions depreciation expense 1419 million 1482 million 1547 million 2014 2013 2012 respectively property equipment periodically reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable juniper networks inc notes consolidated financial statements continued longterm assets longterm assets consisted following millions 1 refer income expense net information promissory note connection 2014 restructuring plan discussed note 9 restructuring charges company reviewed product portfolio determined cease development application delivery controller software technology licensed july 2012 well development another technology company prepaid license result company recognized total charge 854 million recorded within operating expenses consolidated statements operations year ended december 31 2014 revenues associated technology warranties company accrues warranty costs based associated material labor customer support overhead time revenue recognized accrual reported accrued warranty within current liabilities consolidated balance sheets changes company’s warranty reserve follows millions juniper networks inc notes consolidated financial statements continued deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents billable amounts service contracts include technical support hardware software maintenance professional services training services rendered income expense net income expense net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments interest expense primarily includes interest net capitalized interest expense longterm debt customer financing arrangements typically consists investment foreign exchange gains losses nonoperational income expense items interest expense years ended december 31 2014 2013 2012 interest expense included 575 million net 27 million capitalized 452 million net 19 million capitalized 400 million net 71 million capitalized respectively related companys outstanding longterm debt issued march 2011 february 2014 discussed note 10 longterm debt financing juniper networks inc notes consolidated financial statements continued gain legal settlement year ended december 31 2014 company entered settlement agreement palo alto networks inc pan resolving patent litigation two companies resulted realized gain legal settlement subsequent sale related securities 1961 million net legal fees gain investments year ended december 31 2014 company recorded gain 1630 million primarily related sale investments converted privatelyheld investments publiclytraded equity upon ipo subsequently sold year ended december 31 2013 net gain investments primarily comprised gain 71 million related companys privatelyheld investments gain sale junos pulse october 1 2014 company completed sale junos pulse product portfolio company received total consideration 2307 million 1057 million cash net 193 million working capital adjustment 1250 million form 18month noncontingent interest bearing promissory note issued company result sale company recorded gain 196 million income expense net consolidated statement operations companys sale junos pulse driven product rationalization connection companys initiative focus projects highest potential growth note 9 restructuring charges following table presents restructuring charges included cost revenues restructuring charges consolidated statements operations companys restructuring plans millions restructuring charges noted based companys 2014 restructuring plan restructuring plans committed management changes estimates executing approved plans reflected companys results operations 2014 restructuring plan first quarter 2014 company initiated restructuring plan “2014 restructuring plan” designed refocus companys strategy optimize structure improve operational efficiencies 2014 restructuring plan consists workforce reductions facility consolidations closures asset writedowns contract terminations charges year ended december 31 2014 company recorded 520 million severance costs 142 million facility consolidation closures costs 854 million impairment charges related licensed software 123 million asset writedowns 23 million charges related contract terminations recorded restructuring charges consolidated statements operations connection facility consolidation closures charge 142 million juniper networks inc notes consolidated financial statements continued company consent landlord administrative agent holder certain liens secured upon buildings leased premises assigned certain real property leases totaling approximately 04 million square feet third party concurrently assignments company executed sublease assignee one properties approximately 01 million square feet period two years onetime right extend term six months arrangements company paid 123 million landlord released future lease obligations following date assignments company also incurred 53 million transaction fees recorded restructuring charges consolidated statements operations offsetting charges adjustment relating deferred rent liability relating premises 98 million company also recorded inventory writedowns 155 million intangibles writedowns 193 million charge related products contract manufacturers 67 million acceleration endofservice life certain products cost revenues consolidated statements operations year ended december 31 2014 restructuring plan substantially completed december 31 2014 company expect record significant future charges restructuring plan 2013 restructuring plan 2013 company initiated restructuring plan 2013 restructuring plan continue improve cost structure rationalize product portfolio rebalance investments 2013 restructuring plan consists workforce reductions contract terminations project cancellations company recorded 06 million severance costs related 2013 restructuring plan year ended december 31 2014 2013 restructuring plan total costs incurred december 31 2014 289 million 33 million recorded within cost revenues 256 million recorded within restructuring charges consolidated statements operations restructuring activities related plan substantially complete company expect record significant future charges plan 2012 restructuring plan 2012 company initiated restructuring plan 2012 restructuring plan bring cost structure line desired longterm financial strategic model 2012 restructuring plan consists workforce reductions facility consolidations closures supply chain procurement efficiencies year ended december 31 2014 company continued implement restructuring activities 2012 restructuring plan recorded 02 million charges facility consolidations closures 2012 restructuring plan total costs incurred december 31 2014 1128 million 580 million recorded within cost revenues primarily related certain inventory intangible asset impairment charges 548 million recorded within restructuring charges consolidated statements operations restructuring activities related plan substantially complete company expect record significant future charges plan restructuring liability restructuring liabilities reported within accrued liabilities longterm liabilities consolidated balance sheets following table provides summary changes restructuring liability related companys plans year ended december 31 2014 millions december 31 2014 companys restructuring liability 170 million 96 million related severance charges expected settled first quarter 2015 remaining 74 million related facility closures expected paid march 2018 juniper networks inc notes consolidated financial statements continued note 10 longterm debt financing longterm debt following table summarizes companys longterm debt millions except percentages march 2011 company issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes february 2014 company issued 3500 million aggregate principal amount 450 senior notes due 2024 notes collectively notes 2024 notes senior unsecured obligations rank equally companys existing future senior unsecured indebtedness interest notes payable cash semiannually company may redeem notes time whole time part subject makewhole premium event change control holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principle amount plus accrued unpaid interest indenture governs notes also contains various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds effective interest rates notes include interest notes accretion discount amortization issuance costs december 31 2014 company compliance covenants indentures governing companys notes revolving credit facility june 27 2014 company entered credit agreement credit agreement certain institutional lenders citibank na administrative agent provides 5000 million unsecured revolving credit facility option company increase amount credit facility additional 2000 million subject certain conditions proceeds loans made credit agreement may used company working capital general corporate purposes revolving loans may borrowed repaid reborrowed june 27 2019 time amounts borrowed must repaid borrowing may denominated companys option us dollars pounds sterling euro borrowings credit agreement bear interest either floating rate per annum equal base rate plus margin 000 050 depending companys public debt rating ii per annum rate equal reserve adjusted eurocurrency rate plus margin 090 150 depending companys public debt rating base rate defined greatest citibanks base rate b federal funds rate plus 050 c ice benchmark administration settlement rate applicable dollars period one month plus 100 eurocurrency rate determined us dollars pounds sterling rate deposits currency offered london interbank market applicable interest period euro rate specified deposits euro maturity comparable applicable interest period december 31 2014 company compliance covenants credit agreement amounts outstanding juniper networks inc notes consolidated financial statements continued customer financing arrangements company provides certain distribution partners access extended financing arrangements certain enduser customers require longer payment terms typically provided company factoring accounts receivable thirdparty financing providers financing providers program intended affect timing companys revenue recognition financing arrangements proceeds financing provider due company within 30 90 days sale receivable transactions financing provider company surrenders control transferred assets factored accounts receivable isolated company put beyond reach companys creditors even event bankruptcy company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred 2014 company transitioned certain distribution partners third party financing program companys commercial payment terms result companys customer financing activities significantly declined fiscal year 2013 2014 pursuant financing arrangements sale receivables company sold net receivables 4403 million 8984 million 6778 million years ended december 31 2014 2013 2012 respectively company received cash proceeds financing provider 6021 million 8439 million 6798 million years ended december 31 2014 2013 2012 respectively december 31 2014 december 31 2013 amounts owed financing provider 280 million 1898 million respectively recorded accounts receivable company’s consolidated balance sheets company provided guarantees thirdparty financing companies certain thirdparty financing arrangements extended certain enduser customers terms four years company liable aggregate unpaid payments thirdparty financing company event customer default december 31 2014 company required make payments arrangements pursuant arrangements company guarantees thirdparty financing arrangements 222 million december 31 2014 portion receivable financed recognized revenue accounted financing arrangement included accrued liabilities longterm liabilities consolidated balance sheets december 31 2014 2013 estimated cash received financing provider recognized revenue distributors 675 million 623 million respectively note 11 equity cash dividends shares common stock 2014 company declared two quarterly cash dividends 010 per share july 22 2014 october 23 2014 paid september 23 2014 december 23 2014 stockholders record close business september 2 2014 december 2 2014 respectively aggregate amount 860 million future dividends establishment record payment dates subject approval board directors board juniper networks authorized committee thereof see note 18 subsequent events discussion companys dividend declaration subsequent december 31 2014 stock repurchase activities february 2014 companys board approved stock repurchase program authorized company repurchase 21 billion common stock including 12 billion pursuant accelerated share repurchase program 2014 stock repurchase program october 2014 board authorized 13 billion increase 2014 stock repurchase program total 34 billion december 31 2014 12 billion authorized funds remaining 2014 stock repurchase program addition repurchases company’s stock repurchase program company also repurchases common stock certain employees connection net issuance shares satisfy minimum tax withholding obligations upon vesting certain stock awards issued employees juniper networks inc notes consolidated financial statements continued following table summarizes companys repurchases retirements common stock repurchase programs accelerated share repurchase repurchases associated minimum tax withholdings millions except per share amounts 1 part 2014 stock repurchase program company entered two separate accelerated share repurchase agreements collectively asr two financial institutions repurchase 12 billion companys common stock company made upfront payment 12 billion pursuant asr repurchase companys common stock aggregate number shares ultimately purchased determined based volume weighted average repurchase price less agreed upon discount shares received respect asr retired shares return authorized unissued shares common stock company intends repurchase 10 billion common stock end second quarter 2015 part three year capital return program future share repurchases company’s stock repurchase programs subject review circumstances time made time private transactions open market purchases permitted securities laws legal requirements companys stock repurchase programs may discontinued time see note 18 subsequent events discussion companys stock repurchase activity subsequent december 31 2014 juniper networks inc notes consolidated financial statements continued accumulated comprehensive loss income net tax components accumulated comprehensive income net related taxes years ended december 31 2014 december 31 2013 follows millions 1 reclassifications accumulated comprehensive income years ended december 31 2014 december 31 2013 realized gains availableforsale securities 1043 million 10 million respectively included income expense net consolidated statements operations 2 reclassifications accumulated comprehensive income year ended december 31 2014 realized gains cash flow hedges included within research development 14 million sales marketing 03 million general administrative 07 million realized losses within cost revenues 01 million hedged transactions relate consolidated statements operations reclassifications accumulated comprehensive income year ended december 31 2013 realized gains cash flow hedges included within cost revenues 11 million sales marketing 43 million realized losses within research development 34 million general administrative 05 million hedged transactions relate consolidated statements operations juniper networks inc notes consolidated financial statements continued note 12 employee benefit plans equity incentive plans company’s equity incentive plans include 2006 equity incentive plan “2006 plan” 2000 nonstatutory stock option plan “2000 plan” amended restated 1996 stock plan “1996 plan” various equity incentive plans assumed acquisitions 2008 employee stock purchase plan espp plans company granted case acquired plans assumed stock options restricted stock units rsus restricted stock awards rsas performance share awards psas december 31 2014 total approximately 823 million shares common stock reserved future issuance upon exercise stock options vesting rsus rsas psas future grant sharebased compensation awards companys equity incentive plans 2006 plan adopted approved company’s stockholders may 2006 date companys stockholders approved share reserve 1495 million shares common stock plus addition shares subject options 2000 plan 1996 plan outstanding may 18 2006 subsequently expire unexercised maximum additional 750 million shares december 31 2014 2006 plan 271 million shares subject currently outstanding equity awards 478 million shares available future issuance options granted 2006 plan maximum term seven years date grant generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan rsus psas vest solely based continuing employment provision services vest full earlier three years grant date event vesting based factors continued future provision services awards vest full earlier one year grant date 2012 2014 company completed acquisitions mykonos contrail wandl assumed respective plans mykonos software inc 2010 stock plan contrail systems inc 2012 stock plan wandl inc 2013 restricted stock unit plan connection plans company assumed stock options rsus rsas psas exchanged assumed awards juniper networks stock options rsus rsas psas respectively additional awards granted plans company assumed aggregate 85 million shares stock options rsus rsas psas connection acquisitions mykonos contrail wandl december 31 2014 stock options rsus rsas psas representing approximately 41 million shares common stock outstanding awards assumed companys acquisitions espp adopted may 2008 date companys stockholders approved share reserve 190 million shares companys common stock issuance espp permits eligible employees acquire shares company’s common stock 15 discount offering price determined espp periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year december 31 2014 approximately 157 million shares issued 33 million shares remain available future issuance espp juniper networks inc notes consolidated financial statements continued stock option activities since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant following table summarizes company’s stock option activity related information three years ended december 31 2014 millions except per share amounts years stock options assumed connection acquisition contrail aggregate intrinsic value represents difference company’s closing stock price last trading day period 2232 per share december 31 2014 exercise price multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 334 million 294 million 279 million 2014 2013 2012 respectively total fair value options vested 2014 2013 2012 208 million 452 million 709 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes additional information regarding outstanding exercisable options december 31 2014 restricted stock unit restricted stock award performance share award activities rsus rsas generally vest period three four years date grant psas generally vest period two three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding juniper networks inc notes consolidated financial statements continued following table summarizes company’s rsu rsa psa activity related information three years ended december 31 2014 millions except per share amounts years 1 rsus assumed connection acquisition mykonos 2 rsus rsas assumed connection acquisition contrail 3 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 09 million shares depending achievement performance goals range shares could issued awards 0 22 million shares 4 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 11 million shares depending achievement performance goals range shares could issued awards 0 22 million shares 5 includes servicebased marketbased rsus granted 2006 plan according terms 6 rsus rsas psas assumed connection acquisition wandl juniper networks inc notes consolidated financial statements continued 7 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 09 million shares depending achievement performance goals range shares could issued awards 0 14 million shares 8 total fair value rsus rsas psas vested 2014 2013 2012 2101 million 2215 million 1320 million respectively 9 february 20 2014 company announced intention initiate quarterly cash dividend 010 per share common stock third quarter 2014 result companys announcement grant date fair value rsus psas granted announcement date reduced present value dividends expected paid underlying shares common stock requisite derived service period awards entitled receive dividends vested company paid quarterly cash dividends third fourth quarter 2014 010 per share totaling 860 million declaration amount future cash dividends discretion board directors depend companys financial performance economic outlook relevant considerations shares available grant following table presents stock activity total number shares available grant 2006 plan december 31 2014 millions 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 includes canceled expired options 1996 plan 2000 plan expired may 18 2006 become available grant 2006 plan according terms employee stock purchase plan companys espp implemented series offering periods six months duration shorter period determined board employees purchased approximately 29 million 33 million 35 million shares common stock espp average exercise price 1930 1653 1626 per share 2014 2013 2012 respectively juniper networks inc notes consolidated financial statements continued valuation assumptions weightedaverage assumptions used resulting estimates fair value stock options espp marketbased rsus follows 1 blackscholesmerton optionpricing model utilized estimate fair value stock options espp 2 fair value marketbased rsus utilizes monte carlo simulation option pricing model company amortizes fair value awards derived service period adjusted estimated forfeitures separately vesting tranche award provided derived service rendered total fair value marketbased rsus date grant recognized compensation expense even market condition achieved however number shares ultimately vest vary significantly performance specified market criteria sharebased compensation expense sharebased compensation expense associated stock options rsus rsas psas espp recorded following cost expense categories companys consolidated statements operations millions juniper networks inc notes consolidated financial statements continued following table summarizes sharebased compensation expense award type millions following table presents unrecognized compensation cost adjusted estimated forfeitures recognized weightedaverage period related unvested stock options rsus rsas psas december 31 2014 millions except years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company currently matches 30 eligible employee contributions vest immediately company’s matching contributions plan totaled 202 million 207 million 202 million years ended december 31 2014 2013 2012 respectively deferred compensation plan company’s nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds nqdc plan assets included within shortterm investments offsetting obligations included within accrued compensation consolidated balance sheets investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded income expense net offsetting compensation expense recorded operating expenses consolidated statements operations deferred compensation liability nqdc plan approximately 163 million 154 million december 31 2014 december 31 2013 respectively juniper networks inc notes consolidated financial statements continued note 13 segments 2014 company realigned organization onejuniper structure includes consolidating companys rd gotomarket functions reduce complexity increase clarity responsibilities improve efficiency result changes consolidated business considered one reportable segment consistent company’s chief operating decision maker codm views business allocates resources assesses performance company continues sell highperformance network products service offerings across routing switching security service provider enterprise markets following table presents net revenues product service millions company attributes revenues geographic region based customer’s shipto location following table presents net revenues geographic region millions years ended december 31 2014 2013 customer accounted greater 10 companys net revenues year ended december 31 2012 verizon accounted 103 companys net revenues following table presents geographic information property equipment net purchased intangible assets net millions company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2014 december 31 2013 attributable us operations juniper networks inc notes consolidated financial statements continued note 14 income taxes components pretax loss income noncontrolling interest summarized follows millions provision income taxes summarized follows millions provision income taxes differs amount computed applying federal statutory rate pretax loss income follows millions 2014 company provided tax pretax loss primarily due nondeductible goodwill charge 2013 company recorded 642 million net income tax benefit related items unique year amounts included 197 million multiyear claim related us production activities deduction 283 million tax settlement irs 162 million us federal rd tax credit resulting american taxpayer relief act 2012 signed january 2 2013 retroactively reinstated us federal rd tax credit january 1 2012 december 31 2013 juniper networks inc notes consolidated financial statements continued deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities follows millions breakdown current longterm deferred tax assets deferred tax liabilities follows millions december 31 2014 2013 company valuation allowance us domestic deferred tax assets approximately 1445 million 1557 million respectively balance december 31 2014 consisted approximately 1252 million 97 million companys california massachusetts deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 96 million related losses capital nature may carry forward offset future capital gains valuation allowance decreased 112 million 2014 related utilization losses capital nature offset increase california rd credit valuation allowance increased 2013 147 million related increase california rd credit december 31 2014 company federal california net operating loss carryforwards approximately 16 million 278 million respectively company also california tax credit carryforwards approximately 2319 million approximately 162 million benefit california tax credit carryforwards credited additional paidin capital realized companys income tax returns unused net operating loss carryforwards expire various dates beginning year 2021 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 19 billion cumulative undistributed earnings certain foreign subsidiaries december 31 2014 earnings juniper networks inc notes consolidated financial statements continued considered indefinitely invested operations outside us company intends utilize amounts fund future expansion international operations earnings distributed united states form dividends otherwise shares relevant foreign subsidiaries sold otherwise transferred company would subject additional us income taxes subject adjustment foreign tax credits foreign withholding taxes determination amount unrecognized deferred income tax liability related earnings practicable december 31 2014 2013 2012 total amount gross unrecognized tax benefits 1992 million 1376 million 1361 million respectively december 31 2014 approximately 1649 million 1992 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2014 2013 2012 company accrued interest penalties related unrecognized tax benefits 223 million 184 million 167 million respectively within longterm liabilities consolidated balance sheets company recognized expense net interest penalties 28 million 06 million benefit 06 million consolidated statements operations years ended december 31 2014 2013 2012 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease approximately 32 million within next twelve months due lapses applicable statutes limitations completion tax review cycles various tax jurisdictions 2013 company executed closing agreement appeals division irs related intercompany rd cost sharing arrangement license intangibles acquired 2004 2005 2006 company reached final resolution irs proposed adjustments tax years 2006 resulted settlement approximately 196 million including interest company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions netherlands uk france germany japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 company currently examination irs 2007 2009 tax years california franchise tax board 2004 2006 tax years company also subject separate ongoing examinations india tax authorities 2004 tax year 2004 2008 tax years 2008 2010 tax years company aware examinations tax authorities major jurisdictions files income tax returns december 31 2014 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands accordance administrative judicial process juniper networks inc notes consolidated financial statements continued india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative remedies relative matters company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations note 15 net income per share company computed basic diluted net loss income per share attributable juniper networks common stockholders follows millions except per share amounts basic net income per share computed using net loss income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net loss income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options issuances espp vesting rsus rsas psas company includes common shares underlying psas calculation diluted net income per share become contingently issuable excludes shares contingently issuable potentially dilutive common shares excluded computation diluted net loss per share effect would antidilutive juniper networks inc notes consolidated financial statements continued note 16 commitments contingencies operating leases following table summarizes company’s future minimum payments noncancelable operating leases next five years thereafter december 31 2014 millions company leases facilities certain equipment noncancelable operating leases expire various dates october 31 2024 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses rent expense 2014 2013 2012 approximately 460 million 528 million 632 million respectively purchase commitments contract manufacturers suppliers order reduce manufacturing lead times ensure adequate component supply company enters agreements contract manufacturers certain suppliers procure inventory based companys requirements significant portion companys purchase commitments arising agreements consists firm noncancelable commitments purchase commitments totaled 4762 million december 31 2014 company establishes liability connection purchase commitments related quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers based company’s demand forecast customer orders december 31 2014 company accrued 253 million based estimate charges includes 94 million related net losses firm noncancelable purchase commitments longterm debt interest payment longterm debt december 31 2014 company held longterm debt consisting senior notes carrying value 13490 million notes 3000 million mature 2016 bears interest fixed rate 310 3000 million mature 2021 bears interest fixed rate 460 3500 million mature 2024 bears interest fixed rate 450 4000 million mature 2041 bears interest fixed rate 595 interest notes payable semiannually see note 10 longterm debt financing discussion companys longterm debt contractual obligations december 31 2014 contractual obligations primarily consisted 460 million indemnityrelated service related escrows required connection certain asset purchases acquisitions completed 2005 2014 campus buildout obligations 35 million 192 million agreements firm noncancelable specify terms including fixed minimum quantities purchased fixed minimum variable price provisions approximate timing payment tax liabilities december 31 2014 company 1775 million included longterm income taxes payable consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes juniper networks inc notes consolidated financial statements continued guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights thirdparty company also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements custom duty guarantees standby letters credit certain lease facilities december 31 2014 december 31 2013 company 262 million 401 million respectively financing arrangements bank guarantees standby letters credit related financial guarantees 222 million financing guarantees recorded accrued liabilities longterm liabilities consolidated balance sheets december 31 2014 see note 10 longterm debt financing discussion companys thirdparty customer financing arrangements contain guarantee provisions legal proceedings investigations us securities exchange commission sec us department justice doj conducting investigations possible violations company us foreign corrupt practices act fcpa company cooperating agencies regarding matters company’s audit committee assistance independent advisors investigating conducting thorough review possible violations fcpa made recommendations remedial measures including employee disciplinary actions foreign jurisdictions company implemented continues implement company unable predict duration scope outcome sec doj investigations believes adverse outcome reasonably possible however company able estimate reasonable range possible loss sec andor doj could take action us could agree settle event could required pay substantial fines sanctions andor implement additional remedial measures addition may determined violated fcpa litigation addition investigations discussed company involved disputes litigation legal actions company aggressively defending current litigation matters assurances outcome matters currently determinable company currently believes none existing claims proceedings likely material adverse effect financial position many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses record accrual loss contingencies legal proceedings believe unfavorable outcome probable b amount range possible loss reasonably estimable recorded accrual loss contingencies associated legal proceedings investigations discussed juniper networks inc notes consolidated financial statements continued note 17 selected quarterly financial data unaudited tables set forth selected unaudited financial data quarter two years ended december 31 2014 millions except per share amounts 1 first quarter 2014 company initiated 2014 restructuring plan consisted 847 million asset writedowns 280 million severance costs 08 million contract terminations recorded restructuring charges addition company recorded inventory writedowns related acceleration endofservice life certain products totaling 84 million cost revenues second quarter company recorded 99 million severance costs 376 million facility consolidation closures 89 million asset writedowns 15 million contract terminations recorded restructuring charges company also recorded inventory writedowns 115 million charge related products contract manufacturers 23 million acceleration endoflife service certain products cost revenues third quarter company recorded 71 million severance costs benefit 250 million facility consolidation closures result lease assignment 29 million asset writedowns recorded restructuring credit charges fourth quarter company recorded 69 million severance costs 16 million facility consolidation closures 206 million asset impairment writedowns 2 fourth quarter 2014 company recorded 8500 million goodwill impairment charge related security reporting unit 3 first quarter 2014 company recorded gain 1630 million related sale investments converted privatelyheld investments publiclytraded equity upon ipo second quarter company entered settlement agreement pan resulted realized gain legal settlement 1953 million net legal fees pan securities sold third quarter company recorded additional 08 million gain fourth quarter company recorded gain 196 million sale junos pulse 4 net income loss per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 5 july 22 2014 october 23 2014 company declared quarterly cash dividend 010 per share common stock stockholders record close business september 2 2014 december 2 2014 respectively juniper networks inc notes consolidated financial statements continued 1 second quarter 2013 company extended useful lives certain computers equipment based actual historical usage demonstrated longer useful lives well planned use assets change accounted change estimate applied prospectively change accounting estimate decreased depreciation expense within research development expense approximately 110 million 001 per diluted share second quarter 2013 94 million 001 third quarter 2013 79 million 001 fourth quarter 2013 2 third quarter 2013 company implemented 2013 restructuring plan workforce reductions contract terminations project cancellations recorded restructuring charges 74 million 37 million operating expenses cost revenues respectively fourth quarter 2013 company continued implement restructuring activities 2013 restructuring plan primarily recorded charges operating expenses 176 million 3 net income per share computed independently therefore sum quarterly net income per share may equal total computed year cumulative interim period 4 certain amounts prior quarters condensed consolidated statements operations reclassified conform current year presentation note 18 subsequent events dividend declaration january 27 2015 company announced declared quarterly cash dividend 010 per share common stock payable march 24 2015 stockholders record close business march 3 2015 stock repurchase activities subsequent december 31 2014 filing report company repurchased 109 million shares common stock aggregate purchase price 2481 million average price 2275 per share 2014 stock repurchase program settled prior filing report 2014 stock repurchase program company 9269 million authorized funds remaining filing date item 9item 8 consolidated financial statements supplementary data management’s annual report internal control financial reporting juniper networks inc’s management responsible establishing maintaining adequate internal control company’s financial reporting assessed effectiveness company’s internal control financial reporting december 31 2005 making assessment used criteria set forth committee sponsoring organizations treadway commission coso internal controlintegrated framework based assessment using criteria concluded december 31 2005 juniper networks inc’s internal control financial reporting effective juniper networks inc’s independent registered public accounting firm ernst young llp audited financial statements included annual report form 10k issued audit report management’s assessment company’s internal control financial reporting report appears page 43 annual report form 10k please note inherent limitations effectiveness system internal control including possibility human error circumvention overriding controls accordingly even effective internal controls provide reasonable assurances respect financial statement preparation changes conditions effectiveness internal control may vary time sunnyvale california march 3 2006 index consolidated financial statements report independent registered public accounting firm report independent registered public accounting firm consolidated statements operations consolidated balance sheets consolidated statements cash flows consolidated statements stockholders’ equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2005 2004 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2005 audits also included financial statement schedule listed index item 15a financial statements schedule responsibility company’s management responsibility express opinion financial statements schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2005 2004 consolidated results operations cash flows three years period ended december 31 2005 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness juniper networks inc’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated march 3 2006 expressed unqualified opinion thereon ernst young llp san jose california march 3 2006 report independent registered public accounting firm board directors stockholders juniper networks inc audited management’s assessment included accompanying management’s annual report internal control financial reporting juniper networks inc maintained effective internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks inc’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment juniper networks inc maintained effective internal control financial reporting december 31 2005 fairly stated material respects based coso criteria also opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states 2005 consolidated financial statements juniper networks inc report dated march 3 2006 expressed unqualified opinion thereon ernst young llp san jose california march 3 2006 juniper networks inc consolidated statements operations thousands except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets thousands except share data par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows thousands see accompanying notes consolidated financial statements juniper networks inc consolidated statements stockholders’ equity thousands see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business juniper networks inc “juniper networks” “company” founded 1996 develop sell products would able meet stringent demands service providers today company designs sells products services together provide customers secured assured internet protocol “ip” secure networking solutions company’s solutions incorporated global web interconnected public private networks across variety media including voice video data travel end users around world company’s network infrastructure solutions enable service providers networkintensive businesses support deliver services applications highly efficient low cost integrated network company’s service layer technologies “slt” solutions meet broad array customer’s priorities protecting network protecting data network maximizing existing bandwidth acceleration applications across distributed network together company’s secure networking solutions enable customers convert networks provide commoditized best efforts services valuable assets provide differentiation value increased reliability security end users company sells markets products direct sales organization valueadded resellers distributors 2005 company completed acquisitions funk software inc “funk” acorn packet solutions inc “acorn” peribit networks inc “peribit” redline networks inc “redline” kagoor networks inc “kagoor” 2004 company completed acquisition netscreen technologies inc “netscreen” result acquisitions company expanded customer base portfolio products offers two categories networking products infrastructure products consist predominately original juniper networks router portfolio acorn products slt products consist predominately former funk peribit redline kagoor netscreen products note 2 summary significant accounting policies basis presentation consolidated financial statements include company wholly owned subsidiaries intercompany balances transactions eliminated use estimates preparation financial statements related disclosures conformity accounting principles generally accepted united states requires management make estimates judgments affect amounts reported consolidated financial statements accompanying notes estimates used revenue recognition allowance sales returns allowance doubtful accounts allowance contract manufacturer obligations allowance warranty costs goodwill impairments income taxes litigation settlement costs loss contingencies company bases estimates historical experience also assumptions believes standard reasonable actual results experienced company may differ materially management’s estimates cash equivalents highly liquid investments purchased original maturity three months less classified cash equivalents cash equivalents consist cash hand balances banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities investments management determines appropriate classification securities time purchase reevaluates classification balance sheet date realized gains losses declines value judged temporary determined based specific identification method reported consolidated statements operations company’s investments publicly traded equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value comprehensive income equity investments juniper networks investments privately held companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment juniper networks markets may never significant company monitors investments impairment considering financial operational economic data makes appropriate reductions carrying values necessary fair value financial instruments carrying value company’s financial instruments including cash equivalents accounts receivable accrued compensation accrued liabilities approximates fair market value due relatively short period time maturity fair value investments determined using quoted market prices securities similar financial instruments concentrations financial instruments subject juniper networks concentrations credit risk consist primarily cash equivalents investments accounts receivable juniper networks maintains cash equivalents investments fixed income securities highquality institutions invests high quality credit instruments deposits held banks may exceed amount insurance provided deposits generally deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising company’s customer base dispersion across different geographic locations throughout world juniper networks performs ongoing credit evaluations customers generally require collateral accounts receivable juniper networks maintains reserves potential credit losses historically losses within management’s expectations one customer accounted 14 15 total net revenues 2005 2004 respectively two customers individually accounted 15 13 total net revenues 2003 company relies sole suppliers certain components asics custom sheet metal additionally juniper networks relies primarily two significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements juniper networks could negatively impact future operating results property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method lesser estimated useful life generally three five years lease term respective assets land acquired january 2001 depreciated goodwill purchased intangible assets goodwill represents excess purchase price fair value net tangible identifiable intangible assets acquired business combination intangible assets resulting acquisitions entities accounted using purchase method accounting estimated management based fair value assets received identifiable intangible assets comprised purchased trademarks developed technologies customer maintenance contracts intangible assets goodwill subject amortization subject annual assessment minimum impairment applying fairvalue based test future goodwill impairment tests could result charge earnings purchased intangibles finite lives amortized straightline basis respective estimated useful lives ranging two twelve years impairment company evaluates longlived assets heldforuse impairment whenever events changes circumstances indicate carrying amount asset may recoverable asset considered impaired carrying amount exceeds future net cash flow asset expected generate asset considered impaired impairment recognized measured amount carrying amount asset exceeds fair market value company assesses recoverability longlived intangible assets determining whether unamortized balances recovered undiscounted future net cash flows related assets amount impairment measured based projected discounted future net cash flows company evaluates goodwill minimum annual basis whenever events changes circumstances indicate carrying amount asset may recoverable impairment goodwill tested reporting unit level comparing reporting unit’s carrying value including goodwill fair value reporting unit fair values reporting units estimated using combination income discounted cash flows approach market approach utilizes comparable companies’ data carrying value reporting unit exceeds fair value goodwill considered impaired second step performed measure amount impairment loss juniper networks conducted annual impairment test november 1 2005 determined goodwill impaired events circumstances date december 31 2005 would impact assessment revenue recognition juniper networks sells products services direct sales force strategic distribution relationships valueadded resellers company recognizes revenue persuasive evidence arrangement exists delivery performance occurred sales price fixed determinable collectibility reasonably assured evidence arrangement generally consists customer purchase orders certain instances sales contracts agreements shipping terms related documents written evidence customer acceptance applicable used verify delivery performance company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment collectibility assessed based creditworthiness customer determined credit checks customer’s payment history company arrangements products services bundled company determines whether deliverables separable multiple units accounting company allocates total fee arrangements individual deliverables either based relative fair values using residual method circumstances dictate company recognizes revenue deliverable accordance policies product service revenue recognition sales direct endusers valueadded resellers company recognizes product revenue upon transfer title risk loss generally upon shipment company’s practice identify enduser prior shipment valueadded reseller endusers valueadded resellers company significant obligations future performance rights return pricing credits portion company’s sales made distributors agreements allowing pricing credits andor rights return product revenue sales made distributors recognized upon sellthrough reported distributors company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria included rebate agreements factors known time shipping charges billed customers included product revenue related shipping costs included cost product revenues company’s resellers distributors participate various cooperative marketing programs maintains estimated accruals allowances programs services include maintenance training consulting service maintenance includes contracts 24hour technical support hardware repair replacement parts unspecified upgrades available basis service maintenance offered renewable feebased contracts revenue customer support contracts deferred recognized ratably contractual support period generally one year revenue training consulting recognized services completed ratably contractual period allowance doubtful accounts allowance doubtful accounts based company’s assessment collectibility customer accounts juniper networks regularly reviews allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customer’s ability pay warranties juniper networks generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty generally includes parts labor obtained company’s 24hour service center occasion specific terms conditions warranties vary company accrues warranty costs based estimates costs may incurred warranty obligations including material costs technical support labor costs associated overhead warranty accrual included company’s cost revenues recorded time revenue recognized factors affect company’s warranty liability include number installed units estimates anticipated rates warranty claims costs per claim estimated support labor costs associated overhead company periodically assesses adequacy recorded warranty liabilities adjusts amounts necessary contract manufacturer liabilities company outsources manufacturing repair supply chain management operations independent contract manufacturers significant portion cost revenues consists payments independent contract manufacturers procure components manufacture company’s products based company’s demand forecasts based company’s estimates future demand company products turn based historical trends analysis company’s sales marketing organizations adjusted overall market conditions company establishes accrued liabilities included current accrued liabilities accompanying consolidated balance sheets carrying charges obsolete material charges excess components purchased based historical trends research development costs research design develop company’s products expensed incurred software development costs capitalized beginning product’s technological feasibility established ending product available general release customers generally juniper networks’ products released soon technological feasibility established result costs subsequent achieving technological feasibility significant software development costs expensed incurred advertising costs charged sales marketing expense incurred advertising expense 66 million 79 million 13 million 2005 2004 2003 respectively litigation settlement costs time company involved disputes litigation legal actions company records charge equal least minimum estimated liability loss contingency following conditions met information available prior issuance financial statements indicates probable asset impaired liability incurred date financial statements ii range loss reasonably estimated however actual liability litigation may materially different company’s estimates could result need record additional expenses loss contingencies company subject possibility various loss contingencies arising ordinary course business considers likelihood loss impairment asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available management determine whether accruals adjusted whether new accruals required stockbased compensation company’s stock option plans accounted intrinsic value recognition measurement principles apb opinion 25 “apb 25” accounting stock issued employees related interpretations exercise price options granted plans equal market price underlying common stock grant date stockbased employee compensation cost acquisitionrelated compensation cost recognized net income following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 “sfas 123” accounting stockbased compensation employee stock benefits including shares issued stock option plans company’s stock purchase plan pro forma information net tax effect follows millions except per share amounts preparation notes consolidated financial statements 2005 company determined calculation pro forma stockbased compensation expense disclosed sfas 123 2004 reported inadvertently include proper fair value options assumed acquisition 2004 accordingly amount pro forma stockbased compensation expense presented table 2004 revised 2004 previously reported pro forma net income 693 million previously reported pro forma basic net income per share 014 previously reported pro forma diluted net income per share 013 revision effect company’s previously reported consolidated results operations financial condition derivatives company’s policy use derivatives partially offset market exposure fluctuations foreign currencies company enter derivatives speculative trading purposes juniper networks uses foreign currency forward contracts mitigate transaction gains losses generated certain foreign currency denominated monetary assets liabilities derivatives carried fair value changes recorded income expense changes fair value derivatives largely offset remeasurement underlying assets liabilities foreign exchange contracts maturities one two months periodically company uses foreign currency forward andor option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year effective portion derivative’s gain loss initially reported component accumulated comprehensive income upon occurrence forecasted transaction subsequently reclassified consolidated statements operations line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2005 2004 2003 income expense consolidated statements operations provision income taxes estimates judgments occur calculation certain tax liabilities determination recoverability certain deferred tax assets arise temporary differences carryforwards deferred tax assets liabilities measured using currently enacted tax rates apply taxable income effect years tax assets expected realized settled deferred tax assets attributable tax deductions related stock options considered realizable prior utilization tax returns point current tax savings results equity credited savings company regularly assesses likelihood deferred tax assets realized recoverable income taxes recovered future taxable income based realization criteria set forth sfas 109 “accounting income taxes” records valuation allowance reduce deferred tax assets amount believes likely realizable company believes likely forecasted income together tax effects deferred tax liabilities sufficient fully recover remaining deferred tax assets event part net deferred tax assets determined realizable future adjustment valuation allowance would charged earnings period determination made similarly company subsequently realizes deferred tax assets previously determined unrealizable respective valuation allowance would reversed resulting positive adjustment earnings decrease goodwill period determination made addition calculation tax liabilities involves dealing uncertainties application complex tax regulations company recognizes potential liabilities based estimate whether extent additional taxes due comprehensive income comprehensive income defined change equity period nonowner sources company presented comprehensive income part consolidated statements stockholders’ equity comprehensive income includes net unrealized losses availableforsale securities net foreign currency translation gains losses excluded net income foreign currency translation assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period foreign currency translation gains losses material years ended december 31 2005 2004 2003 effect exchange rate changes cash balances held foreign currencies immaterial years presented recent accounting pronouncements december 16 2004 financial accounting standards board fasb issued fasb statement 123 revised 2004 “sfas 123r” sharebased payment revision sfas 123 accounting stock issued employees sfas 123r supersedes apb 25 amends fasb statement 95 statement cash flows generally approach sfas 123r similar approach described sfas 123 however sfas 123r requires sharebased payments employees including grants employee stock options recognized income statement based fair values pro forma disclosure longer alternative sfas 123r permits public companies adopt requirements using one two methods modified prospective method modified retrospective method company plans adopt sfas 123r using modified prospective method compensation cost recognized beginning effective date based requirements sfas 123r sharebased payments granted effective date b based requirements sfas 123 awards granted employees prior effective date sfas 123r remain unvested effective date company recognize results operations compensation cost stockbased awards issued december 31 2005 straightline basis requisite service period entire award stockbased awards issued prior january 1 2006 company amortizes related compensation costs using gradedvesting method permitted sfas 123 company currently accounts sharebased payments employees using apb 25 intrinsic value method generally recognizes compensation cost employee stock options adoption sfas 123r fair value method significant adverse impact company’s reported results operations stockbased compensation expense charged directly company’s reported earnings pretax balance unearned stockbased compensation expensed period 2006 2010 related sharebased awards unvested december 31 2005 previously calculated disclosureonly requirements sfas 123 approximately 98 million modifications cancellations underlying unvested securities company may required accelerate increase cancel remaining unearned stockbased compensation expense extent company grants additional equity securities employees assumes unvested securities connection acquisitions stockbased compensation expense increased additional unearned compensation resulting additional grants acquisitions company anticipates grant additional employee stock options restricted stock units 2006 fair value grants included amount impact grants cannot predicted time depends number sharebased payments granted current fair values sfas 123r also requires benefits tax deductions excess recognized compensation cost reported financing cash flow rather operating cash flow required current standard requirement likely reduce net operating cash flow increase net financing cash flows periods adoption company cannot estimate amounts future depend among things employees exercise stock options amount operating cash flows recognized prior periods excess tax deductions 1295 million 660 million 108 million 2005 2004 2003 respectively november 2005 fasb issued fsp fas 123r3 transition election accounting tax effects guidance provides simplified method calculate additional paidin capital apic pool beginning balance excess tax benefits method determining subsequent impact pool option awards outstanding fully partially vested upon adoption sfas 123r beginning january 1 2006 addition fsp addresses alternative apic pool calculation used tax benefits related certain employee awards included cash flow financing activities cash outflow operating activities within statements cash flows fsp allows companies one year later adoption date sfas 123r november 10 2005 evaluate available transition alternatives make onetime election company process evaluating impact new method provided guidance reclassifications certain reclassifications made prior year balances order conform current year’s presentation note 3 business acquisitions juniper networks completed six purchase acquisitions three years ended december 31 2005 company acquired funk acorn peribit redline kagoor 2004 company acquired netscreen total purchase price acquisition respective acquisition dates outlined millions total purchase price certain acquisitions could increase upon release amounts held escrow indemnity obligations upon additional contingent payments allocation initial purchase consideration company allocated purchase price tangible intangible assets acquired liabilities assumed including iprd based fair values excess purchase price fair values recorded goodwill subject change due release amounts held escrow indemnity obligations additional contingent payments changes acquisition related assets liabilities fair values assigned intangible assets acquired based valuations prepared independent third party appraisal firms using estimates assumptions provided management summary purchase price allocations acquisition follows millions purchased intangible assets following table presents details purchased intangible assets acquired millions except years existing technology consists products reached technological feasibility includes products acquired product lines existing technology valued using discounted cash flow “dcf” method calculates value intangible asset present value tax cash flows potentially attributable net return fair value attributable tangible intangible assets maintenance agreements represent revenue generated contracts customers pay annual maintenance support income approach used estimate fair value maintenance agreements includes estimating ongoing aftertax income expected maintenance agreements place time acquisition including expected renewals patents core technology represent combination processes patents trade secrets used existing inprocess technology value trade name trademarks represented benefit owning intangible assets rather paying royalties use intangible assets valued using royalty savings method estimates value intangible assets capitalizing royalties saved company owns assets relationships customers represent rights granted var distributor resell certain products var distributor relationships valued using avoided cost method takes account cost establishing relationship 2005 acquisitions pro forma results operations presented 2005 acquisitions effects acquisitions material juniper either individual aggregate annual basis funk acquisition december 1 2005 company completed acquisition funk leading provider standardsbased network access security solutions developed products technologies protect integrity network ensuring user device meet organization’s security policies granting access purchase price funk included cash payment 1102 million currently excluded aggregate purchase price 1113 million balance 122 million held escrow indemnity obligations onehalf expire january 2007 remaining onehalf june 2007 addition company may required pay certain additional amounts 50 million contingent upon achieving certain agreedupon conditions next 13 months close acquisition contingent payments associated future employment conditions recorded compensation expense incurred close acquisition company recorded liability 03 million associated future lease severance contractual obligations remained paid december 31 2005 acorn acquisition october 20 2005 company completed acquisition acorn’s products technologies provide smooth migration path flexible costeffective connecting legacy time division multiplexing tdm circuitbased applications across nextgeneration ip networks purchase price acorn included cash payment 40 million currently excluded aggregate purchase price 43 million balance 15 million held escrow indemnity obligations expire may 30 2007 addition company may required pay certain additional amounts 22 million contingent upon achieving certain agreedupon conditions next 24 months close acquisition depending contingency additional payments recorded either compensation expense additional purchase price additionally company may required pay additional amount 10 million twoyear period contingent upon future services former acorn employees contingent payments associated future employment conditions recorded compensation expense incurred future lease contractual obligations immaterial time acquisition peribit acquisition july 1 2005 company completed acquisition peribit acquisition enabled company secure assure delivery performance applications ip network premium traffic processing acquisition peribit expand company’s customer base portfolio products acquisition resulted issuance 113 million shares company’s common stock fair value approximately 2564 million former shareholders peribit approximately 16 million shares fair value 352 million established acquisition date held escrow indemnity obligations prescribed merger agreement escrow amount excluded total purchase price 3120 million onehalf indemnity obligations expire first anniversary closing date remaining onehalf expires 18 months closing date july 1 2005 common stock issued acquisition valued using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced april 26 2005 company also assumed outstanding peribit stock options fair value approximately 364 million options valued using blackscholes option pricing model volatility assumption 41 expected life 18 years riskfree interest rate 36 market value company’s common stock 2262 per share determined described close acquisition company recorded liability 30 million associated future lease severance contractual obligations march 2009 december 31 2005 17 million remained paid 09 million payable next 12 months redline acquisition may 2 2005 company completed acquisition redline pioneer development application front end “afe” technology designed network solutions improve performance flexibility scalability webenabled enterprise data centers public web sites purchase price redline included cash payment 975 million 30 million preacquisition loan company redline forgiven assumed stock options aggregate fair value 211 million stock options valued using blackscholes option pricing model inputs 43 volatility 156 years expected life 35 riskfree interest rate market value juniper networks common stock 2262 per share determined using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced april 26 2005 company also assumed 10 million net liabilities currently excluded aggregate purchase price 1231 million escrow payment 132 million related redline’s indemnity obligations expire may 2 2006 close acquisition company recorded liability 08 million associated future lease contractual obligations 05 million remained paid december 31 2005 kagoor acquisition may 1 2005 company completed acquisition kagoor leading provider session border control products voiceoverinternet protocol voip networking purchase price kagoor included 582 million cash assumed stock options aggregate fair value 76 million stock options valued using blackscholes option pricing model inputs 43 volatility 158 years expected life 35 riskfree interest rate market value juniper networks common stock 2164 per share determined using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced march 29 2005 currently excluded aggregate purchase price 663 million escrow payment 68 million related kagoor’s indemnity obligations expire may 1 2006 close acquisition company recorded liability 04 million associated future lease contractual obligations 01 million remained paid december 31 2005 inprocess research development company’s methodology allocating purchase price purchase acquisitions inprocess research development “iprd” determined established valuation techniques hightechnology communications equipment industry projects qualify iprd represent yet reached technological feasibility alternative future use iprd expensed upon acquisition year ended december 31 2005 total iprd expense 110 million connection funk peribit kagoor acquisitions iprd acorn redline acquisitions funk efforts pertained development radius products including steelbelted radius “sbr” sbr high availability “ha” mobile ip module “mim” ii products funk’s iprd acquisition date also included development new versions endpoint assurance proxy remote control odyssey product families time acquisition estimated development efforts completed next four months estimated cost approximately 09 million peribit efforts included development next versions software sequence reducer “sr” family sequence mirror “sm” family central management system “cms” products well hardware program sr sm families time acquisition estimated development efforts completed next twelve months estimated cost approximately 23 million kagoor efforts included variety signaling protocols next generation products operating systems time acquisition estimated development efforts completed next eight months estimated cost approximately 08 million december 31 2005 estimated costs completing research development efforts relating acquisitions approximated 20 million deferred stockbased compensation unvested stock options valued 132 million 38 million 20 million issued peribit redline kagoor acquisitions respectively unvested portion intrinsic value replacement stock options established acquisition date allocated deferred compensation purchase price allocation amortized expense using gradedvesting method remaining vesting period 2004 acquisition netscreen acquisition april 16 2004 juniper networks completed acquisition netscreen acquisition resulted issuance approximately 132 million shares company’s common stock fair value approximately 36512 million former stockholders netscreen common stock issued acquisition valued using average closing price company’s common stock fiveday trading period beginning two days ending two days date transaction announced juniper networks also assumed outstanding netscreen stock options fair value approximately 5205 million options valued using blackscholes option pricing model inputs 08 volatility 3 years expected life 25 riskfree interest rate market value juniper networks common stock 2764 per share determined described company also incurred direct costs associated acquisition approximately 134 million initial purchase price allocation company decreased net tangible assets acquired increased goodwill 61 million change due recognition preacquisition contingency 120 million partially offset number reductions valuation certain preacquisition accruals 2005 company paid additional 60 million related preacquisition contingency recorded expense results operations company accrued acquisition charges 213 million primarily related severance facility charges ninetyfour former netscreen employees identified termination time acquisition related severance paid remaining restructuring change consists primarily facility charges paid end lease terms extend 2008 2005 company reversed 69 million acquisition accrual primarily due reoccupation former netscreen facilities december 31 2005 30 million remained paid 15 million recorded longterm liabilities consolidated balance sheets order backlog represents value standing orders products services order backlog valued using avoided cost method estimates avoided selling expenses due fact netscreen firm purchase orders place time acquisition juniper networks amortized fair value acquired order backlog 2004 cost revenues total purchase price 275 million allocated inprocess research development “iprd” expensed 2004 projects qualify iprd represent yet reached technological feasibility alternative future use technological feasibility defined equivalent betaphase working prototype remaining risk relating development time acquisition netscreen multiple iprd efforts way certain current future product lines efforts included developing integrating secure routers embedded encryption chips well functions features next generation internet protocol “ip” wireless digital subscriber line connectivity voice ip capability company utilized dcf method value iprd using rates ranging 20 25 depending estimated useful life technology applying dcf method value acquired technology estimated discounting present value free cash flows expected generated products technology associated remaining economic life technology distinguish cash flows attributable underlying technology cash flows attributable assets available generating product revenues adjustments made provide fair return fixed assets working capital assets provide value product lines time netscreen acquisition estimated development efforts would completed next eighteen months estimated cost approximately 25 million december 31 2005 remaining costs associated research development efforts unvested stock options restricted stock valued 935 million allocated deferred compensation purchase price allocation amortized expense using gradedvesting method remaining vesting period value represented unvested portion intrinsic value replacement stock options restricted stock established acquisition date options assumed conjunction acquisition exercise prices ranging 009 2711 per share weighted average exercise price 1248 per share weighted average remaining contractual life approximately 8 years juniper networks assumed approximately 59 million vested options approximately 205 million unvested options restricted stock following unaudited pro forma financial information presents combined results operations juniper networks netscreen acquisition occurred beginning periods presented information 2004 unaudited amounts derived audited statement operations juniper networks year ended december 31 2004 unaudited statement operations netscreen three half months ended april 15 2004 information 2003 unaudited amounts derived audited statements operations juniper networks year ended december 31 2003 audited statement operations netscreen fiscal year ended september 30 2003 adjustments 06 million 868 million made combined results operations years ended december 31 2004 2003 respectively reflecting elimination amortization purchased intangibles deferred stock compensation charges cost goods sold inventory writeups valuation order backlog iprd net tax impact unaudited pro forma financial information intended represent indicative consolidated results operations juniper networks would reported acquisition completed dates presented taken representative future consolidated results operations company pro forma financial information 2004 2003 includes following material nonrecurring charges period presented millions note 4 goodwill purchased intangible assets following table presents details company’s purchased intangible assets definite lives millions amortization expense related finitelived purchased intangible assets 852 million 568 million 207 million 2005 2004 2003 respectively 2005 company recorded impairment charge operating expense 59 million due significant decrease forecasted revenues associated kagoor’s products estimated future amortization expense purchased intangible assets definite lives next five years follows millions net additions existing goodwill 2005 primarily due recognition preacquisition contingency 60 million related netscreen acquisition addition preacquisition tax adjustments 06 million 05 million made redline peribit related goodwill amounts respectively increased goodwill adjustments partially offset preacquisition tax adjustment 04 million related netscreen total goodwill acquired 2005 471 million associated funk’s goodwill could tax deductible company performed annual impairment analysis november 1 2005 determined impairment existing goodwill time company continue evaluate goodwill whenever events changes circumstances indicate may potential impairment indicator note 5 restructuring operating charges following restructuring charges based juniper networks’ restructuring plans committed management changes estimates executing approved plans reflected juniper networks’ results operations restructuring connection netscreen acquisition connection netscreen acquisition 2004 company recorded restructuring charge 04 million termination 13 employees eliminate certain duplicative activities employees functions geographic theaters addition ninetyfour former netscreen employees also terminated severance payments paid december 31 2004 restructuring connection discontinuance cmts products 2003 company announced would longer develop gseries cmts products recorded charge operating expense 140 million comprised workforce reduction costs asset impairment charge costs associated vacating facilities costs associated termination contracts related costs workforce reduction severance seventysix employees paid 2003 asset impairment charge primarily longlived assets longer needed result company’s decision cease development gseries cmts product line facility charges consisted primarily cost vacating facilities dedicated development gseries cmts products impairment cost certain leasehold improvements net present value facility charge calculated using company’s riskadjusted borrowing rate amounts related net facility charge included accrued liabilities paid respective lease term july 2008 difference actual future rent payments net present value recorded operating expenses incurred contractual commitments charges consisted primarily carrying obsolete material charges company’s contract manufacturers suppliers onhand onorder material related gseries cmts products costs satisfy endoflife commitments certain customer contracts following table shows changes restructuring liability 2005 millions restructuring connection unisphere acquisition 2004 company adjusted restructuring reserve established 2002 09 million primarily changes facilities sublease assumptions recorded adjustment credit restructuring impairments special charges consolidated statements operations 2005 company adjusted reserve immaterial amount due additional facilities sublease income company’s estimated costs exit facilities based available commercial rates potential subleases december 31 2005 07 million unpaid balance pertained leases consolidated facilities respective lease terms 2009 note 6 investments following summary investments december 31 2005 millions following summary investments december 31 2004 millions realized gains losses sale availableforsale securities 09 million 03 million 120 million 2005 2004 2003 respectively company aggregated investment category length time securities continuous unrealized loss position following table shows summary fair value unrealized losses investments december 31 2005 millions unrealized losses primarily caused interest rate increases contractual terms investments permit issuer settle securities price less amortized cost investment given company ability intent hold investments recovery fair values may maturity company consider investments otherthantemporarily impaired december 31 2005 note 7 longterm debt 2003 juniper networks received 3928 million net proceeds offering 4000 million aggregate principal amount zero coupon convertible senior notes due june 15 2008 “senior notes” senior notes senior unsecured obligations rank parity right payment company’s existing future senior unsecured debt rank senior company’s existing future debt expressly provides subordinated notes senior notes convertible shares juniper networks common stock subject certain conditions time prior maturity prior repurchase juniper networks conversion rate 496512 shares per 1000 principal amount convertible notes subject adjustment certain circumstances carrying amounts fair values senior notes millions 2005 immaterial amount company’s senior notes converted common shares 2004 2003 company paid 1450 million 7920 million respectively retire outstanding 475 convertible subordinated notes due march 15 2007 retirements resulted net loss 41 million 2004 net loss 11 million 2003 loss gain represents difference carrying value subordinated notes time retirement including unamortized debt issuance costs amount paid extinguish subordinated notes note 8 financial information property equipment property equipment consist following millions depreciation expense 536 million 408 million 437 million 2005 2004 2003 respectively restricted cash restricted cash december 31 2005 relates funk acorn redline kagoor acquisitions well establishment trust amount 250 million deposits standby letters credits facility leases juniper networks established trust secure indemnification obligations certain directors officers arising activities event company provide financially incapable providing indemnification amounts accrued paid conjunction trust three years ended december 31 2005 equity investments december 31 2005 2004 carrying values company’s minority equity investments privately held companies 132 million 38 million respectively 2005 company invested total 110 million privately held companies addition company recognized gain 17 million due business combination one portfolio companies cost basis 10 million wrote 04 million investment one privately held companies addition equity investments privately held companies company held certain marketable equity securities classified availableforsale 2003 company sold certain availableforsale investments cost basis approximately 43 million recognized gain approximately 87 million deferred revenue amounts billed excess revenue recognized included deferred revenue accounts receivable accompanying consolidated balance sheets product deferred revenue includes shipments endusers valueadd resellers distributors breakdown company’s deferred revenue millions warranties changes company’s warranty reserve follows millions comprehensive income activity comprehensive income follows millions components accumulated comprehensive loss follows millions restructuring impairments special charges restructuring impairments special charges recognized three years ended december 31 2005 follows millions note 9 commitments contingencies commitments following table summarizes company’s principal contractual obligations december 31 2005 millions operating leases juniper networks leases facilities operating leases expire various times longest expires 2014 rental expense 2005 2004 2003 approximately 364 million 298 million 265 million respectively future minimum payments noncancellable operating leases totaled 1916 million december 31 2005 rent related expenses paid related party 44 million 33 million none 2005 2004 2003 respectively senior notes december 31 2005 carrying value 4000 million zero coupon convertible senior notes due june 15 2008 “senior notes” outstanding purchase commitments company firm purchase commitments contract manufacturers order reduce manufacturing lead times ensure adequate component supply contract manufacturers place noncancelable nonreturnable “ncnr” orders valued 781 million december 31 2005 based company’s build forecasts company take ownership components ncnr orders represent firm purchase commitments pursuant juniper networks’ agreements contract manufacturers components used contract manufacturers build products based purchase orders company received customers company incur liability products built contract manufacturers fulfill customer’s order ships however components go unused company may assessed carrying charges obsolete charges december 31 2005 company accrued 216 million based estimate charges contractual obligations december 31 2005 contractual obligations consisted following • escrow amount related funk acquisition 122 million indemnity obligations onehalf indemnity obligations expire january 2007 remaining onehalf expire june 2007 also included contingent bonus payable based certain milestones 5 million bonus earned period one year recorded compensation expense • escrow amount related acorn acquisition 15 million indemnity obligations indemnity obligations expire may 2007 also included contingent earnout payable stockholders based certain milestones 22 million bonus payable employees related continued employment 10 million earnout bonuses earned period two years recorded additional purchase consideration compensation expense based contingencies • escrow amounts related redline kagoor acquisitions 132 million 68 million respectively indemnity obligations indemnity obligations expire may 2006 addition 16 million shares company’s common stock fair value 352 million established acquisition date held escrow associated acquisition peribit indemnity obligations included table onehalf indemnity obligations expire july 2006 remaining onehalf expire january 2007 guarantees company entered agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights third party guarantees indemnification arrangements include guarantees product performance standby letters credits certain lease facilities company recorded liability related indemnification guarantee provisions guarantees indemnification arrangements significant impact company’s financial position results operations cash flows legal proceedings company subject legal claims litigation arising ordinary course business employment intellectual property claims including matters described outcome matters currently determinable although expect legal claims litigation ultimately material adverse result however adverse result one matters could negatively affect results period occur ipo allocation case december 2001 class action complaint filed united states district court southern district new york goldman sachs group inc credit suisse first boston corporation fleetboston robertson stephens inc royal bank canada dain rauscher wessels sg cowen securities corporation ubs warburg llc warburg dillon read llc chase hambrecht quist llc jp morgan chase co lehman brothers inc salomon smith barney inc merrill lynch pierce fenner smith incorporated collectively “underwriters” company certain company’s officers action brought behalf purchasers company’s common stock company’s initial public offering june 1999 secondary offering september 1999 specifically among things complaint alleged prospectus pursuant shares common stock sold company’s initial public offering subsequent secondary offering contained certain false misleading statements omissions regarding practices underwriters respect allocation shares common stock offerings receipt commissions customers related allocations various plaintiffs filed actions asserting similar allegations concerning initial public offerings approximately 300 issuers various cases pending southern district new york coordinated pretrial proceedings initial public offering securities litigation 21 mc 92 april 2002 plaintiffs filed consolidated amended complaint action company alleging violations securities act 1933 securities exchange act 1934 defendants coordinated proceeding filed motions dismiss october 2002 company’s officers dismissed case without prejudice pursuant stipulation february 19 2003 court granted part denied part motion dismiss declined dismiss claims company june 2004 stipulation settlement release claims issuers including company submitted court preliminary approval terms settlement approved would dismiss release claims participating defendants including company exchange dismissal directors officers insurance carriers would agree guarantee recovery plaintiffs underwriter defendants least 10 billion issuer defendants would agree assignment surrender plaintiffs certain claims issuer defendants may underwriters august 31 2005 court granted preliminary approval settlement subject number conditions including final court approval settlement occur litigation continues company believes meritorious defenses intends defend case vigorously federal securities class action suit quarter ended march 31 2002 number essentially identical shareholder class action lawsuits filed united states district court northern district california company certain officers former officers purportedly behalf stockholders purchased company’s publicly traded securities april 12 2001 june 7 2001 april 2002 court granted defendants’ motion consolidate actions one may 2002 court appointed lead plaintiffs approved selection lead counsel consolidated complaint filed august 2002 plaintiffs allege defendants made false misleading statements assert claims violations federal securities laws seek unspecified compensatory damages relief september 2002 defendants moved dismiss consolidated complaint march 2003 court granted defendants motion dismiss leave amend plaintiffs filed amended complaint april 2003 defendants moved dismiss amended complaint may 2003 march 2004 court granted defendants motion dismiss without leave amend entered final judgment plaintiffs appealed december 2005 complete briefing oral argument united states court appeals ninth circuit affirmed district court’s dismissal final judgment state derivative claim based federal securities class action suit august 2002 consolidated amended shareholder derivative complaint purportedly filed behalf company captioned juniper networks inc derivative litigation civil action cv 807146 filed superior court state california county santa clara complaint alleges certain company’s officers directors breached fiduciary duties company engaging alleged wrongful conduct including conduct complained securities litigation described company named solely nominal defendant plaintiffs seek recovery previous complaints dismissed leave amend plaintiffs lodged third amended complaint august 2004 defendants demurred third amended complaint november 18 2004 court sustained defendants’ demurrer without leave amend entered order final judgment plaintiffs appealed california court appeal sixth district appeal fully briefed parties oral argument yet scheduled toshiba patent infringement litigation november 13 2003 toshiba corporation filed suit united states district court delaware company alleging certain company’s products infringe four toshiba patents seeking injunction unspecified damages company filed answer complaint february 2004 toshiba amended complaint add two patents company answered amended complaint july 2004 case discovery phase trial scheduled august 2006 irs notices proposed adjustments internal revenue service irs concluded audit company’s federal income tax returns fiscal years 1999 2000 2004 company received notice proposed adjustment nopa irs final resolution issues raised nopa uncertain company believe outcome matter material adverse effect consolidated financial position results operations company also routine examination certain state nonus tax authorities company believes adequately provided reasonably foreseeable outcome related audits conjunction irs income tax audit certain company’s us payroll tax returns currently examination fiscal years 1999 2001 company received second nopa amount 117 million employment tax assessments primarily related timing tax deposits related employee stock option exercises company responded nopa february 2005 intend dispute assessment irs initial appeals conference held january 31 2006 company currently believe liability reasonably estimated time event issue resolved unfavorably juniper networks exists possibility material adverse impact results operations period unfavorable outcome becomes probable reasonably estimable note 10 stockholders’ equity stock option plans amended restated 1996 stock option plan company’s amended restated 1996 stock option plan “1996 plan” provides granting incentive stock options employees nonstatutory stock options employees directors consultants incentive stock options granted exercise price less fair value per share common stock date grant nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors committee board directors options granted 1996 plan generally become exercisable fouryear period beginning date grant options granted 1996 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant juniper networks authorized 164623000 shares common stock issuance 1996 plan december 31 2005 22411922 shares available future option grants stock sales 1996 plan 1996 plan also provides sale restricted shares common stock employees consultants shares issued consultants fair value services previously rendered contingent upon future events shares sold employees made pursuant restricted stock purchase agreements containing provisions established board directors committee board directors provisions give juniper networks right repurchase shares original sales price upon termination employee right expires rate determined board directors generally rate 25 one year 20833 per month thereafter december 31 2005 zero shares subject repurchase rights 1996 plan 3905000 shares repurchased 1996 plan connection employee terminations since adoption 1996 plan permitted company make grants restricted stock case award entire number shares subject restricted stock award would issued time grant shares could subject vesting provisions based time conditions specified board directors authorized committee board company would right repurchase unvested shares subject restricted stock award grantee’s service company terminated prior full vesting award repurchased unvested shares would considered outstanding dividend voting purposes shares restricted stock issued 1996 plan 2005 2004 2003 november 3 2005 board directors “board” juniper networks inc “company” adopted amendment juniper networks inc 1996 stock plan “plan” add ability issue restricted stock units “rsus” plan unlike restricted stock awards rsu represents obligation company issue unrestricted shares common stock grantee extent vesting criteria award satisfied case restricted stock awards vesting criteria rsus based time conditions specified board authorized committee board however vesting occurs grantee entitled stockholder rights respect unvested shares 2005 company issued 4000 rsus average intrinsic value 219 per share 2000 nonstatutory stock option plan july 2000 board directors adopted juniper networks 2000 nonstatutory stock option plan “2000 plan” 2000 plan provides granting nonstatutory stock options employees directors consultants nonstatutory stock options may granted exercise price less 85 fair value per share date grant however nonstatutory stock options granted less fair market value date grant vesting exercise provisions determined board directors committee board directors options granted 2000 plan generally become exercisable fouryear period beginning date grant options granted 2000 plan maximum term ten years options granted consultants consideration fair value services previously rendered contingent upon future events expensed period grant december 31 2005 juniper networks authorized 90901437 shares common stock issuance 2000 plan december 31 2005 56045740 shares available future option grants 2000 plan plans assumed upon acquisition connection acquisitions company assumed options plans acquired companies exchanged options juniper networks options authorized appropriate number shares common stock issuance pursuant options december 31 2005 approximately 15472302 shares outstanding plans assumed acquisitions 2005 6517 shares restricted common stock repurchased average price 033 per share connection employee terminations 33586 shares restricted shares subject repurchase december 31 2005 option activity option plans three years ended december 31 2005 summarized follows following schedule summarizes information stock options outstanding option plans december 31 2005 december 31 2005 approximately 68158000 options exercisable average exercise price 1819 december 31 2004 approximately 43562000 options exercisable average exercise price 1333 employee stock purchase plan december 16 2005 board directors amended company’s 1999 employee stock purchase plan “espp” eliminate ability participant espp increase rate hisher payroll deductions offering period defined espp change effective beginning offering period commencing february 1 2006 april 1999 board directors approved adoption juniper networks 1999 employee stock purchase plan “purchase plan” purchase plan permits eligible employees acquire shares company’s common stock periodic payroll deductions 10 base compensation employee may purchase 6000 shares twelvemonth period event may employee purchase 25000 worth stock determined fair market value shares time option granted one calendar year purchase plan implemented series offering periods six months duration price common stock may purchased 85 lesser fair market value company’s common stock first day applicable offering period last day respective offering period employees purchased 911607 shares 769000 shares 1475000 shares common stock purchase plan average exercise price 1996 1539 674 per share 2005 2004 2003 respectively december 31 2005 total 4742700 shares issued purchase plan average price 892 per share 7257300 shares remained available future issuance purchase plan december 31 2004 total 3831000 shares issued purchase plan average price 795 per share 8169000 shares remained available future issuance purchase plan stockbased compensation company elected follow apb 25 related interpretations accounting employee stockbased compensation plans exercise price company’s employee stock options equals market price underlying stock date grant compensation expense recognized acquisitionrelated compensation costs company disclosed pro forma fair value stockbased compensation information required sfas 123 note 2 “summary significant accounting policies” fair value option granted assumed december 31 2005 estimated date grant date assumption using minimum value company went public blackscholes method blackscholes option valuation model developed use estimating fair value traded options vesting restrictions fully transferable blackscholes model requires input highly subjective assumptions including expected stock price volatility following shows assumptions used calculate fair value company’s stockbased awards assumptions 2004 revised include options assumed acquisition 2004 weighted average assumptions previously reported 2004 54 volatility 326 riskfree interest rate 46 years expected life revision effect company’s previously reported consolidated results operations financial condition well pro forma stockbased compensation expense reported sfas 123 2004 anticipation adopting sfas 123r company refined variables used blackscholes model 2005 result company refined methodology estimating expected term representative future exercise patterns company also refined computation expected volatility considering volatility publicly traded options purchase common stock historical stock volatility weighted average estimated fair value employee stock options granted 2005 2004 2003 963 1219 817 per option respectively weighted average estimated fair value shares granted employee stock purchase plan 2005 2004 2003 636 444 308 per share respectively december 16 2005 board directors approved acceleration vesting certain unvested “outofthemoney” stock options exercise price per share equal greater 2200 previously granted company’s stock option plans outstanding december 16 2005 options purchase approximately 212 million shares common stock 493 total outstanding unvested options december 16 2005 accelerated options accelerated excluded options previously granted certain employees including executive officers board directors juniper addition acceleration unvested “outofthemoney” options accompanied restrictions imposed shares purchased exercise accelerated options restrictions prevent sale shares prior date shares would originally vested optionee employed date whether optionee actually employee time purpose acceleration enable company avoid recognizing compensation expense associated options future periods consolidated statements operations pursuant financial accounting standards board statement 123r sfas 123r company apply expense recognition provisions relating stock options beginning first quarter fiscal 2006 approving acceleration board considered impact future financial results stockholder value employee retention company believes acceleration unvested “outofthemoney” options best interest stockholders acceleration reduce company’s reported compensation expense future periods light accounting regulations result acceleration company expects reduce pretax stock option expense otherwise would required record approximately 153 million subsequent adoption sfas 123r beginning 2006 acceleration vesting options result charge consolidated statements operations 2005 common stock reserved future issuance december 31 2005 juniper networks reserved aggregate approximately 190752000 shares common stock future issuance stock option plans 1999 employee stock purchase plan future issuance upon conversion convertible senior notes common stock repurchase program july 2004 company’s board directors approved program repurchase 2500 million company’s common stock 2005 2004 company repurchased retired zero 29 million shares respectively common stock average price 2004 repurchases 2217 per share aggregate purchase price 636 million program may discontinued time convertible preferred stock 10000000 shares convertible preferred stock par value 000001 per share authorized issuance preferred stock issued outstanding december 31 2005 note 11 401k plan juniper networks maintains savings retirement plan qualified section 401k internal revenue code 1986 amended employees meeting eligibility requirement defined may contribute statutory limits year beginning january 1 2001 company began matching employee contributions matching formula 50 6 eligible pay annual maximum 2000 effective january 1 2005 company increased match 50 100 eligible pay annual maximum 2000 matching contributions vest immediately company’s matching contributions plan totaled 51 million 31 million 20 million 2005 2004 2003 respectively note 12 segment information operating segment defined component enterprise engages business activities may earn revenue incur expenses separate financial information available evaluated regularly chief operating decision maker “codm” deciding allocate resources assessing performance 2005 company’s codm senior management team together “management” began allocate resources assess performance based financial information categories products service following acquisitions funk acorn peribit redline kagoor company combined products acquired companies security segment create slt operating segment result company currently following operating segments infrastructure slt service infrastructure segment includes products e tseries product families well acorn products slt segment includes security products application acceleration products funk peribit redline kagoor netscreen acquisitions security products consist firewall virtual private network “vpn” systems appliances secure sockets layer vpn appliances intrusion detection prevention appliances session border control products jseries product family application acceleration products consist application front end platforms wide area network “wan” optimization platforms service segment delivers worldwide services customers infrastructure slt segments prior fiscal 2005 management evaluated company’s performance geographic theater categories products based revenues management assess performance geographic theaters categories products measures income expenses therefore company one operating segment realignment operating segments 2005 due shift management structure responsibilities measure business based product service profitability commencing fourth quarter 2005 primary financial measure used management assessing performance allocating resources segments management operating income includes certain cost revenues research development expenses sales marketing expenses general administrative expenses direct costs standard costs research development product marketing expenses applied directly operating segment indirect costs manufacturing overhead cost sales allocated based standard costs indirect operating expenses sales business development general administrative expenses allocated operating segment based factors including headcounts revenue prior period information included comparative purposes financial information operating segment used management make financial decisions allocate resources follows millions one customer accounted 14 15 company’s net revenues 2005 2004 respectively two customers individually accounted 15 13 company’s net revenues 2003 revenue attributed significant customer derived sale products services three operating segments company attributes sales geographic theater based customer’s shipto location following table shows net revenue geographic theater millions company tracks assets physical location 90 company’s assets including property equipment december 31 2005 2004 attributable us operations company allocate assets segment note 13 net income per share basic net income per share computed dividing income available common stockholders weighted average number common shares outstanding period diluted net income per share computed giving effect dilutive potential shares outstanding period dilutive potential common shares consist incremental common shares subject repurchase common shares issuable upon exercise stock options shares issuable upon conversion subordinated notes following table presents calculation basic diluted net income per share millions except per share data employee stock options purchase approximately 37720000 shares 11833000 shares 13065000 shares 2005 2004 2003 respectively outstanding included computation diluted earnings per share exercise price stock options greater average share price common shares therefore effect would antidilutive note 14 income taxes following geographical breakdown income provision income taxes millions provision income taxes consists following millions provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows millions deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components company’s deferred tax assets liabilities follows millions december 31 2005 company valuation allowance us domestic deferred tax assets approximately 1986 million approximately 158 million relates tax benefits stock option deductions credited equity realized remaining balance 406 million relates capital losses carry forward offset future capital gains net valuation allowance decreased 92 million increased nil years ended december 31 2005 2004 respectively 2005 reduction attributable recognition certain us domestic deferred tax assets december 31 2005 company federal state net operating loss carryforwards approximately 251 million 2419 million respectively company also federal state tax credit carryforwards approximately 774 million 638 million respectively unused net operating loss research development tax credit carryforwards expire various dates beginning years 2021 2012 respectively company provides us income taxes earnings foreign subsidiaries unless subsidiaries’ earnings considered indefinitely reinvested outside united states december 31 2005 company unrecognized deferred tax liabilities approximately 238 million related approximately 662 million cumulative net undistributed earnings foreign subsidiaries earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations american jobs creation act 2004 repatriation foreign earnings american jobs creation act 2004 “jobs act” enacted october 22 2004 provides temporary 85 dividends received deduction certain foreign earnings repatriated either fiscal 2004 fiscal 2005 deduction results approximate 525 federal tax rate repatriated earnings 2005 company’s chief executive officer board directors approved domestic reinvestment plan required jobs act repatriate 2250 million foreign earnings 2005 company repatriated 2250 million jobs act 2005 recorded net tax benefit 2005 197 million related repatriation dividend net tax benefit consists federal state tax provision net federal benefit 97 million offset tax benefit 294 million related adjustment deferred tax liabilities unrepatriated earnings note 15 selected quarterly financial data unaudited table sets forth selected unaudited financial data quarter last two years millions except per share amounts certain reclassifications made prior quarter balances order conform current year’s presentation 2005 quarterly results reflect impact acquisitions kagoor redline second quarter peribit third quarter acorn funk fourth quarter ongoing effects operations remainder year 2004 quarterly results reflect impact acquisition netscreen second quarter ongoing effects operations remainder year basic diluted net losses per share computed independently quarters presented therefore sum quarters may equal full year net loss per share amounts note 16 subsequent event 2006 company repurchased 10071100 common shares average price 1851 part common stock repurchase program february 15 2006 total 12939700 common shares repurchased since inception program equating approximately 250 million average price 1932 per share item 9item 8 financial statements supplementary data index consolidated financial statements years ended december 31 2012 2011 2010 contents page report independent registered public accounting firm report independent registered public accounting firm managements report internal control financial reporting consolidated statements operations consolidated statements comprehensive income consolidated balance sheets consolidated statements cash flows consolidated statements changes stockholders equity notes consolidated financial statements report independent registered public accounting firm board directors stockholders juniper networks inc audited accompanying consolidated balance sheets juniper networks inc december 31 2012 2011 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2012 audits also included financial statement schedule listed index item 15a2 financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position juniper networks inc december 31 2012 2011 consolidated results operations cash flows three years period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states juniper networks incs internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated february 26 2013 expressed unqualified opinion thereon ernst young llp san jose california february 26 2013 report independent registered public accounting firm board directors stockholders juniper networks inc audited juniper networks incs internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria juniper networks incs management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying managements report internal control financial reporting responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion juniper networks inc maintained material respects effective internal control financial reporting december 31 2012 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets juniper networks inc december 31 2012 2011 related consolidated statements operations comprehensive income changes stockholders equity cash flows three years period ended december 31 2012 juniper networks inc report dated february 26 2013 expressed unqualified opinion thereon ernst young llp san jose california february 26 2013 managements report internal control financial reporting management juniper networks inc “company” responsible establishing maintaining adequate internal control financial reporting company companys internal control financial reporting process designed supervision companys principal executive principal financial officers provide reasonable assurance regarding reliability financial reporting preparation companys financial statements external purposes accordance us generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance us generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness companys internal control financial reporting december 31 2012 based framework set forth committee sponsoring organizations treadway commission “coso” internal control integrated framework based assessment management concluded december 31 2012 companys internal control financial reporting effective effectiveness companys internal control financial reporting december 31 2012 audited ernst young llp independent registered public accounting firm audits companys consolidated financial statements stated report preceding report expresses unqualified opinion effectiveness companys internal control financial reporting december 31 2012 juniper networks inc consolidated statements operations millions except per share amounts see accompanying notes consolidated financial statements juniper networks inc consolidated statements comprehensive income millions taxes related availableforsale securities cash flow hedges zero 2011 2010 see accompanying notes consolidated financial statements juniper networks inc consolidated balance sheets millions except par values see accompanying notes consolidated financial statements juniper networks inc consolidated statements cash flows millions see accompanying notes consolidated financial statements juniper networks inc consolidated statements changes stockholders equity millions see accompanying notes consolidated financial statements juniper networks inc notes consolidated financial statements note 1 description business basis presentation description business juniper networks inc “company” “juniper” designs develops sells products services together provide customers highperformance network infrastructure built simplicity security openness scale company serves highperformance networking requirements global service providers enterprises governments research public sector organizations view network critical success basis presentation consolidated financial statements include company whollyowned subsidiaries prepared accordance us generally accepted accounting principles “us gaap” intercompany balances transactions eliminated certain amounts prior year consolidated financial statements reclassified conform current year presentation beginning first quarter 2012 company aligned organizational structure focus platform software strategy resulted two reportable segments organized principally product families platform systems division psd software solutions division ssd company reclassified segment data prior periods conform current periods presentation segment change impact previously reported consolidated net revenues operating income net income net income per share see note 13 segments discussion companys segment reorganization company previously owned 60 percent interest joint venture nokia siemens networks bv “nsn” given companys majority ownership interest joint venture accounts joint venture consolidated accounts company noncontrolling interest recorded noncontrolling investors interests net assets operations joint venture july 2011 nsn company entered agreement cease operation terminate joint venture subsequently nsn assumed activities joint venture company terminated joint venture first quarter 2013 termination expected material effect companys financial position results operations note 2 significant accounting policies use estimates preparation financial statements related disclosures conformity us gaap requires company make judgments assumptions estimates affect amounts reported consolidated financial statements accompanying notes company bases estimates assumptions current facts historical experience various factors believes reasonable circumstances determine carrying values assets liabilities readily apparent sources extent material differences companys estimates actual results companys future consolidated results operation may affected fair value fair value defined price would received upon sale asset paid transfer liability orderly transaction market participants measurement date determining fair value company considers principal advantageous market transacts considers assumptions market participants would use pricing asset liability company applies following fair value hierarchy prioritizes inputs used measure fair value three levels bases categorization within hierarchy upon lowest level input available significant fair value measurement level 1 quoted prices active markets identical assets liabilities juniper networks inc notes consolidated financial statements continued level 2 quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument inputs valued using market based approaches level 3 inputs unobservable inputs based company’s assumptions inputs valued using internal financial models cash equivalents investments cash equivalents highly liquid investments purchased remaining maturity three months less classified cash equivalents cash equivalents consist cash hand demand deposits banks highly liquid investments money market funds commercial paper government securities certificates deposit corporate debt securities readily convertible cash investments availableforsale trading securities companys investments publiclytraded debt equity securities classified availableforsale investments initially recorded cost periodically adjusted fair value consolidated balance sheets unrealized gains losses investments reported separate component accumulated comprehensive income loss realized gains losses determined based specific identification method reported consolidated statements operations company recognizes impairment charge availableforsale investments decline fair value investments cost basis determined temporary company considers various factors determining whether recognize impairment charge including length time investment loss position extent fair value less companys cost basis investments financial condition nearterm prospects investee company determines decline investments fair value temporary difference recognized impairment loss consolidated statements operations companys nonqualified compensation plan invests mutual funds classified trading securities reported fair value consolidated balance sheets realized unrealized holding gains losses reported consolidated statements operations privatelyheld investments company investments privatelyheld companies investments included longterm assets consolidated balance sheets carried cost adjusted impairment company controlling interest ability exercise significant influence companies investments inherently high risk market technologies products manufactured companies usually early stage time investment company markets may never significant company measures fair value privatelyheld investments using analysis financial conditions near term prospects investees including recent financing activities capital structure realized gains losses reported consolidated statements operations derivatives company uses derivatives partially offset market exposure fluctuations certain foreign currencies company enter derivatives speculative trading purposes company uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated nonfunctional currencies derivatives carried fair value changes recorded expense income net changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities foreign exchange forward contracts maturities one year less juniper networks inc notes consolidated financial statements continued company also uses foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating operating expenses derivatives designated cash flow hedges maturities less one year derivatives carried fair value effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified operating expense line item hedged transaction relates company records ineffectiveness hedging instruments immaterial 2012 2011 2010 expense income net consolidated statements operations cash flows hedges classified operating activities concentrations financial instruments subject company concentrations credit risk consist primarily cash equivalents investments accounts receivable company invests highquality credit instruments maintains cash equivalents availableforsale investments fixed income securities several highquality institutions deposits held banks including held foreign branches global banks may exceed amount insurance provided deposits may redeemed upon demand therefore bear minimal risk generally credit risk respect accounts receivable diversified due number entities comprising companys customer base dispersion across different geographic locations throughout world company performs ongoing credit evaluations customers generally require collateral accounts receivable company maintains reserves potential bad debt historically losses within managements expectations years ended december 31 2012 2010 verizon communications inc verizon accounted 103 104 net revenues respectively year ended december 31 2011 single customer accounted 10 net revenues company relies sole suppliers certain components asics custom sheet metal additionally company relies primarily limited number significant independent contract manufacturers production products inability supplier manufacturer fulfill supply requirements company could negatively impact future operating results inventory consists primarily component parts used manufacturing process stated lower average cost market provision recorded inventory determined excess anticipated demand obsolete adjust inventory estimated realizable value property equipment property equipment recorded cost less accumulated depreciation calculated using straightline method estimated useful lives assets one half years five years computers equipment software five years furniture fixtures seven forty years building improvements ten forty years land improvements leasehold improvements amortized using straightline method lease term maximum ten years construction progress related construction development property equipment yet placed service intended use depreciation equipment commences placed service depreciation buildings leasehold improvements commences ready intended use goodwill longlived assets goodwill represents future economic benefits arising assets acquired business combination acquisition individually identified separately recorded excess purchase price estimated fair value net assets businesses acquired business combination recognized goodwill intangible assets acquired business combination determined indefinite useful life amortized instead tested impairment least annually fourth quarter goodwill intangible assets may also tested impairment annual tests presence impairment indicators limited significant adverse change legal factors business climate b substantial decline market capitalization c adverse action assessment regulator unanticipated competition e loss key personnel f likelythannot expectation sale disposal reporting unit significant portion thereof g realignment resources restructuring existing businesses response changes industry market conditions h testing recoverability significant asset juniper networks inc notes consolidated financial statements continued group within reporting unit higher discount rate used impairment analysis impacted increase interest rates company performs annual goodwill impairment analysis reporting unit level one level operating segment level fourth quarter year fair value companys reporting units determined using income market valuation approaches income approach fair value reporting unit based present value estimated future cash flows reporting unit expected generate remaining life market approach value reporting unit based analysis compares value reporting unit values publicly traded companies similar lines business application income market valuation approaches company required make estimates future operating trends judgments discount rates variables actual future results related assumed variables could differ estimates longlived assets property plant equipment purchased intangible assets subject amortization reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events circumstances include limited significant decrease fair value underlying business significant decrease benefits realized acquired business difficulties delays integrating business significant change operations acquired business recoverability assets held used measured comparison carrying amount asset group estimated undiscounted future cash flows expected generated asset group impairment charge recognized amount carrying amount asset group exceeds fair value company amortizes intangible assets estimable useful lives straightline basis useful lives revenue recognition revenue recognized following criteria met • persuasive evidence arrangement exists company generally relies upon sales contracts agreements customer purchase orders determine existence arrangement • delivery occurred company uses shipping terms related documents written evidence customer acceptance applicable verify delivery performance • sales price fixed determinable company assesses whether sales price fixed determinable based payment terms whether sales price subject refund adjustment • collectability reasonably assured company assesses collectability based creditworthiness customers determined credit checks payment histories company records accounts receivable net allowance doubtful accounts estimated customer returns pricing credits sales arrangements contain multiple elements software nonsoftware components function together deliver tangible products essential functionality company allocates revenue element based selling price hierarchy selling price deliverable based either vendorspecific objective evidence “vsoe” available thirdparty evidence “tpe” vsoe available estimated selling price “esp” neither vsoe tpe available company recognizes revenue deliverable accordance policies product service revenue recognition vsoe selling price based price charged element sold separately determining vsoe company requires substantial majority selling prices fall within reasonable range based historical discounting trends specific products services tpe selling price established evaluating largely interchangeable competitor products services standalone sales similarly situated customers however companys products contain significant element proprietary technology solutions offer substantially different features functionality comparable pricing thirdparty products similar functionality typically cannot obtained esp established considering multiple factors including limited pricing practices different geographies different sales channels gross margin objectives internal costs competitor pricing strategies industry technology lifecycles multiple element arrangements software deliverables included revenue allocated separate unit accounting nonsoftware deliverables software deliverables group using relative selling prices deliverables arrangement based aforementioned selling price hierarchy arrangement contains juniper networks inc notes consolidated financial statements continued one software deliverable arrangement consideration allocated software deliverables group allocated software deliverable using residual method vsoe fair value undelivered items exists residual method amount revenue allocated delivered elements equals total arrangement consideration less aggregate fair value undelivered elements vsoe one undelivered items exist revenue entire arrangement deferred recognized earlier delivery elements ii fair value established unless maintenance undelivered element case entire arrangement fee recognized ratably contractual support period company limits amount revenue recognition delivered elements amount contingent future delivery products services subject customerspecific return refund privileges company records reductions revenue estimated product returns pricing adjustments rebates price protection period related revenue recorded amount reductions based historical sales returns price protection credits specific criteria outlined rebate agreements factors known time portion companys sales made distributors agreements allowing pricing credits rights return product revenue sales made distributors recognized upon sellthrough reported distributors company deferred revenue shipments distributors reflects effects distributor pricing credits amount gross margin expected realized upon sellthrough deferred revenue recorded net related product costs revenue service revenues include revenue maintenance training professional services maintenance offered renewable contracts revenue maintenance service contracts deferred recognized ratably contractual support period generally one three years revenue training professional services recognized services completed ratably contractual period generally one year less company sells certain interests accounts receivable nonrecourse basis part customer financing arrangements primarily one major financing company cash received arrangement advance revenue recognition recorded secured borrowing within current liabilities allowance doubtful accounts allowance doubtful accounts based companys assessment collectability customer accounts company regularly reviews receivables remain outstanding past applicable payment terms establishes allowance considering factors historical experience credit quality age accounts receivable balances current economic conditions may affect customers ability pay warranty reserves company generally offers oneyear warranty hardware products 90day warranty media contains software embedded products warranty costs recognized part companys cost sales based associated material costs labor costs overhead time revenue recognized material costs estimated primarily based upon historical costs repair replace product returns within warranty period labor overhead costs estimated primarily based upon historical trends cost support customer cases within warranty period contract manufacturer liabilities company establishes liability noncancelable nonreturnable ncnr purchase commitments contract manufacturers carrying charges quantities excess demand forecasts obsolete material charges components purchased contract manufacturers meet company’s demand forecast customer orders demand forecasts based upon historical trends analysis companys sales marketing organizations adjusted overall market conditions research development costs research design develop companys products expensed incurred software development costs capitalized beginning products technological feasibility established ending product available general release customers generally companys products released soon technological feasibility juniper networks inc notes consolidated financial statements continued established result costs incurred achieving technological feasibility product general availability significant advertising costs charged sales marketing expense incurred advertising expense 200 million 172 million 171 million 2012 2011 2010 respectively foreign currency translations assets liabilities foreign operations nonus dollar functional currency translated us dollars using exchange rates effect end period revenue expenses translated us dollars using average exchange rates period resulting translation adjustments included company’s consolidated balance sheets stockholders’ equity section component accumulated comprehensive income loss contingencies company subject possibility various loss contingencies arising ordinary course business management considers likelihood loss related asset incurrence liability well ability reasonably estimate amount loss determining loss contingencies estimated loss contingency accrued probable asset impaired liability incurred amount loss reasonably estimated company regularly evaluates current information available determine whether accruals adjusted whether new accruals required sharebased compensation company utilizes blackscholesmerton “bsm” optionpricing model estimate fair value stock options espp shares company determines fair value restricted stock units rsus restricted stock awards rsas performance share awards psas based closing market price company’s common stock date grant sharebased compensation expense based fair value underlying awards amortized straightline basis net estimated forfeitures respect psas generally vest three years portion award attributable performance year company recognizes psa expense straightline basis remaining vesting period starting period annual performance targets set performance year bsm model requires various highly subjective assumptions represent managements best estimates volatility riskfree interest rate expected life dividend yield expected volatility based implied volatility markettraded options companys common stock adjusted relevant factors including historical volatility company’s common stock recent period commensurate estimated expected life company’s stock options expected life stock option award based historical experience provision income taxes income tax expense based pretax financial accounting income deferred tax assets liabilities recognized expected tax consequences temporary differences tax bases assets liabilities reported amounts valuation allowances recorded reduce deferred tax assets amount likely realized company accounts uncertainty income taxes using twostep approach recognizing measuring uncertain tax positions first step evaluate tax position recognition determining weight available evidence indicates likely position sustained audit including resolution related appeals litigation processes second step measure tax benefit largest amount 50 likely realized upon settlement company classifies liability unrecognized tax benefits current extent company anticipates payment receipt cash within one year interest penalties related uncertain tax positions recognized provision income taxes juniper networks inc notes consolidated financial statements continued recent accounting pronouncements february 2013 financial accounting standards board fasb issued accounting standards update asu 201302 topic 350 comprehensive income asu 201302 amends topic 220 improve reporting reclassifications accumulated comprehensive income respective line items net income asu 201302 effective reporting periods beginning december 15 2012 company intends adopt standard first quarter 2013 expect adoption material impact consolidated results operations financial condition july 2012 fasb issued asu 201202 topic 350 intangibles goodwill asu 201202 amends topic 350 allow entity first assess qualitative factors determine whether likely fair value indefinitelived intangible asset less carrying value entity would required determine fair value indefinitelived intangible unless entity determines based qualitative assessment likely fair value less carrying value asu 201202 effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted company intends adopt standard first quarter 2013 expect adoption impact consolidated results operations financial condition note 3 business combinations companys consolidated financial statements include operating results acquired businesses date acquisition pro forma results operations acquisitions presented financial impact companys consolidated results operations individually aggregate material additional information existing acquisition dates unknown company may become known remainder measurement period exceed 12 months acquisition date may result changes amounts allocations recorded company completed three business combinations 2012 two business combinations 2011 four business combinations 2010 either cash consideration andor stock related fair value vested sharebased awards assumed approximately 1873 million 305 million 3945 million respectively following table presents purchase consideration allocations acquisitions based upon acquisitiondate fair values including cash equivalents acquired millions company recognized 20 million 96 million 63 million acquisitionrelated costs years ended december 31 2012 2011 2010 respectively acquisitionrelated charges expensed period incurred reported companys consolidated statements operations within cost revenues operating expense goodwill recognized 2012 2011 acquisitions primarily attributable expected synergies deductible us federal income tax purposes approximately 889 million acquired goodwill 2010 acquisition deductible income tax purposes fiscal 2012 acquisitions contrail systems inc december 14 2012 company acquired remaining ownership interest contrail systems inc contrail increasing ownership 12 100 cash stock transaction approximately 917 million contrail privatelyheld software networking company provides softwaredefined networking solutions technology augments junipers portfolio products services juniper networks inc notes consolidated financial statements continued aggregate consideration 917 million allocated follows net tangible assets acquired 36 million including cash equivalents 86 million intangible assets 174 million recognized goodwill 707 million assigned companys psd segment company previously accounted investment contrail cost 30 million prior acquisition date fair value companys previous equity interest contrail remeasured fair value 177 million based upon adjustments market participants would consider estimating fair value previously held interest contrail resulted 147 million gain reported within expense income net consolidated statements operations mykonos software inc february 13 2012 company acquired 100 equity securities mykonos software inc mykonos 826 million cash acquisition mykonos extended juniper networks security portfolio intrusion deception system capable detecting attacker attack process connection acquisition company acquired net tangible liabilities 02 million intangible assets 243 million recognized goodwill 585 million assigned companys ssd segment bitgravity inc march 8 2012 company acquired source code license patent jointownership employees related service management layer bitgravity incs bitgravity content delivery network cdn technology 130 million cash connection acquisition company acquired net tangible assets 01 million intangible assets 124 million recognized goodwill 05 million assigned companys ssd segment intangible assets acquired following table presents details intangible assets acquired business combinations completed 2012 respective acquisition dates millions except years acquired inprocess research development “iprd” consists existing research development projects time acquisition projects qualify iprd assets represent yet reached technological feasibility alternative future use initial recognition acquired iprd assets accounted indefinitelived intangible assets development costs incurred acquisition acquired development projects expensed incurred upon completion development acquired iprd assets considered amortizable intangible assets iprd project abandoned company writes related purchased intangible asset period abandoned fiscal 2011 acquisitions opnext february 9 2011 company acquired certain ip assets opnext 260 million cash accounted business combination acquisition opnexts asic technology furthers junipers nextgeneration development converged packet optical solutions companys service provider customers connection acquisition company acquired fair value intangible assets 257 million recognized goodwill 03 million juniper networks inc notes consolidated financial statements continued brilliant february 18 2011 company acquired certain assets including intellectual property ip brilliant supplier nextgeneration packetbased network synchronization equipment monitoring solutions 45 million cash ip assists company extending market position delivering solutions offer greater flexibility service providers continue deploy 3g 4g networks connection acquisition company acquired net tangible assets 17 million intangible assets 27 million recognized goodwill 01 million intangible assets acquired following table presents details intangible assets acquired business combinations completed 2011 respective acquisition dates millions except years fiscal 2010 acquisitions ankeena networks inc april 19 2010 company acquired remaining ownership interest ankeena networks inc “ankeena” increasing ownership 77 100 cash stock transaction 689 million acquisition ankeena privatelyheld provider new media infrastructure technology provides company strong video delivery capabilities ankeenas products optimize webbased video delivery provides key components content delivery network architecturesolution improves consumers online video experience reduces service provider carrier service provider infrastructure costs providing webbased video aggregate consideration 689 million allocated follows net tangible assets acquired 36 million including cash equivalents 23 million intangible assets 122 million recognized goodwill 531 million company previously accounted investment ankeena cost 20 million prior acquisition acquisitiondate fair value companys previous equity interest ankeena remeasured fair value 52 million based upon adjustments market participants would consider estimating fair value previously held equity interest ankeena resulted gain 32 million reported within expense income net consolidated statements operations smobile systems inc july 30 2010 company acquired 100 equity securities smobile systems inc smobile privatelyheld software company focused solely smartphone tablet security solutions enterprise service provider consumer markets 695 million cash acquisition smobile allows company extend security focus integration smobiles product portfolio junos®pulse connection acquisition smobile company acquired net tangible liabilities 52 million including cash equivalents 04 million intangible assets 266 million recognized goodwill 481 million altor december 6 2010 company acquired remaining ownership interest altor increasing ownership 50 100 cash transaction 1040 million acquisition altor privatelyheld provider virtualization security provides company data center cloud security solutions including products optimize webbased video juniper networks inc notes consolidated financial statements continued delivery provides key components content delivery network architecturesolution improves consumers online video experience reduces service provider carrier service provider infrastructure costs providing webbased video aggregate consideration 1040 million allocated follows net tangible assets acquired 45 million including cash equivalents 64 million intangible assets 213 million recognized goodwill 782 million company previously accounted investment altor cost 20 million prior acquisition acquisitiondate fair value companys previous equity interest altor remeasured fair value 41 million based upon adjustments market participants would consider estimating fair value previously held equity interest altor resulted gain 21 million reported within expense income net consolidated statements operations trapeze networks december 16 2010 company acquired 100 equity securities trapeze networks trapeze subsidiary belden inc provider enterprise wireless local area network wlan solutions 1521 million cash acquisition made wlan infrastructure key part junipers portfolio accelerates growth enterprise market connection acquisition trapeze company acquired net tangible assets 59 million including cash equivalents 08 million intangible assets 564 million recognized goodwill 898 million intangible assets acquired following table presents details intangible assets acquired business combinations completed 2010 respective acquisition dates millions except years juniper networks inc notes consolidated financial statements continued note 4 cash equivalents investments availableforsale trading securities following tables summarize companys unrealized gains losses fair value investments designated availableforsale trading securities december 31 2012 december 31 2011 millions balance includes companys nonqualified deferred compensation plan assets additional information see note 12 employee benefits plans section deferred compensation plan juniper networks inc notes consolidated financial statements continued balance includes companys nonqualified deferred compensation plan assets additional information see note 12 employee benefits plans section deferred compensation plan following table presents maturities companys shortterm longterm fixed income securities december 31 2012 millions company 98 135 investments unrealized loss positions december 31 2012 december 31 2011 respectively gross unrealized losses related investments primarily due changes market interest rates company reviews investments identify evaluate investments indication possible impairment company aggregates investments category length time securities continuous unrealized loss position facilitate evaluation availableforsale debt securities unrealized losses company determines intent sell investments ii likely required sell investments recovery entire amortized cost basis addition december 31 2012 company anticipates recover entire amortized cost basis availableforsale debt securities determined otherthantemporary impairments associated credit losses required recognized year ended december 31 2012 2011 2010 availableforsale equity securities unrealized losses company determined indication otherthantemporary impairments december 31 2012 juniper networks inc notes consolidated financial statements continued determination based several factors including financial condition nearterm prospects issuer company’s intent ability hold publiclytraded equity securities period time sufficient allow anticipated recovery market value years december 31 2012 2011 2010 company recognize otherthantemporary impairments associated investments following tables present companys availableforsale investments unrealized loss position december 31 2012 december 31 2011 millions balance greater 12 months includes investments immaterial unrealized loss position december 31 2012 balance greater 12 months includes investments immaterial unrealized loss position december 31 2011 material realized gains losses sale availableforsale trading securities 2012 2011 2010 restricted cash investments company classifies cash investments restricted cash investments consolidated balance sheets designated available sale securities amounts held escrow accounts required certain acquisitions completed 2005 2012 ii india gratuity trust israel retirement trust cover statutory severance obligations event termination companys india israel employees respectively iii directors officers indemnification trust juniper networks inc notes consolidated financial statements continued following table summarizes companys cash investments classified restricted cash investments consolidated balance sheets millions privatelyheld investments december 31 2012 december 31 2011 carrying values company’s privatelyheld investments 320 million 518 million respectively included longterm assets consolidated balance sheets company reviews investments identify evaluate investments indication possible impairment company adjusts privatelyheld investments impairment fair value less carrying value respective assets otherthantemporary basis years ended december 31 2012 december 31 2011 company determined certain privatelyheld investments otherthantemporarily impaired resulted impairment charges 200 million 18 million respectively recorded within expense income net consolidated statements operations 2010 company determined impairments privatelyheld investments juniper networks inc notes consolidated financial statements continued note 5 fair value measurements assets liabilities measured fair value recurring basis following tables provide summary assets liabilities measured fair value recurring basis reported consolidated balance sheets millions 1 balance includes1026 million restricted investments measured fair market value related companys trust acquisitions related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets juniper networks inc notes consolidated financial statements continued 1 balance includes 751 million restricted investments measured fair market value related companys trust acquisition related escrows 2 balance relates restricted investments measured fair market value companys india gratuity trust 3 balance relates investments measured fair value related companys nonqualified deferred compensation plan assets companys level 2 availableforsale fixed income securities priced using quoted market prices similar instruments nonbinding market prices corroborated observable market data company uses inputs actual trade data benchmark yields brokerdealer quotes alternative pricing sources reasonable levels price transparency obtained quoted market prices independent pricing vendors sources determine ultimate fair value assets companys policy recognize asset liability transfers among level 1 level 2 level 3 actual date events change circumstances caused transfer years ended december 31 2012 december 31 2011 company transfers levels fair value hierarchy assets liabilities measured fair value juniper networks inc notes consolidated financial statements continued assets liabilities measured fair value nonrecurring basis certain companys assets including intangible assets goodwill privatelyheld investments measured fair value nonrecurring basis impairment indicated privatelyheld investments normally carried cost measured fair value due events circumstances company identified significantly impacting fair value investments company measured fair value privatelyheld investments using analysis financial condition nearterm prospects investee including recent financing activities capital structure year ended december 31 2012 privatelyheld investments carrying value 200 million measured fair value resulting impairment charge 200 million year ended december 31 2011 privatelyheld investments carrying value 22 million measured fair value resulting impairment charge 18 million investments classified level 3 assets due absence quoted market prices inherent lack liquidity year ended december 31 2010 privatelyheld investments carrying value 08 million measured fair value result impairment charge year ended december 31 2012 certain purchased intangible assets carrying value 54 million measured fair value resulting impairment charge 54 million recorded within cost revenues consolidated statements operations company measured fair value assets primarily using discounted cash flow projections purchased intangible assets classified level 3 assets due absence quoted market prices see note 7 goodwill purchased intangibles assets information assets measured fair value nonrecurring basis year ended december 31 2011 december 31 2010 company liabilities measured fair value nonrecurring basis december 31 2012 2011 2010 assets liabilities measured fair value carrying amounts companys accounts receivable financing receivables accounts payable accrued liabilities approximate fair value due short maturities fair value company’s longterm debt disclosed note 10 longterm debt financing determined using quoted market prices level 1 note 6 derivative instruments company uses derivatives partially offset market exposure fluctuations certain foreign currencies enter derivatives speculative trading purposes notional amount companys foreign currency derivatives summarized follows millions cash flow hedges company use foreign currency forward option contracts hedge certain forecasted foreign currency transactions relating cost services operating expenses derivatives intended hedge us dollar equivalent companys planned cost services operating expenses denominated foreign currencies derivatives designated cash flow hedges execution cash flow hedge derivatives typically occurs every month maturities one year less effective portion derivatives gain loss initially reported component accumulated comprehensive income loss upon occurrence forecasted transaction subsequently reclassified cost services operating expense line item hedged transaction relates company records ineffectiveness hedging instruments income net consolidated statements operations cash flows hedges classified operating activities amounts within comprehensive income expected reclassified earnings within next 12 months juniper networks inc notes consolidated financial statements continued december 31 2012 december 31 2011 total fair value company’s derivative assets recorded current assets consolidated balance sheets 35 million 04 million respectively december 31 2012 december 31 2011 total fair value company’s derivative liabilities recorded accrued liabilities consolidated balance sheets 01 million 96 million respectively year ended december 31 2012 company recognized gain 72 million accumulated comprehensive income effective portion derivative instruments reclassified loss 75 million comprehensive income operating expense consolidated statements operations year ended december 31 2011 company recognized loss 79 million accumulated comprehensive income effective portion derivative instruments reclassified gain 07 million comprehensive income operating expense consolidated statements operations year ended december 31 2010 company recognized loss 30 million accumulated comprehensive income effective portion derivative instruments reclassified loss 21 million comprehensive income operating expense consolidated statements operations ineffective portion companys derivative instruments recognized consolidated statements operations material years ended december 31 2012 2011 2010 nondesignated derivatives company also uses foreign currency forward contracts mitigate variability gains losses generated remeasurement certain monetary assets liabilities denominated foreign currencies derivatives qualify special hedge accounting treatment derivatives carried fair value changes recorded income net consolidated statements operations changes fair value derivatives largely offset remeasurement underlying assets liabilities cash flows derivatives classified operating activities derivatives maturities two months company recognized net gain 10 million gain 15 million loss 03 million nondesignated derivative instruments within expense income net consolidated statements operations years ended december 31 2012 2011 2010 respectively note 7 goodwill purchased intangible assets goodwill following table presents goodwill activity allocated companys reportable segments millions connection companys 2012 organizational realignment certain prior period amounts reclassified conform current periods segment presentation adjustments goodwill year ended december 31 2011 related adjustments net tangible assets assumed certain businesses acquired 2010 2011 additions goodwill 2012 based purchase price allocations acquisitions completed 2012 company also recorded adjustments net tangible assets assumed related acquisitions completed 2012 impairments goodwill years ended december 31 2012 2011 2010 juniper networks inc notes consolidated financial statements continued purchased intangible assets company’s purchased intangible assets follows millions years ended december 31 2012 2011 2010 company added 541 million 284 million 1165 million purchased intangible assets result acquisitions completed 2012 2011 2010 respectively refer note 3 business combinations details year ended december 31 2012 68 million acquired iprd accounted indefinite lived assets reached technological feasibility reclassified amortizable finitelived assets amortization purchased intangible assets included operating expenses cost product revenues totaled 323 million 271 million 86 million years ended december 31 2012 2011 2010 respectively connection restructuring plan 2012 discussed note 9 restructuring charges company assessed impairment remaining useful life certain intangible assets determined intangible assets 54 million impaired writtendown fair value zero intangible assets 107 million longer utilized result company recorded 161 million charges related items year ended december 31 2012 included cost revenues consolidated statements operations recorded companys ssd segment december 31 2012 estimated future amortization expense purchased intangible assets finite lives follows millions juniper networks inc notes consolidated financial statements continued note 8 financial information company purchases holds inventory ensure adequate component supplies life underlying products majority companys inventory production components inventories net reported within prepaid expenses current assets consolidated balance sheets consisted following millions year ended december 31 2012 company recorded charges 443 million cost revenues representing inventory held excess forecasted demand 363 million connection restructuring plan 2012 discussed note 9 restructuring charges inventory charges years ended december 31 2011 2010 material property equipment property equipment consisted following millions depreciation expense 1547 million 1422 million 1468 million 2012 2011 2010 respectively 2011 company recorded 135 million asset impairment charge restructuring charges consolidated statement operations related abandoned inprocess internal use software project licensed software july 3 2012 company entered agreement riverbed technology inc riverbed license riverbeds application delivery controller “adc” software exchange aggregate consideration 880 million consist following 1 cash consideration 750 million 650 million paid third quarter 2012 remaining 100 million payable third quarter 2013 2 technology integration services fair value 126 million 3 technology partnership wide area network optimization solutions 4 transaction costs 04 million contingent consideration 100 million recorded may also payable riverbed certain thirdparty approvals underlying technology integration services obtained aggregate consideration 880 million allocated acquired adc software 844 million associated prepaid maintenance support 10 million remaining amounts expected received performance services licensed software acquired reported within longterm assets consolidated balance sheets amortized useful life 6 years beginning period product available general release customers estimated 2013 amortization expense recognized cost product revenues juniper networks inc notes consolidated financial statements continued technology integration services require company develop certain technology crosslicense associated software provide support seven years fair value technology integration services less estimated amounts reimbursed reported within deferred revenue consolidated balance sheets amounts deferred underlying technology delivered event thirdparty approval obtained within reasonable time frame 200 million becomes payable riverbed amount held escrow reported within restricted cash investments consolidated balance sheets warranties company accrues warranty costs part cost sales based associated material costs labor costs customer support overhead time revenue recognized provision reported accrued warranty within current liabilities consolidated balance sheets changes company’s warranty reserve follows millions deferred revenue details companys deferred revenue reported consolidated balance sheets follows millions deferred product revenue represents unrecognized revenue related shipments distributors sold endusers undelivered product commitments shipments met revenue recognition criteria deferred product revenue recorded net related costs product revenue deferred service revenue represents customer payments made advance services include technical support hardware software maintenance professional services training juniper networks inc notes consolidated financial statements continued expense income net expense income net consisted following millions interest income primarily includes interest earned company’s cash equivalents investments interest expense primarily includes interest expense net capitalized interest expense longterm debt customer financing arrangements consists investment foreign exchange realized unrealized gains losses nonoperational income expense items 2012 company recognized gains 455 million including 147 million gain acquisition privatelyheld investment contrail impairment losses 200 million included related privatelyheld investments years end december 31 2012 2011 interest expense included 400 million net 71 million capitalized 377 million net 12 million capitalized respectively related companys outstanding longterm debt issued march 2011 see note 10 longterm debt financing 2011 included certain legal expenses unrelated current recent operations approximately 70 million 2010 company recognized total gain 87 million primarily due acquisitions privatelyheld investments ankeena altor note 9 restructuring charges restructuring charges based companys restructuring plans committed management restructuring charges recorded within cost revenues restructuring charges consolidated statements operations applicable changes estimates executing approved plans reflected companys results operations restructuring liabilities reported within accrued liabilities longterm liabilities consolidated balance sheets 2012 company initiated restructuring plan 2012 restructuring plan bring cost structure line desired longterm financial strategic model 2012 restructuring plan consists workforce reductions facility consolidations closures supply chain procurement efficiencies year ended december 31 2012 company recorded 404 million charges workforce reductions facility consolidations closures charges related 2012 restructuring plan connection restructuring activities company also recorded certain inventory intangible asset impairment charges contract termination charges totaling 529 million cost revenues 2011 company implemented restructuring plan 2011 restructuring plan effort better align business operations current market macroeconomic conditions 2011 restructuring plan consisted certain workforce reductions facility closures lesser extent contract terminations company recorded majority restructuring charges associated plan years ended december 31 2012 2011 facilitiesrelated charges expected completed march 2018 2009 company implemented restructuring plan 2009 restructuring plan effort better align business operations market macroeconomic conditions 2009 restructuring plan included restructuring certain business functions resulted reductions workforce facilities company recorded majority restructuring charges associated plan years ended december 31 2010 2009 juniper networks inc notes consolidated financial statements continued following table presents restructuring charges included restructuring charges consolidated statements operations companys restructuring plans following table provides summary changes restructuring liability related companys plans december 31 2012 millions connection restructuring plans discussed company expects record aggregate future charges approximately 190 million 2013 consisting approximately 30 million 160 million related workforce reductions facility closures respectively note 10 longterm debt financing longterm debt march 2011 company issued 3000 million aggregate principal amount 310 senior notes due 2016 notes 3000 million aggregate principal amount 460 senior notes due 2021 notes 4000 million aggregate principal amount 595 senior notes due 2041 notes together 2016 notes 2021 notes interest notes payable cash semiannually company may redeem notes time whole time part subject makewhole premium event change control holders notes may require company repurchase cash part notes purchase price equal 101 aggregate principle amount plus accrued unpaid interest indenture governs notes also contains various covenants including limitations companys ability incur liens enter saleleaseback transactions certain dollar thresholds december 31 2012 company compliance debt covenants following table summarizes companys longterm debt millions except percentages effective interest rates notes include interest notes accretion discount amortization issuance costs december 31 2012 december 31 2011 estimated fair value notes included longterm debt approximately 10907 million 10698 million respectively based quoted market prices level 1 juniper networks inc notes consolidated financial statements continued customer financing arrangements company customer financing arrangements factor accounts receivable thirdparty financing provider certain customers require longer payment terms typically provided company program intended affect timing revenue recognition company recognizes revenue upon sellthrough financing arrangements proceeds financing provider due company 30 days sale receivable transactions financing provider company surrendered control transferred assets factored accounts receivable isolated company put beyond reach creditors even event bankruptcy company maintain effective control transferred assets obligations rights redeem transfer repurchase receivables transferred pursuant financing arrangements sale receivables company sold net receivables 6778 million 7382 million 6375 million years ended december 31 2012 2011 2010 respectively company received cash proceeds financing provider 6798 million 6865 million 5957 million years ended december 31 2012 2011 2010 respectively december 31 2012 december 31 2011 amounts owed financing provider 1476 million 1629 million respectively recorded accounts receivable company’s consolidated balance sheets portion receivable recognized revenue accounted financing arrangement included accrued liabilities longterm liabilities consolidated balance sheets december 31 2012 december 31 2011 estimated cash received financing provider recognized revenue distributors 307 million 333 million respectively note 11 equity stock repurchase activities june 2012 company’s board directors “board” approved stock repurchase program 2012 stock repurchase program authorized company repurchase 10 billion common stock 2012 stock repurchase program addition stock repurchase program approved board february 2010 stock repurchase program authorized company repurchase 10 billion common stock 2010 stock repurchase program addition stock repurchase program approved board march 2008 also enabled company repurchase 10 billion common stock december 31 2012 5682 million authorized funds remaining companys stock repurchase programs addition repurchases company’s stock repurchase programs also repurchases common stock companys employees connection net issuance shares satisfy minimum tax withholding obligations vesting certain stock awards following table summarizes companys repurchases retirements common stock repurchase programs repurchases net issuances millions except per share amounts juniper networks inc notes consolidated financial statements continued shares common stock repurchased company’s stock repurchase programs employees connection net issuances retired future share repurchases company’s stock repurchase programs subject review circumstances place time made time private transactions open market purchases permitted securities laws legal requirements program may discontinued time see note 18 subsequent events discussion companys stock repurchase activity 2013 note 12 employee benefit plans sharebased compensation plans company’s sharebased compensation plans include 2006 equity incentive plan “2006 plan” 2000 nonstatutory stock option plan “2000 plan” amended restated 1996 stock plan “1996 plan” various equity incentive plans assumed acquisitions 2008 employee stock purchase plan “2008 purchase plan” plans company granted case acquired plans assumed stock options rsas rsus psas december 31 2012 total approximately 1251 million shares common stock reserved future issuance upon exercise stock options vesting rsas rsus psas future grant sharebased compensation awards companys equity incentive plans 2008 purchase plan 2006 plan adopted approved company’s stockholders may 2006 initial authorized share reserve 645 million shares common stock plus addition shares subject options 2000 plan 1996 plan outstanding may 18 2006 subsequently expire unexercised maximum additional 750 million shares addition company’s stockholders’ approved amendments 2006 plan increased number shares reserved issuance 2006 plan thereby increasing authorized share reserve 300 million shares may 2010 2011 250 million shares may 2012 december 31 2012 2006 plan 542 million shares subject currently outstanding equity awards 543 million shares available future issuance options granted 2006 plan maximum term seven years date grant generally vest become exercisable fouryear period subject terms change control severance agreements except limited number shares allowed 2006 plan rsus psas vest solely based continuing employment provision services vest full earlier three years grant date event vesting based factors continued future provision services awards vest full earlier one year grant date 2010 2012 company completed acquisitions ankeena altor mykonos contrail assumed respective plans ankeena networks inc 2008 stock plan altor networks inc 2007 stock plan 2009 israeli equity incentive sub plan mykonos software inc 2010 stock plan contrail systems inc 2012 stock plan connection plans company assumed stock options rsa rsu awards exchanged assumed awards juniper networks stock options rsas rsus new stock options rsas rsus granted plans company registered aggregate 13 million shares common stock 2010 2012 stock awards previously granted assumed plans acquired companies assumed 68 million shares stock options rsa rsu awards connection acquisition contrail december 31 2012 stock options rsas rsus representing approximately 72 million shares common stock outstanding awards assumed companys acquisitions company adopted 2008 purchase plan may 2008 board initial authorized share reserve 120 million shares companys common stock issuance plan addition company’s stockholders’ approved amendments 2008 plan increased number shares reserved issuance 2008 plan thereby increasing authorized share reserve 70 million may 2012 2008 purchase plan permits eligible employees acquire shares company’s common stock 15 discount offering price determined 2008 purchase plan periodic payroll deductions 10 base compensation subject individual purchase limits 6000 shares twelvemonth period 25000 worth stock determined fair market value shares time stock purchase option granted one calendar year stock option activities since 2006 company granted stock option awards maximum contractual life seven years date grant prior 2006 stock option awards generally tenyear contractual life date grant juniper networks inc notes consolidated financial statements continued following table summarizes company’s stock option activity related information three years ended december 31 2012 millions except per share amounts years 1 stock options assumed connection acquisition ankeena altor 2 stock options assumed connection acquisition contrail aggregate intrinsic value represents difference company’s closing stock price last trading day period 1967 per share december 31 2012 exercise price multiplied number related options pretax intrinsic value options exercised representing difference fair market value company’s common stock date exercise price option 279 million 2498 million 2603 million 2012 2011 2010 respectively total fair value options vested 2012 2011 2010 709 million 807 million 832 million respectively juniper networks inc notes consolidated financial statements continued following table summarizes information stock options outstanding sharebased compensation plans december 31 2012 december 31 2012 approximately 268 million shares common stock exercisable average exercise price 2377 per share december 31 2011 approximately 261 million shares common stock exercisable weightedaverage exercise price 2151 per share december 31 2010 approximately 321 million shares common stock exercisable weightedaverage exercise price 2096 per share restricted stock unit performance share award restricted stock award activities rsus rsas generally vest period three four years date grant psas generally vest three years provided certain annual performance targets vesting criteria met vested rsus psas voting dividend participation rights common stock shares underlying awards considered issued outstanding juniper networks inc notes consolidated financial statements continued following table summarizes company’s rsus rsas psas activity related information year ended december 31 2012 millions except per share amounts years 1 rsus assumed connection acquisitions ankeena altor 2 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved estimated 19 million shares depending achievement performance goals range shares could issued awards 0 45 million shares 3 number shares subject psas granted represents aggregate maximum number shares may issued pursuant award full term aggregate number shares subject psas would issued performance goals determined compensation committee achieved target 09 million shares depending achievement performance goals range shares could issued awards 0 22 million shares 4 rsus assumed connection acquisition mykonos 5 rsus rsas assumed connection acquisition contrail juniper networks inc notes consolidated financial statements continued shares available grant following table presents stock activity total number shares available grant 2006 plan december 31 2012 millions 1 rsus psas per share unit purchase price lower 100 fair market value companys common stock day grant 2006 plan counted shares authorized plan two onetenth shares common stock share subject award number shares subject psas granted represents maximum number shares may issued pursuant award full term 2 includes canceled expired options 1996 plan 2000 plan expired may 18 2006 become available grant 2006 plan according terms employee stock purchase plan companys 2008 purchase plan implemented series offering periods six months duration shorter period determined board employees purchased approximately 35 million 24 million 20 million shares common stock 2008 purchase plan average exercise price 1626 2153 2120 per share fiscal years 2012 2011 2010 respectively december 31 2012 approximately 95 million shares issued 95 million shares remain available future issuance 2008 purchase plan sharebased compensation expense weighted average assumptions used resulting estimates fair value stock options employee stock purchase plan juniper networks inc notes consolidated financial statements continued company’s sharebased compensation expense associated stock options employee stock purchases rsus psas rsas recorded following cost expense categories millions following table summarizes sharebased compensation expense award type millions december 31 2012 approximately 694 million unrecognized compensation cost adjusted estimated forfeitures related unvested stock options recognized weightedaverage period approximately 24 years approximately 2478 million unrecognized compensation cost adjusted estimated forfeitures related unvested rsus psas recognized weightedaverage period approximately 18 years approximately 716 million unrecognized compensation cost adjusted estimated forfeitures related unvested rsas recognized weightedaverage period approximately 34 years 401k plan company maintains savings retirement plan qualified section 401k internal revenue code 1986 amended irc employees meeting eligibility requirements defined irc may contribute statutory limits year company matched employee contributions since january 1 2001 currently matching 30 eligible employee contributions matching contributions vest immediately company’s matching contributions plan totaled 202 million 163 million 132 million years ended december 31 2012 2011 2010 respectively deferred compensation plan company’s nonqualified deferred compensation “nqdc” plan unfunded unsecured deferred compensation arrangement nqdc plan officers senior employees may elect defer portion compensation contribute amounts one investment funds nqdc plan assets included within shortterm investments offsetting obligations included within accrued compensation consolidated balance sheets investments considered trading securities reported fair value realized unrealized holding gains losses related investments recorded expense net offsetting compensation expense recorded operating expenses consolidated statements operations deferred compensation liability nqdc plan approximately 126 million 93 million december 31 2012 december 31 2011 respectively additional information regarding companys nqdc see note 4 cash equivalents investments juniper networks inc notes consolidated financial statements continued note 13 segments company’s chief operating decision maker “codm” allocates resources assesses performance based financial information company’s divisions fiscal 2012 company reorganized operations two reportable segments principally product families psd ssd result change product families services organized within two divisions based homogeneity products technology provide improved visibility comparability company reclassified segment operating results 2011 2010 conform 2012 organizational realignments company’s psd segment primarily offers scalable routing switching products used service provider enterprise public sector networks control direct network traffic data centers core edge aggregation campus wide area networks wans branch customer premise equipment level companys psd segment consists routing switching securityother products services routing includes products services acx e mx ptx series switching primarily consists products services ex series wireless local area network solutions well qfabric™ securityother include products services branch srx branch firewall j series well network application platform junos® space companys ssd segment offers solutions meet broad array customers’ priorities protecting users applications data network providing network services across distributed infrastructure ssd segment primarily consists securityother routing products services securityother includes highend srx services vgw virtual gateways highend firewall virtual private network systems appliances secure socket layer virtual private network appliances intrusion detection prevention appliances wide area network optimization platforms junos pulse routing primarily consists routing services software mobile applications mobilenexttm codm allocate companys business segments certain operating expenses managed separately corporate level direct costs operating expenses standard cost goods sold research development product marketing expenses generally applied segment indirect costs manufacturing overhead cost revenues allocated based factors including headcount usage revenue segment contribution margin provides supplemental data operational performance comprised direct costs operating expenses well indirect costs corporate unallocated expenses includes sales marketing general administrative costs sharebased compensation amortization purchased intangible assets restructuring charges gains losses equity investments expense net income taxes certain charges segment contribution margin excludes corporate unallocated expenses juniper networks inc notes consolidated financial statements continued following table summarizes financial information segment used codm millions 1 amount includes unallocated costs global functions sales marketing general administrative 2 amount includes amortization expense purchased intangible assets reported operating expenses cost revenues 3 amount includes restructuring charges reported operating expenses cost revenues 4 amount includes acquisitionrelated costs reported operating expenses cost revenues depreciation expense allocated psd segment 1210 million 1095 million 1148 million years ended december 31 2012 2011 2010 respectively depreciation expense allocated ssd segment 337 million 327 million 320 million years ended december 31 2012 2011 2010 respectively juniper networks inc notes consolidated financial statements continued company attributes revenues geographic region based customer’s shipto location following table shows net revenues geographic region millions years ended december 31 2012 2010 verizon accounted 103 104 net revenues respectively reported companys psd ssd segments year ended december 31 2011 single customer accounted 10 net revenues company tracks assets physical location majority company’s assets excluding cash equivalents investments december 31 2012 december 31 2011 attributable us operations years ended december 31 2012 december 31 2011 gross property equipment held us percentage total property equipment approximately 83 80 respectively although management reviews asset information corporate level allocates depreciation expense segment codm review asset information segment basis note 14 income taxes components income provision income taxes noncontrolling interest summarized follows millions provision income taxes summarized follows millions juniper networks inc notes consolidated financial statements continued provision income taxes differs amount computed applying federal statutory rate income provision income taxes follows millions deferred income taxes reflect net tax effects tax carryforward items temporary differences carrying amounts assets liabilities financial reporting purposes amounts used income tax purposes significant components companys deferred tax assets liabilities follows millions december 31 2012 2011 company valuation allowance us domestic deferred tax assets approximately 1410 million 1452 million respectively balance december 31 2012 consisted approximately 948 million 97 million companys california massachusetts deferred tax assets respectively company believes likely utilized future years remaining deferred tax assets company recorded valuation allowance approximately 365 million related losses capital nature may carry forward offset future capital gains valuation allowance decreased 42 million increased 230 million years ended december 31 2012 2011 respectively 2012 decrease relates utilization losses capital nature approximately 137 million 97 million 2011 increase due changes income apportioned california massachusetts respectively income apportioned massachusetts california impacts future taxable income within states years deferred tax assets expected realized settled juniper networks inc notes consolidated financial statements continued december 31 2012 company federal california net operating loss carryforwards approximately 249 million 396 million respectively company also california tax credit carryforwards approximately 1840 million approximately 148 million benefit california tax credit carryforwards credited additional paidin capital realized companys income tax returns unused net operating loss carryforwards expire various dates beginning year 2013 california tax credit carryforwards carry forward indefinitely company provides us income taxes earnings foreign subsidiaries unless subsidiaries earnings considered indefinitely reinvested outside united states company made provision us income taxes approximately 16091 million cumulative undistributed earnings certain foreign subsidiaries december 31 2012 companys intention permanently reinvest earnings distributed company would accrue additional income tax expense approximately 4834 million earnings considered indefinitely invested operations outside us intend utilize amounts fund future expansion international operations december 31 2012 2011 2010 total amount gross unrecognized tax benefits 1361 million 1322 million 1164 million respectively december 31 2012 approximately 1224 million 1361 million gross unrecognized tax benefits recognized would affect effective tax rate reconciliation beginning ending amount companys total gross unrecognized tax benefits follows millions december 31 2012 2011 2010 company accrued interest penalties related unrecognized tax benefits 167 million 173 million 189 million respectively within longterm liabilities consolidated balance sheets accordance companys accounting policy accrued interest penalties related unrecognized tax benefits recognized component tax expense consolidated statements operations company recognized benefit net interest penalties 06 million 16 million expense 46 million consolidated statements operations years ended december 31 2012 2011 2010 respectively company engages continuous discussions negotiations tax authorities regarding tax matters various jurisdictions greater remote likelihood balance gross unrecognized tax benefits decrease 0 420 million within next twelve months due lapses applicable statutes limitation completion tax review cycles various tax jurisdictions fourth quarter 2011 company resolved audit state tax authority years 2002 2004 result settlement company recorded tax benefit approximately 70 million including interest penalties 2010 company recognized approximately 734 million tax benefits related sharebased compensation company previously recorded unrecognized tax benefits 2009 march 22 2010 court overturned may 27 2009 decision xilinx v commissioner affirmed original us tax court decision held favor taxpayer juniper networks named party case courts decision eliminates uncertainty regarding benefit tax position taken company certain years prior fiscal 2004 relative allocable transfer price sharebased compensation related companys intangible development costs courts decision affirms value sharebased compensation related sharebased compensation grants made prior 2004 required included juniper networks inc notes consolidated financial statements continued cost sharing agreements related parties light courts decision company determined tax benefit recognized prior tax position likely sustained company conducts business globally result juniper networks one subsidiaries files income tax returns us federal jurisdiction various state foreign jurisdictions normal course business company subject examination taxing authorities throughout world including major jurisdictions ireland hong kong uk france germany netherlands japan china australia india us exceptions company longer subject us federal state local nonus income tax examinations years 2004 although carryforward attributes generated prior 2004 may still adjusted upon examination internal revenue service irs attributes either used future period company currently examination irs 2004 2009 tax years company also subject two separate ongoing examinations india tax authorities 2004 tax year 2004 2008 tax years respectively additionally company reached final resolution irs adjustment proposed 1999 2000 tax years company aware examination taxing authorities major jurisdictions files income tax returns december 31 2012 2011 part 2005 2006 irs audit company received proposed adjustment related intercompany rd cost sharing arrangement license intangibles acquired 2005 2009 part 2004 irs audit company received similar proposed adjustment related license intangibles acquired 2004 2008 company received proposed adjustment india tax authorities related 2004 tax year 2009 india tax authorities commenced separate investigation 2004 2008 tax returns disputing companys determination taxable income due cost basis certain fixed assets company accrued 46 million penalties interest 2009 related matter company understands india tax authorities may issue initial assessment substantially higher amount result accordance administrative judicial process india company may required make payments substantially higher amount accrued order ultimately settle issue company strongly believes assessment may receive excess amount accrued would inconsistent applicable india tax laws intends defend position vigorously company pursuing available administrative procedures relative matters referenced company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations note 15 net income per share company computed basic diluted net income per share attributable juniper networks common stockholders follows millions except per share amounts juniper networks inc notes consolidated financial statements continued basic net income per share computed using net income available common stockholders weightedaverage number common shares outstanding period diluted net income per share computed using net income available common stockholders weightedaverage number common shares outstanding plus potentially dilutive common shares outstanding period dilutive potential common shares consist common shares issuable upon exercise stock options employee stock purchase plan issuances vesting rsus rsas psas company excludes outstanding stock options exercise prices greater average market price rsus rsas grant date fair market value greater average market price calculation diluted net income per share effect would antidilutive company includes common shares underlying psas calculation diluted net income per share become contingently issuable excludes shares contingently issuable potentially dilutive common shares approximately 323 million 174 million 140 million shares outstanding included computation diluted earnings per share years ended december 31 2012 2011 2010 respectively note 16 commitments contingencies commitments following table summarizes company’s future principal contractual obligations december 31 2012 millions operating leases company leases facilities certain equipment noncancelable operating leases expire various dates november 30 2022 certain leases require company pay variable costs taxes maintenance insurance include renewal options escalation clauses future minimum payments noncancelable operating leases totaled 2661 million december 31 2012 rent expense 2012 2011 2010 approximately 632 million 657 million 559 million respectively purchase commitments order reduce manufacturing lead times ensure adequate component supply contract manufacturers utilized company place ncnr orders components based company’s build forecasts december 31 2012 ncnr component orders placed contract manufacturers value 1586 million contract manufacturers use components build products based company’s forecasts customer purchase orders received company generally company components title products transfers contract manufacturers company immediately company’s customers upon delivery designated shipment location company establishes liability ncnr commitments carrying charges quantities excess demand forecasts obsolete materials charges components purchased contract manufacturers meet company’s forecast customer orders december 31 2012 company accrued 277 million based estimate charges longterm debt interest payment longterm debt december 31 2012 company held longterm debt consisting senior notes carrying value 9992 million notes 3000 million mature 2016 bears interest fixed rate 310 3000 million mature 2021 bears interest fixed rate 460 4000 million mature 2041 bears interest fixed rate juniper networks inc notes consolidated financial statements continued 595 interest notes payable semiannually see note 10 longterm debt financing discussion companys longterm debt contractual obligations december 31 2012 contractual obligations primarily consisted 1242 million indemnityrelated service related escrows required certain asset purchases acquisitions completed 2005 2010 2011 2012 551 million campus buildout obligations tax liabilities addition table december 31 2012 company 1124 million included longterm liabilities consolidated balance sheets unrecognized tax positions time company unable make reasonably reliable estimate timing payments related amount due uncertainties timing tax audit outcomes guarantees company enters agreements customers contain indemnification provisions relating potential situations claims could alleged company’s products infringe intellectual property rights thirdparty company also financial guarantees consisting guarantees product service performance guarantees related thirdparty customerfinancing arrangements customs duties guarantees standby letters credit certain lease facilities december 31 2012 december 31 2011 company 126 million 199 million respectively bank guarantees standby letters credit related financial guarantees legal proceedings company involved disputes litigation legal actions including limited matters described company aggressively defending current litigation matters assurances outcome matters currently determinable company currently believes existing claims proceedings likely material adverse effect financial position many uncertainties associated litigation actions thirdparty claims company may cause company incur costly litigation andor substantial settlement charges addition resolution intellectual property litigation may require company make royalty payments could adversely affect gross margins future periods events occur companys business financial condition results operations cash flows could adversely affected actual liability matters may materially different companys estimates could result need adjust liability record additional expenses unless otherwise noted period presented recorded accrual loss contingencies associated legal proceedings determined unfavorable outcome probable reasonably possible determined amount range possible loss reasonably estimable 2011 federal securities class action august 15 2011 purported securities class action lawsuit captioned city royal oak retirement system v juniper networks inc et al case 11cv04003lhk filed united states district court northern district california naming company certain officers directors defendants complaint alleges defendants made false misleading statements regarding companys business prospects plaintiffs seek unspecified amount monetary damages behalf purported class january 9 2012 court appointed city omaha police fire retirement system city bristol pension fund lead plaintiffs lead plaintiffs allege defendants made false misleading statements companys business future prospects failed adequately disclose impact certain changes accounting rules lead plaintiffs purport assert claims violations sections 10b 20a securities exchange act 1934 sec rule 10b5 behalf purchased otherwise acquired juniper networks common stock july 20 2010 july 26 2011 inclusive march 14 2012 defendants filed motions dismiss lead plaintiffs amended complaint july 23 2012 court issued order dismissing action giving lead plaintiffs leave file amended complaint lead plaintiffs filed second amended complaint august 20 2012 defendants filed motion dismiss second amended complaint september 17 2012 lead plaintiffs filed opposition october 22 2012 defendants filed reply brief november 8 2012 hearing motion dismiss scheduled may 16 2013 juniper networks inc notes consolidated financial statements continued 2011 california state derivative lawsuits august 22 september 9 2011 four purported shareholder derivative actions filed superior court state california county santa clara naming certain companys officers directors defendants company named nominal defendant actions consolidated juniper networks inc shareholder litigation case 111cv207701 lead case order dated september 12 2011 complaints generally based upon disclosures alleged omissions challenged securities class action complaints purport assert claims defendants breach fiduciary duties unjust enrichment abuse control gross mismanagement waste corporate assets complaints seek among relief damages unspecified amount restitution attorneys fees costs march 8 2012 company filed motion stay action resolution federal securities class action discussed also filed demurrer seeking dismiss action reason plaintiffs lack standing plaintiffs filed oppositions motions april 5 2012 defendants filed reply briefs may 7 2012 hearing july 27 2012 court ordered actions stayed time federal court issues order denying motion dismiss securities class action city omaha police fire retirement system v juniper networks inc et al case cv114003lhk court deferred deciding demurrer pending stay 2011 federal derivative lawsuit september 27 2011 december 28 2011 two purported shareholder derivative actions captioned ratinova v johnson et al case 11cv04792 lisa e coppola era v johnson et al case 11cv06667 respectively filed united states district court northern district california naming certain companys officers directors defendants company named nominal defendant action like state derivative actions federal derivative lawsuits generally based upon disclosures alleged omissions challenged securities class action complaints purport assert claims defendants breach fiduciary duties unjust enrichment complaints seek among relief damages unspecified amount restitution attorneys fees costs order dated january 30 2012 court consolidated actions juniper networks inc shareholder derivative litigation master file 11cv04792lhk february 3 2012 parties filed stipulation parties requested court stay action time court entered order denying motion dismiss related federal securities class action described february 6 2012 court granted parties stipulation irs notices proposed adjustments company currently examination irs 2004 2009 tax years additionally company reached final resolution irs adjustment proposed 1999 2000 tax years may 2011 part 2005 2006 irs audit company received proposed adjustment related intercompany rd cost sharing arrangement license intangibles acquired 2005 2009 part 2004 irs audit company received similar proposed adjustment related license intangibles acquired 2004 combined estimated incremental tax liabilities related proposed adjustments would approximately 9000 million excluding interest penalties company filed protests proposed deficiencies review appeals division irs company pursuing available administrative procedures relative irs audit matters referenced company believes adequately provided reasonably foreseeable outcomes related proposed adjustments ultimate resolution matters unlikely material effect consolidated financial condition results operations however still possibility adverse outcome matters could material effect consolidated financial condition results operations juniper networks inc notes consolidated financial statements continued note 17 selected quarterly financial data unaudited tables sets forth selected unaudited financial data quarter two years ended december 31 2012 millions except per share amounts 1 third quarter 2012 company recorded net period adjustments reducing income taxes noncontrolling interest 82 million net adjustments resulted increased research development expense 186 million related prototype development costs partially offset increased net revenues 62 million related reversal certain revenue obligations reduced cost revenues 42 million related inventory purchases company assessed materiality adjustments using relevant quantitative qualitative factors determined adjustments individually aggregate material previously reported period 2 third quarter 2012 company implemented 2012 restructuring plan workforce reductions facility consolidations closures supply chain procurement efficiencies recorded restructuring charges 295 million connection restructuring activities company also recorded certain inventory intangible asset impairment charges totaling 524 million cost revenues fourth quarter 2012 company continued implement restructuring activities 2012 restructuring plan 3 acquisitionrelated charges comprised direct indirect costs financial advisory legal due diligence well integration costs related acquisitions completed 2011 2012 4 net income per share attributable juniper network stockholders computed independently therefore sum quarterly net income per share may equal total computed fiscal year cumulative interim period juniper networks inc notes consolidated financial statements continued 1 acquisitionrelated charges comprised direct indirect costs financial advisory legal due diligence well integration costs related acquisitions completed 2010 2011 2 restructuring charges consisted restructuring charges asset impairment charges third quarter 2011 company implemented 2011 restructuring plan workforce reduction recorded restructuring charges 168 million fourth quarter 2011 company recorded charge 135 million associated abandoned inprocess internal used software project 3 net income per share attributable juniper network stockholders computed independently therefore sum quarterly net income per share may equal total computed fiscal year cumulative interim period note 18 subsequent event stock repurchases subsequent december 31 2012 filing report company repurchased 36 million shares common stock 799 million average purchase price 2220 per share 2012 stock repurchase program 36 million shares settled prior filing report 2012 stock repurchase program company 4883 million authorized funds remaining filing date purchases companys stock repurchase program subject review circumstances place time made time permitted securities laws legal requirements program may discontinued time item 9 nannannanitem 15 exhibits financial statement schedules reports form 8k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 10th day march 2003 power attorney know persons presents person whose signature appears hereby constitutes appoints lisa c berry marcel gani individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 following persons capacities date indicated signed report certifications scott kriens certify 1 reviewed annual report form 10k juniper networks inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operation cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluations evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses scott kriens name scott kriens title chairman chief executive officer date march 10 2003 marcel gani certify 1 reviewed annual report form 10k juniper networks inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operation cash flows registrant periods presented annual report 4 registrant’s certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluations evaluation date 5 registrant’s certifying officers disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses marcel gani name marcel gani title chief financial officer date march 10 2003 juniper networks inc schedule ii valuation qualifying account years ended december 31 2002 2001 2000 thousands exhibit indexitem 15 exhibits financial statement schedules reports form 8k 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following consolidated financial statement schedules juniper networks filed part annual report form 10k read conjunction financial statements schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 72 report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 20th day february 2004 power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor marcel gani individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 following persons capacities date indicated signed report juniper networks inc schedule ii valuation qualifying account years ended december 31 2003 2002 2001 thousands exhibit indexitem 15 exhibits financial statement schedules 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 78 report b exhibits see exhibit index page 78 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 3rd day march 2005 juniper networks inc robert rb dykes robert rb dykes executive vice president business operations chief financial officer duly authorized officer principal financial accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robert dykes individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 following persons capacities date indicated signed report juniper networks inc schedule ii valuation qualifying account years ended december 31 2004 2003 2002 thousands exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules listed omitted information required set forth therein applicable shown financial statements notes herein see exhibit index page 116 report b exhibits see exhibit index page 116 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 9th day march 2007 juniper networks inc robert rb dykes robert rb dykes executive vice president business operations chief financial officer duly authorized officer principal financial accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robert dykes individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 following persons capacities date indicated signed report juniper networks inc schedule ii valuation qualifying account years ended december 31 2006 2005 2004 millions exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 121 report b exhibits see exhibit index page 121 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 28th day february 2008 juniper networks inc robyn denholm robyn denholm executive vice president chief financial officer duly authorized officer principal financial accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signed report juniper networks inc schedule ii valuation qualifying account years ended december 31 2007 2006 2005 exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part annual report form 10k schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 114 report b exhibits see exhibit index page 114 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 2nd day march 2009 juniper networks inc robyn denholm robyn denholm executive vice president chief financial officer duly authorized officer principal financial officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying account years ended december 31 2008 2007 2006 exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part annual report form 10k schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 120 report b exhibits see exhibit index page 120 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 26th day february 2010 juniper networks inc robyn denholm robyn denholm executive vice president chief financial officer duly authorized officer principal financial officer gene zamiska gene zamiska vice president finance corporate controller duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated us gaap element schedule valuation qualifying accounts disclosure juniper networks inc schedule ii valuation qualifying account years ended december 31 2009 2008 2007 exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part annual report form 10k schedule page schedule ii valuation qualifying account schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 108 report b exhibits see exhibit index page 108 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 25th day february 2011 juniper networks inc robyn denholm robyn denholm executive vice president chief financial officer duly authorized officer principal financial officer gene zamiska gene zamiska vice president finance corporate controller duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date kevin r johnson chief executive officer director principal executive officer february 25 2011 kevin r johnson robyn denholm executive vice president chief financial officer principal financial officer february 25 2011 robyn denholm gene zamiska vice president finance corporate controller principal accounting officer february 25 2011 gene zamiska scott kriens chairman board february 25 2011 scott kriens pradeep sindhu chief technical officer vice chairman board february 25 2011 pradeep sindhu robert calderoni director february 25 2011 robert calderoni mary b cranston director february 25 2011 mary b cranston michael lawrie director february 25 2011 michael lawrie william f meehan director february 25 2011 william f meehan director february 25 2011 david schlotterbeck stratton sclavos director february 25 2011 stratton sclavos william r stensrud director february 25 2011 william r stensrud juniper networks inc schedule ii valuation qualifying account years ended december 31 2010 2009 2008 exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part annual report form 10k schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index page 107 report b exhibits see exhibit index page 107 report c none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 24th day february 2012 juniper networks inc robyn denholm robyn denholm executive vice president chief financial officer duly authorized officer principal financial officer gene zamiska gene zamiska vice president finance corporate controller duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying account years ended december 31 2011 2010 2009 exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part report schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits see exhibit index report b exhibits see exhibit index report c none juniper networks junos mykonos qfabric registered trademarks juniper networks inc united states countries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 25 2014 robyn denholm robyn denholm executive vice president chief financial operations officer duly authorized officer principal financial officer february 25 2014 terrance f spidell terrance f spidell vice president corporate controller chief accounting officer duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell l gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying account years ended december 31 2013 2012 2011 millions exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part report schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits see exhibit index report b exhibits see exhibit index report c none juniper networks juniper networks logo junos mykonos netscreen qfabric screenos registered trademarks juniper networks inc andor affiliates united states countries names may trademarks respective owners signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 19 2016 robyn denholm robyn denholm executive vice president chief financial operations officer duly authorized officer principal financial officer february 19 2016 terrance f spidell terrance f spidell vice president corporate controller chief accounting officer duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints rami rahim brian martin kenneth miller robyn denholm individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2015 2014 2013 millions exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part report schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits see exhibit index report b exhibits see exhibit index report c none juniper networks juniper networks logo junos contrail bti systems appformix aurrion netscreen screenos registered trademarks juniper networks inc andor affiliates united states countries names may trademarks respective owners signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 24 2017 kenneth b miller kenneth b miller executive vice president chief financial officer duly authorized officer principal financial officer february 24 2017 terrance f spidell terrance f spidell vice president corporate controller chief accounting officer duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints rami rahim brian martin kenneth miller individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2016 2015 2014 millions exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangement item 16 form 10k summary applicableitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2017 2016 2015 millions schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits filed herewith furnished herewith indicates management contract compensatory plan contract arrangement b exhibits see exhibits item 15a3 report c none item 16 form 10k summary applicable juniper networks juniper networks logo junos contrail bti systems cyphort appformix aurrion netscreen screenos registered trademarks juniper networks inc andor affiliates united states countries names may trademarks respective owners signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 23 2018 kenneth b miller kenneth b miller executive vice president chief financial officer duly authorized officer principal financial officer february 23 2018 terrance f spidell terrance f spidell vice president corporate controller chief accounting officer duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints rami rahim brian martin kenneth miller individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2018 2017 2016 millions upon adoption topic 606 company recorded reduction 107 million part cumulative effect adjustment january 1 2018 opening accumulated deficit balance consolidated balance sheet see note 2 significant accounting policies information cumulative effect changes made companys consolidated balance sheet january 1 2018 adoption topic 606 schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits filed herewith furnished herewith indicates management contract compensatory plan contract arrangement † portions exhibit indicated asterisks omitted pursuant request confidential treatment separately filed securities exchange commission b exhibits see exhibits item 15a3 report c none item 16 form 10k summary applicable juniper networks juniper networks logo junos contrail bti systems cyphort appformix registered trademarks juniper networks inc andor affiliates united states countries names may trademarks respective owners signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 22 2019 kenneth b miller kenneth b miller executive vice president chief financial officer duly authorized officer principal financial officer february 22 2019 terrance f spidell terrance f spidell vice president corporate controller chief accounting officer duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints rami rahim brian martin kenneth miller individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2019 2018 2017 millions upon adoption topic 606 company recorded reduction 107 million part cumulative effect adjustment january 1 2018 opening accumulated deficit balance consolidated balance sheet schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits filed herewith furnished herewith indicates management contract compensatory plan contract arrangement † portions exhibit indicated asterisks omitted pursuant request confidential treatment separately filed securities exchange commission b exhibits see exhibits item 15a3 report c none item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 20 2020 kenneth b miller kenneth b miller executive vice president chief financial officer duly authorized officer principal financial officer february 20 2020 thomas austin thomas austin vice president corporate controller chief accounting officer duly authorized officer principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules juniper networks inc schedule ii valuation qualifying accounts years ended december 31 2020 2019 2018 millions upon adoption topic 606 company recorded reduction 107 million part cumulative effect adjustment january 1 2018 opening accumulated deficit balance consolidated balance sheet schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits filed herewith furnished herewith indicates management contract compensatory plan contract arrangement †portions exhibit indicated asterisks omitted pursuant request confidential treatment separately filed securities exchange commission b exhibits see exhibits item 15a3 report c none item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 12 2021bys kenneth b miller kenneth b miller executive vice president chief financial officer duly authorized officer principal financial officer february 12 2021bys thomas austin thomas austin vice president corporate controller chief accounting officer duly authorized officer principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicateditem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part report schedules omitted required information applicable information presented consolidated financial statements notes thereto item 8 herein 3 exhibits see exhibit index report b exhibits see exhibit index report c none juniper networks junos mykonos qfabric registered trademarks juniper networks inc united states countries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 20 2015 robyn denholm robyn denholm executive vice president chief financial operations officer duly authorized officer principal financial officer february 20 2015 terrance f spidell terrance f spidell vice president corporate controller chief accounting officer duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell l gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying account years ended december 31 2014 2013 2012 millions exhibit index incorporated reference exhibit filing exhibit file date following materials juniper networks incs annual report form 10k year ended december 31 2014 formatted xbrl extensible business reporting language consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements cash flows v consolidated statements changes stockholders equity iv notes consolidated financial statements tagged blocks text 101ins xbrl instance document 101sch xbrl taxonomy extension schema document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules listed omitted information required set forth therein applicable shown financial statements notes herein signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized city sunnyvale state california 6th day march 2006 power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robert dykes individually attorneyinfact full power substitution capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 following persons capacities date indicated signed report juniper networks inc schedule ii valuation qualifying account years ended december 31 2005 2004 2003 millions exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangementitem 15 exhibits financial statement schedules following documents filed part report 1 consolidated financial statements see index consolidated financial statements item 8 herein 2 financial statement schedules following financial statement schedule included part report schedules listed omitted information required set forth therein applicable shown financial statements notes herein 3 exhibits see exhibit index report b exhibits see exhibit index report c none juniper networks junos mykonos qfabric registered trademarks juniper networks inc united states countries signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized juniper networks inc february 26 2013 robyn denholm robyn denholm executive vice president chief financial officer duly authorized officer principal financial officer february 26 2013 gene zamiska gene zamiska vice president corporate finance duly authorized officer principal accounting officer power attorney know persons presents person whose signature appears hereby constitutes appoints mitchell gaynor robyn denholm individually attorneyinfact full power substitution capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneyinfact substitute may cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated juniper networks inc schedule ii valuation qualifying account years ended december 31 2012 2011 2010 millions exhibit index filed herewith furnished herewith filed netscreen technologies inc indicates management contract compensatory plan contract arrangement